Welcome to the American States Water Company conference call discussing the company's second quarter 2016 results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5:00 P.M. Eastern Time and run through Friday, August 12, 2016, on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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 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. 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 U.S. 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 Eva Tang, Chief Financial Officer of American States Water Company.
Thank you, Denise. Welcome, everyone, and thank you for joining us today. During today's call, I'll review the company's financial results for the second quarter, and Bob will discuss some highlights for the quarter, Golden State Water's pending rate case, California drought-related matters, and our contracted services business segment at American States Utility Services, or ASUS. I'll begin with an overview of our financial results. For the second quarter, diluted earnings were $0.45 per share compared to $0.41 per share for the same period in 2015. Of the $0.45 earnings per share for the quarter, $0.36 was from our water segment, $0.01 was from our electric segment, $0.07 from our contracted service segment, and our parent company contributed $0.01. Net income for the quarter was $16.7 million compared to $15.7 million for the same period in last year.
I'll discuss major items that impacted our revenues and expenses for the quarter. Water revenue was $81.1 million for the quarter. As of today, Golden State Water has not received a decision on its pending water general rate case, which will set new rates for years 2016 through 2018. As discussed in our first quarter call, we expect the 2016 revenue requirements from the decision to be lower than the 2015 adopted level due to decreases in various operating expenses. As a result, we adjusted our water revenue downward by $7 million for the quarter, with corresponding decreases to supply costs, depreciation, and other operating expenses to reflect the settled position with the CPUC's Office of Ratepayer Advocates. The adjustment to 2016 recorded water revenue also reflects Golden State Water's position on litigated capital budgets and compensation-related issues in the pending rate case.
These adjustments did not have a significant impact to pre-tax operating income for the quarter. Partially offsetting this decrease in water revenue was the recognition of a portion of the 2015 water revenue adjustment mechanism that had previously been deferred. Revenue from electric operations for the quarter was $7.7 million as compared to $7.9 million for the same period in 2015. Revenue decreased by approximately $434,000, primarily due to the August 2015 termination of a supply cost surcharge to recover previously incurred energy costs and was offset by a corresponding decrease in supply costs, resulting in no impact to pre-tax operating income. This electric revenue decrease was also partially offset by CPUC-approved fourth-year rate increases for 2016 and rate increases generated from terminal advice letters for capital projects approved by the CPUC during 2015 and 2016.
Revenue for our contracted services business, ASUS, increased to $4.1 million to $23.2 million for the quarter. The increase was due to an increase in construction activity along with higher O&M management fees resulting from the successful resolution of price redeterminations received during the third quarter of 2015. As I mentioned earlier, for the quarter, the water segment's gross margin was adjusted for both lower revenues and lower supply costs based on our stipulated positions in the pending water rate case. Our water and electric supply costs were $21.6 million, a decrease of $5.4 million for the quarter as compared to the same period in 2015. 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 customer in the future.
Other operation expenses decreased by $445,000 for second quarter of 2016 due to a decrease in conservation and drought-related costs. Golden State Water has been authorized by the CPUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery. In the second quarter, we filed for recovery of drought-related costs of approximately $1.3 million, which had been previously incurred. Incremental drought-related costs are being expensed until recovery is approved by the CPUC. Administrative and general expenses for the quarter were $21.3 million as compared to $20.5 million for the same period in 2015. The increase was mainly due to increases in costs at ASUS, resulting from higher labor costs, higher allocation of A&G expenses from corporate headquarters as stipulated in the pending water rate case, and an increase in outside service costs.
For Golden State Water, there was a corresponding decrease in the allocation of A&G costs as stipulated in the pending water rate case. This decrease, as well as decreases in other miscellaneous A&G items, were mostly offset by increasing costs associated with defending against condemnation-related actions. Depreciation and amortization expense decreased by $935,000 due primarily to the reduction in composite rates stipulated in the pending water rate case, resulting from an updated depreciation study. The decrease from the lower composite rates were partially offset by depreciation from net addition to utility plants associated with Golden State Water's capital expenditure program. The lower net depreciation expense has been reflected in the water's revenue requirements. Maintenance expense decreased by $570,000 due to a lower level of maintenance performed during the second quarter of 2016. Different factors contributed to the timing of when maintenance activity occurred.
ASUS construction expense increased by $2.5 million to $12.9 million during the quarter as compared to the same period last year, due primarily to an increase in overall construction activity. Interest and other income increased due to higher gains on investments held for retirement benefit plans as compared to the second quarter of 2015. Income tax expense increased by $522,000 to $10.1 million due to an increase in pre-tax operating income, partially offset by an overall lower effective income tax rate. Slide 10 shows the EPS bridge by business segment, comparing the second quarter of this year with the second quarter of 2015. Moving on to the next slide. Diluted earning per share were $0.73 for the six months ended June 30, 2016, and 2015. For more details, please refer to the press release and the Form 10-Q issued yesterday. Next, I will briefly discuss our liquidity.
Net cash provided by operating activities for the six months ended June 30, 2016, decreased by $14.5 million to $48.5 million as compared to the same period in 2015. The decrease in operating cash flow was primarily due to lower tax payments made in 2015, largely as a result of the implementation of new federal tax repair regulation in 2014. There was also a reduction in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the six months ended June 30, 2016. With that, I'll turn the call over to Bob.
Thank you, Eva. Hello, everyone. I appreciate everyone joining us today. The company delivered solid earnings in the second quarter. In addition, our water and electric utilities continue to invest to maintain and improve the reliability of our systems. For the six months ended June 30th this year, Golden State Water invested $63 million on company-funded necessary infrastructure work. We are on track to invest approximately $95 million in capital projects during 2016, which may change somewhat once a decision is issued by the CPUC on the pending water rate case. I'm also very pleased to report that ASUS was awarded a 50-year contract by the U.S. government to operate, maintain, and provide construction management services for the water and wastewater systems at Eglin Air Force Base, located in Florida.
The value of the contract is estimated at approximately $510 million over the 50-year period and is subject to annual economic price adjustments. ASUS will assume operations at Eglin following the completion of a 10-month transition period. This contract is a result of years of focus and hard work from our ASUS team, who remain committed to winning new base proposals. Our team is involved at various stages of the proposal process at a number of bases considering privatization. We are not able to share more about the status of these proposals because of the competitive nature of this business. The U.S. government is expected to release additional bases for bidding over the next several years. We believe we are well-positioned to compete for these contracts.
As we discussed in previous quarters, we filed a general rate case in mid-2014 for all of our water regions and the general office. The application will determine rates charged to customers for the years 2016, 2017, and 2018. Golden State Water has settled with the CPUC's Office of Ratepayer Advocates on 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 2015 state-mandated conservation targets. Primary litigated issues relate to our capital budget requests and compensation for managerial-level employees. We are not certain when in 2016 the final decision will be issued. Once issued, rates will be retroactive to January 1st, 2016. As Eva mentioned earlier, adopted revenues for 2016 are expected to be lower than the 2015 adopted levels.
As you may know, a big part of a utility's 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 capital investment with little to no impact on customer rates. As a reminder, we received approval by the CPUC to defer our electric general rate case for a year and the cost of capital proceeding by one additional year. Both will now be filed in early 2017.
In regard to the drought situation in California, the State Water Resources Control Board issued revised emergency regulations in May, allowing for self-certification of conservation standards based upon supply conditions by water system. In June, Golden State Water provided an analysis to the state board indicating there was no supply deficit predicted for our large urban water systems. At this time, all of our large systems are in voluntary conservation using the previously assigned mandatory targets and three-days-per-week watering limitations. The state board could modify its requirements as drought conditions change throughout the state. Golden State Water has been authorized by the PUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery. During the second quarter of this year, we filed for recovery of drought-related items of approximately $1.3 million, incurred mostly in 2015.
Incremental drought-related costs are being expensed until recovery is approved by the CPUC. Lastly, as of August 2nd, the US Drought Monitor estimates 60% of California in the rank of severe drought. This is down from 74% reported at the end of April. Increased rainfall and higher snowpack levels during the winter months have helped the drought situation. Turning to our contracted services business at ASUS, I'm proud to say that after we complete the Eglin Air Force Base transition, ASUS will be providing water and/or wastewater utility services to 10 military bases, including three of the largest military installations in the U.S., Fort Bragg in North Carolina, Fort Bliss in Texas, and Eglin Air Force Base in Florida. To one of the most high-profile bases in Andrews Air Force Base, which is located in Maryland.
With regard to the second quarter, construction activity picked up during the quarter, we believe we're still on track to achieve our projected earnings per share contribution from ASUS of $0.28-$0.32 per share for 2016, as discussed during our year-end and first quarter earnings calls. We continue to work closely with the U.S. government on outstanding price redeterminations. We expect the third price redetermination for Fort Bragg and the fourth price redetermination for Fort Bliss to be finalized this quarter, and the third price redetermination for Fort Jackson to be finalized during the fourth quarter of this year. 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. Finally, I'd like to turn our attention to dividends. Our board of directors just approved a third quarter dividend of $0.224 per share on the common shares of the company. Dividends on the common shares will be payable on September 1st to shareholders of record at the close of business on August 15th. American States Water Company has paid dividends every year since 1931. For the five years ending December 31st, 2015, our calendar year dividend has grown at a compound annual growth rate of about 11%. Given American States' current low payout ratio compared to our peers and our earnings growth prospects, there's room to grow the dividend in the future.
I'd like to thank you for your interest in American States Water and will now turn the call over to the operator for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing star then two. Once again, it is star one if you would like to ask a question. We'll pause just a moment to gather our questions. Our first question will come from Jonathan Reeder of Wells Fargo. Please go ahead.
Hey, Bob and Eva. How are you all doing today?
Good.
Good, thank you.
Thanks, Jonathan.
Hey, just a couple of minor questions. Consumption levels in the GRC, you're saying they reflect the 2015 kind of mandatory reduction usage levels. Does that mean, you could be, I guess, over-collecting in the RAM accounts during the rest of the year since the mandatory reductions were backed off and now they're just voluntary, assuming the usage kind of bounces back a little?
Well, Jonathan, yes, that's right. We're using 2015, approximately the mandated consumption level. This year-to-date, our consumption is still 8% less than last year at the same period, six months. We don't expect over-collection in the RAM balancing account. We think the RAM balance will decrease, but hard to say. It depends on how the remaining months going to be. Hopefully, the RAM balances will be less than what we experienced in 2015.
Jonathan, though what was included in the rate case was based upon 2015 mandatory reduction levels, I believe they did back those down by roughly 3% off the mandatory reduction. The average is 25. I think they were looking more at the 22%. As Eva says, what happens the rest of the year will tell the tale, I guess. Then, of course, you don't know what kind of action the State Board's going to take if a lot of the systems put in no reductions and there's some speculation that it's going to be difficult to avoid sort of new reductions coming out in the future. It is definitely a work in process.
Okay. Let me just make sure I understand. Your RAM balance, where is it at this point in terms of the under collection in aggregate?
For this year, for 2016, we had about $22 million accumulated. However, once the decisions come about, because we have higher base rate in the 2016 adopted revenue, supposedly, a portion of the $22 million will become another regulatory memo account to collect the retroactive revenue back to January 1. Even though the $22 million represents the RAM balance right now, but will be replaced by another regulatory memo account, once the decision's issued. Does that make sense?
Yeah, I think so. Then I guess my other question on ASUS, I didn't know if, Bob, you felt in position to try to estimate what the impact to EPS power could be, from the addition of Eglin? Is it still too early, since you haven't had a whole lot of time to get in there and see the base and the amount of assets and all that stuff?
Well, we know it'd be helpful for you folks to have some sort of estimate, we're going to try to give you one. The contract award included both O&M and a little bit of initial capital upgrade work. If you just look at those items, we think it's going to be sort of full-year run rate basis, $0.02-$0.03 per share. However, if we get substantial initial capital upgrades or later new capital upgrades, that amount could go up.
Okay, it's $0.02-$0.03, if you have any, I guess, of the special projects or just the projects that are awarded on kind of an annual basis related to Eglin, that would be incremental. Is that right?
Yeah. That's a good way to look at it. Just so you understand, there is a 10-month transition here. The $0.02-$0.03, we wouldn't see that completely in 2017. We'd see about half of it, I would guess. The annual run rate would be $0.02-$0.03.
Right. The timing of kind of the special construction projects, I'm assuming that wouldn't start until 2018, as you wouldn't, I guess, get the budget until September 2017 for Eglin. Is that right?
There's a lot of things to be worked out with the military on the base in terms of special construction. The initial capital upgrades, it's hard to say when we'll start to see those, but it's possible 2018.
Okay.
During the transition period of this 10 months, it's more like a due diligence period, we can work on the inventory level to make sure we have the inventory correct compared to when we submitted bids. There are opportunities to make sure we have the right inventory level to go forward with this every year price adjustment mechanism on the military base.
Okay.
We'll be going through with our GIS systems to identify both were, make sure the pipe that we're taking over is consistent with the maps we'll be given, as well as the age of the pipe. There'll be a lot of work done in that particular area to make sure that the inventory that we're taking over is, we can substantiate it and that it's accurate.
Okay. Well, we'll wait for your update regarding that. Congratulations on adding the 10th base, and now I guess we'll look forward to the 11th one, right?
Right. Yeah.
We are.
We've got the momentum now.
There you go. All right, take care. Appreciate the time today.
Thank you.
Thank you.
As a reminder, if you would like to ask a question, please press star then one. We'll pause just a moment for any additional questions. At this time, I'm showing no additional questions. I would like to hand the conference back over to Bob Sprowls for any closing remarks.
Yes, I just wanted to close with just passing along my thank you for all your participation today, and I look forward to speaking with everyone next quarter, if not before.
Thank you. Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect your lines.