Welcome to the American States Water Company Conference Call discussing the company's 3rd Quarter 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 Thursday, November 10, 2016, on the company's website, www.aswater.com.
The slides that the company will be referring to are also available on the website. There will be an opportunity for questions later. This call will be limited to an 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 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. 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 call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.
Thank you, Andrew. Welcome everyone and thank you for joining us today. I'll begin with some highlights for the quarter. Eva will then discuss some 3rd quarter details and then I'll wrap it up with some updates on the general rate case. The balance rates order instituting rulemaking, California drought, ASUS, dividends and then we will both take your questions.
The Q3 of 2016 was very busy for us as we achieved success in many aspects of our business. I'm pleased to report that the company delivered higher third quarter earnings as compared to last year and raised the 4th quarter dividend by 8%. While not surprised at their continued confidence in our company, I was very pleased to get our Board's approval earlier this week to increase our dividend. We also continue to invest in the reliability of our water and electric systems. Golden State Water Company, our utility subsidiary has invested $95,000,000 on company funded necessary infrastructure work for the 9 months ended September 30, 2016, as compared to $58,000,000 for the same period last year.
In fact, our total spending for the Q3 year to date 2016 exceeded the level of spending for the same time periods for the past 3 years. We expect to finish the year with approximately $105,000,000 to $115,000,000 in capital investment. In addition, during the quarter, our contracted services business ASUS was awarded a 50 year contract by the U. S. Government to operate, maintain and provide construction management services for both the water and wastewater systems at Eglin Air Force Base in Florida.
The initial value of the contract is estimated at approximately $510,000,000 over the 50 year period and is subject to annual economic price adjustments. We expect to assume operations at Eglin by mid-twenty 17 and for this new base to contribute $0.02 to $0.03 per share on an annualized basis. We're excited about expanding our service to the U. S. Government.
After we complete the base transition, ASUS will then be providing water and or wastewater utility services to 10 military bases, including 3 of the largest military installations in the United States, Fort Bragg, Fort Bliss and Eglin Air Force Base, as well as one of the most high profile bases Andrews Air Force Base. I will now turn the call over to Eva to review some of the details for the quarter.
Thank you, Bob. Good morning or to most of you, good afternoon, everyone. I'll begin with an overview of our financial results on Slide 7. Diluted earnings for the Q3 were $0.59 per share compared to $0.56 per share for the same period in 2015. Of the $0.59 earnings per share for the quarter, $0.47 was from our Water segment, dollars 0.02 from our Electric segment and $0.10 from our contracted services business.
I'll discuss major items that impacted our revenues and expenses for the quarter on the next slide. During the quarter, there was a decrease of $6,700,000 in water revenues. The decrease was as a result of a 2016 revenue adjustment to reflect decreases in supply costs, depreciation and other operating expenses. Based on our settlement position with the CPUC's Office of Ratepayer Advocates for the pending water rate case, which when finalized will be retroactive to January 1, 2016. You will see the corresponding decreases in the expenses on the next slide.
The adjustments on both revenues and expenses did not result in any significant impact to pre tax operating income for the quarter. The 2016 water revenues also reflect our positions on litigated capital budget and compensation related issues in the pending rate case. Bob will discuss the water rate case later in the call. Partially offsetting this revenue decrease was an increase in water consumption by a small portion of our customers that are not under conservation rate, as well as new revenues generated from a water system acquired in October 2015. Water consumption was up by 12% this quarter compared to the same period last year.
Revenue from electric operations for the quarter increased by approximately 2.5% due to CPUC approved 4th year rate increases for 2016 and rate increases generated for from certain advice letters for capital projects approved by the CPUC during 2015 2016. Regarding ASUS' revenue, I want to point out that there were retroactive management fees of $3,500,000 recorded for Q3 of 20 15 or approximately $0.05 per share. There were no similar retroactive revenue recorded during Q3 this year. Therefore, excluding the retroactive item from 2015, ASUS had an increase in revenues of almost $800,000 for this quarter, largely due to an overall increase in construction activities. Looking at Slide 9.
Our water and electric supply costs were $25,300,000 for the Q3 of 2016, a decrease of $6,100,000 from last year, primarily reflecting the settled water supply costs in the pending water rate case. Any changes in supply cost for both the water and electric segment as compared to the adopted supply cost are attracted in balancing accounts, which will be recovered from or refunded to our customers in the future. Other operation expenses increased by $300,000 for the quarter, primarily as a result of higher conservation costs as well as an increase in water treatment costs. Administrative and general expenses for the Q3 of 2016 were $19,800,000 as compared to $19,300,000 for the same period last year. This increase was largely due to costs associated with defending against the condensation related actions at the Water segment, partially offset by decreases in insurance, vehicle and pension related expenses.
Depreciation and amortization expense decreased by $1,000,000 due to the reduction in composite rates stipulated in the pending water rate case, resulting from an updated depreciation study. The decrease was partially offset by depreciation from net additions to utility plants associated with Golden State Water's capital expenditure program. The lower net depreciation expense has been reflected in the water revenue requirement. SUS's construction expense decreased by $1,200,000 despite a slight increase in construction activity during the Q3 this year. This was largely due to improved cost efficiencies on capital projects.
Interest and other income, which is not on the slide, increased due to higher gains on investments held for retirement benefit plans as compared to the Q3 of 2015. Our income tax expense decreased by $1,700,000 for the quarter due to an overall lower effective income tax rate as a result of differences between book and taxable income that are treated as a flow through adjustment in accordance with the regulatory requirements. There's also a decrease in pretax income. Slide 10 shows the EPS bridge comparing the Q3 of this year with the Q3 of 2015. I have reviewed major items impacting the comparability of the two periods.
Excluding the $0.05 per share in retroactive revenue in Q3 2015 at ASUS, we were $0.08 per share ahead for the quarter as compared to last year. Turning to Slide 11. Diluted earnings per share were $1.32 for the 9 months ended September 30, 2016, as compared to $1.29 per share for the same period last year. Again, the $1.29 earnings per share for 20.15 included $0.05 retroactive revenues at ASUS, which did not recurred in 2016. I'll briefly discuss our liquidity on Slide 12.
Net cash provided by operating activity for the 9 months ended September 30, 2016, decreased by 8,600,000 to $7,750,000 The decrease was due in large part to a reduction in cash generated by contracted services due to the timing of billing of and the cash received for construction work at the military bases during the 9 months ended September 30, 2016. There were also lower tax payments made during 2015, largely as a result of implementation of federal tax repair regulations in 2014. Partially offsetting the decrease was an increase in surcharges received during 2016 for shortfalls in consumption for prior years. Cash flow used for investing activities increased by dollars for 2016 due to a significant increase in capital expenditures at Golden State Water. As Bob mentioned earlier, we have invested $95,000,000 on company funded infrastructure work thus far in 20 16.
We expect to invest $105,000,000 to $115,000,000 in capital projects by the end of the year. To help fund our operation and capital requirements, we recently extended our credit facility from $100,000,000 to $150,000,000 With that, I'll turn the call back to Bob.
Thank you, Eva. Turning to Slide 13, as we discussed in previous quarters, we filed a general rate case in mid-twenty 14 for all of our regions in the general office. The application will determine rates charged to customers for the years 2016, 2017 2018. Golden State Water has settled with the PUC's Office of Ratepayer Advocates and nearly all of the company's operating expenses as well as the consumption levels used to calculate rates for years 2016 through 2018, which reflect the state mandated conservation targets from 2015. The primary litigated issues relate to our capital budget request and compensation for managerial level employees.
A proposed decision is expected in the Q4 of this year. Once a final decision is issued, rates will be retroactive to January 1, 2016. The adopted revenues for 2016 are expected to be lower than the 2015 adopted levels. As you may know, a big part of the utilities revenue requirement is the recovery of projected expenses. Our projected expenses for 2016 in the rate case were lower than the 2015 adopted expense levels.
In particular, there was a decrease in supply costs resulting from lower consumption projected, lower depreciation expense resulting from a new depreciation study and a decrease in other operating expenses in this 2016 through 2018 rate case cycle due to our cost control efforts and improvements in operation efficiency. Because of the company's efforts, we were able to propose necessary increases in our construction program with little to no impact on customer rates. 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 segment by 1 year. Both are now scheduled to be filed during the Q1 of 2017. Last month, the CPUC issued a proposed decision on its ongoing order instituting rulemaking or OIR addressing the CPUC's water action plan objective of setting rates that balance investment, conservation and affordability.
Among other things, the proposed decision retains the water revenue adjustment mechanism, institutes a sales reconciliation mechanism to adjust forecasted water consumption authorized by the PUC based on actual consumption, changes tier grades to include a very high tier grade and a super user charged aimed at high usage customers, implements advanced metering infrastructure for all customers and shifts more revenue recovery through monthly fixed charges versus quantity charges. A final decision on this phase is expected yet this year. Golden State Water cannot predict the final outcome of this proceeding. On Slide 15, we discuss the drought situation in California as it continues to impact our water supply. We have experienced dropping groundwater levels at a few small service areas in the Central Coast area of California and have implemented mandatory water restrictions in those areas, moving to higher stages of the staged mandatory water conservation and rationing plan.
Customers in these service areas are subject to penalties for excessive water usage. Should dry conditions continue to persist, areas served by these smaller basins may experience further mandatory conservation measures in the future. We have been authorized by the CPUC to track incremental drought related costs incurred in a memorandum account for possible future recovery. During the Q2 of 2016, we filed for recovery of drought related items of approximately $1,300,000 incurred mostly in 2015. Incremental drought related costs are being expensed until recovery is approved by the CPUC.
Move on to ASUS on Slide 16. As I mentioned earlier, the Eglin Base Award was a great win for the company. Our team is currently involved in various stages of the proposal process at a number of other bases considering privatization. This is a key focus for us as the U. S.
Government is expected to release additional bases for bidding over the next several years. We are well positioned to compete for these new contracts. Turning to ASUS's 3rd quarter performance, construction activity increased overall and was also performed more efficiently. Similar to our regulated business, ASUS continually looks for operational efficiencies to improve earnings while still delivering quality service. We continue to work closely with the U.
S. Government on outstanding price redeterminations and asset transfers. The 3rd price redetermination for Fort Jackson was finalized during the Q3 of this year as well as an asset transfer at Fort Jackson. An asset transfer at Andrews Air Force Base was also finalized during the Q3 of this year. And we expect the 3rd price redetermination for Fort Bragg and the 4th price redetermination for Fort Bliss to be finalized this 4th quarter.
Filings for these price redeterminations, requests for equitable adjustment, asset transfers and contract modifications, award 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 base. We believe ASUS will contribute between $0.29 $0.33 per share for calendar 2016.
In order to project for 2017, we will need to determine the amount of capital work that we will complete for the year and that gets worked out between the company, the contracting officer and the Director of Public Works at the various bases. Through September 30, 2016, the U. S. Government awarded ASUS $21,000,000 in new construction projects with more expected to be awarded in the Q4. 2016 funding for new capital projects was lower than in 2015 due to a reduction in military construction funding government wide.
However, we have carryover amounts from the larger dollar awards in 2015 that will be performed in 2017. In fact, ASUS has performed more construction work for the year to date September this year than for the same period last year. Taking all the factors into consideration, we believe ASUS's earnings for 2017 will be in the $0.32 to 0 point 3 $6 per share range. Finally, I would like to turn our attention to dividends outlined on Slide 17. As I mentioned at the beginning of this call, our Board of Directors just approved an 8% increase in the 4th quarter dividend from $0.22 $0.04 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. We believe that prudently increasing dividends enhances our ability to attract capital in the future to fund necessary infrastructure investments in our utility operations. We are also confident that ASUS will be a continued source of dividends for our shareholders. With this dividend announcement, our calendar year dividend will have grown at a compound annual growth rate of about 11% for the 5 years ended 2016. American States Water Company has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 62 consecutive years.
Given our low payout ratio compared to our peers and our earnings growth prospects, there is room to grow the dividend in the future. I'd like to thank you for your interest in American States Water and I'll now turn the call over to the operator for questions.
The first question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Hi, Bob and Eva. Hope you all are doing well. Bob, I wanted to touch on your ASUS comments and around the construction expenditures expected for 2017. I know it's still kind of a moving target, but can you just, I guess, offer some guidance what's into your 2017 full year estimate? Is it a similar level of expenditures to 2016 or does it indeed represent a decrease?
Yes. It's a lot like 2016. So it won't really represent a decrease.
Okay. So similar to 2016 and then I guess the incremental drivers of like the $0.03 higher in the midpoint would be the partial year of Eglin as well as some of those price redeterminations?
Yes. Yes, that's exactly right.
Okay. And then for the CapEx on the regulated utility side, you said you're expecting $105,000,000 to 115,000,000 in 2016. Does that mean the request in the GRC for like $90,000,000 a year, does that mean it was front end loaded or how should we interpret that?
Well, we're pretty focused on getting the dollar spent in 2016. We're really not going to know about 2017 2018 until we get a decision. But we feel like we need to be spending dollars on pipe replacement. And so we didn't feel like we were getting sort of too far out in front of our skis on that. It just felt like we needed to get going.
We're a little disappointed here that we hadn't gotten our rate case decision by now and it does make it a little difficult for us to plan capital when we don't have that. But we've been out replacing pipe like we should and we think the PUC was favorably on that.
Okay. But I mean the GRC contemplates only about $90,000,000 a year. And so you're expecting this year to be ahead of that pace. And that's, I guess within the backdrop of the remaining contested issues being on the appropriate level of CapEx. So presumably, the interveners are arguing for something less than $90,000,000 and you're actually spending more than $90,000,000
Yes, that's correct. The interveners are arguing for a lesser amount than the $90,000,000
We also have the Seawood Dollar Mount Jonathan, which is about $17,000,000 that's above or beyond the $90,000,000 average. And when we project the rate case, it really start projecting from 20 15 2017 2018. So I think we're working on the safe project. Once the decision issue, we will look to see our plan going forward. We think the way we're doing right now, it will help us with our 2nd and third year earnings test as well.
Okay.
Yes. And as Eva aptly pointed out, we had to file this case in mid-twenty 14. And so we had to include a forecast for 2015, 2016, 2017 2018. And so it all sort of goes into a big pot, I guess. And so we are taking a hard look at spending and we do feel pretty comfortable that what we're spending the additional dollars on is our important projects.
And if we have to get a little bit ahead of the adopted rate base, we'll just live with that until the next rate case.
Okay. And then I appreciate the fact you're trying to adjust the kind of reported revenues and expenses in line with the settlement there. But I guess if you could just maybe discuss like what could still cause potentially the margins or the year to date earnings to be overstated and how that exactly could flow through. I mean, I guess if the final outcome isn't until 2017, would it presumably not ever get restated in 2016 or just be a special item in 2017 or if you get that proposed decision before year end, would it get restated in 2016?
And Jonathan, when proposed decision issued, we will have to assess every item proposed decision. It's still a long way between proposed decision to the final decision. But we may have to adjust it. Right now, we don't know what the outcome will be from the proposed decision. Is there quite we'll have to assess the potential contingent loss, let's say, that for accounting purposes.
Right. But where I guess where would the areas be where I guess potentially the margins could come in? I mean is it on the tax benefit side or something have tax the repairs tax benefit increased in 2016 versus 2015 and those could kind of get clawed back or where would it potentially come from given the items that you have already settled?
I think the one big item is the CapEx, right. We request about $90,000,000 a year on average and ORAs positions far less than that. That could be a potential adjustment to our revenue requirements, depends on where the judge ended on his decision.
Because of the rate base effect of that. Yes.
Because we're on a return on the CapEx less depreciation. So capital expenditure definitely is one big item.
Okay. And if that came in lower than what you requested, then that would lower the revenues you've recorded thus far?
I believe so.
Yes. That's accurate statement.
Okay. And then just last question. I know in the release you cited the deal you did last year. I think it was the Rural Water Company.
What was the size of that? Yes, it was about 1,000 customers. So it wasn't excessively large, but every little bit helps as they say.
Okay. Was there a dollar amount that you disclosed on it or no?
We paid I think we disclosed that. Yes, dollars 1,700,000 for the purchase and got that fully recovered.
Okay, excellent. Thank you for the additional info.
Yes. Thanks,
This concludes our question and answer session. I would like to turn the conference back over to Mr. Bob Sprowls for any closing remarks.
Thank you, Andrew. Yes, I just want to wrap up today by just thanking everyone again for your participation today and for your interest in the company. And Eve and I both look forward to speaking with you next quarter. So thank you very much.
Thank you.
As a reminder, this call will be archived on our website beginning Thursday, November 3, 2016 at 5 pm Eastern Time and will run through Friday, November 11, 2016. This concludes today's American States Water Company conference call.