Nov 5, 2013
Executives
Eva G. Tang - Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance, Treasurer and Corporate Secretary Robert J.
Sprowls - Chief Executive Officer, President, Director, Member of ASUS Committee, Member of Special Issuance Committee, Chief Executive Officer of Golden State Water Company, Chief Executive Officer of Chaparral City Water Company, President of Golden State Water Company and President of Chaparral City Water Company
Analysts
Kenneth J. Dorell - Janney Montgomery Scott LLC, Research Division Heike M.
Doerr - Robert W. Baird & Co.
Incorporated, Research Division Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR, conference call discussing the company's third quarter 2013 results.
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 Tuesday, November 12, 2013, on the company's website, www.aswater.com.
[Operator Instructions] As a reminder, this call will be recorded and will be limited to no more than 1 hour. At this time, I would like to turn the call over to Ms.
Eva Tang, Chief Financial Officer of American States Water Company. Ms.
Tang, the floor is yours ma'am.
Eva G. Tang
Thank you, Mike. Welcome, everyone, and thank you for joining us today.
On the call with me is our President and CEO, Bob Sprowls. Before we begin this presentation, please note that certain matters discussed in 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. With that, I will now discuss the third quarter financial results.
I'm pleased to report that diluted earnings for the third quarter were $0.53 per share, which was a 10.4% increase compared to $0.48 per share for the same period in 2012. Net income for the quarter increased by $2.2 million, or 11.7%, as compared to the third quarter of last year.
For the quarter, water revenue at Golden State Water increased by $3 million, or 3.2%, to $93.9 million as compared to the third quarter last year, mainly due to the California Public Utilities Commission approval of our water rate case in May for rate increases effective January 2013. There was also a $1.5 million increase in revenues related to new surcharges approved by the CPUC for recovery of previously incurred cost.
These surcharges increased both revenue and operating expenses, resulting in no impact to net earnings. Electric revenue increased by $300,000 to $8.8 million.
Electric revenue for 2013 were based on 2012 adopted rates. We expect to have a proposed decision on our pending electric rate case early next year.
Revenues for American States Utility Services decreased by $6.2 million to $28.1 million compared to the third quarter last year. The decrease in revenues was primarily due to excessive rainfall experienced at Fort Bragg in the month of June and July, as well as a slowdown of renewal and replacement capital work at Fort Bliss, which we had anticipated.
Our water and electric supply cost for this quarter were $29.7 million or 31.3% of total operating expenses. Any changes in supply cost for the both the water and electric segment as compared to the adopted supply cost are tracked in balancing accounts, which will be recovered from, or refunded to, our customer in the future.
Other operation expenses decreased by $209,000 in the third quarter of this year to $7.2 million. The decrease was driven by lower conservation cost at Golden State Water, partially offset by increases in chemical treatments and labor costs charged to operations.
Excluding the surcharges, which includes both revenue and expenses at the water segment as discussed earlier, A&G expenses increased by $1.3 million to $18.9 million as compared to the same period last year. The increase was primarily driven by higher workers' compensation and employee benefit-related costs at the water segment, increased regulatory and on-site server cost incurred for the pending electric rate case and an increase in cost at our contracted services segment as we pursue new military utility privatization opportunities.
Depreciation and amortization expenses decreased by $477,000 to $9.8 million for the third quarter due to lower composite rates for depreciation approved in the water rate case. The decrease in the composite rate was partially offset by additions to utility plants.
Maintenance expense increased by $434,000, primarily in our water segment as a result of an increase in plant maintenance work. We anticipate the increase will continue for the remainder of the year, though we do not anticipate the 2013 expense to exceed the amount being recovered in rates.
ASUS's construction expenses decreased by $4.1 million to $19.3 million during the third quarter as compared to the same period last year. The decrease is due to lower construction activity this quarter as we discussed earlier.
Interest expense stayed relatively flat for the quarter; however, interest income decreased by $234,000 due to interest income recorded in the third quarter of 2012 related to certain refund claims approved by the Internal Revenue Service. Income tax expense decreased by $2.5 million to $9.9 million in the third quarter as compared to the same period last year, mainly due to a decrease in the effective income tax rate for the water segment and a cumulative tax benefit of $1.5 million recorded in the third quarter at the AWR parent level.
This cumulative tax benefit covers a period of 5 years for tax deductions related to employee benefit plan. We intend to take the tax deduction in future years, which is approximately a $300,000 after tax benefit, or $0.01 per share each year.
Moving on to liquidity and capital resources. Net cash provided by operating activities decreased by $4.3 million to $87.3 million for the 9 months ended September 30, 2013 compared to the same period last year.
The decrease is mainly from our contracted services segment due to the timing of when construction work is billed and cash is received from the government. The building for construction work generally occurred at completion of work or are based on a billing schedule contract they agreed to with the government.
Even with this decrease in cash flow from operating activities, we had $26.2 million of cash on a consolidated basis. This was due to an increase in Golden State Water's cash flow from operating activities as a result of surcharges implemented to recover our previously incurred cost and on the collected revenue, resulting from decreases in consumption.
In regards to our capital expenditures, Golden State Water paid $68.8 million in capital projects during the 9 months ended September 30, 2013. We are on track to spend a total of approximately $255 million in capital expenditure, excluding among funded by others, for the years 2013 through 2015, which is consistent with the approved capital dollars in the water rate case.
For additional details on our third quarter and year-to-date results, please refer to our earnings release and Form 10-Q issued yesterday. With that, I'll turn the call over to Bob.
Robert J. Sprowls
Thank you, Eva. Hello, everyone.
In early September 2013, we completed a 2 for 1 stock split of the company's common shares and paid a 14.1% increased dividend to our shareholders. I am pleased to announce that our Board of Directors recently approved another quarterly dividend of $0.2025 per share on the common shares of the company, which will be paid on December 2, 2013 to shareholders of record at the close of business on November 15.
This represents the 310th consecutive dividend payment made by the company. For our regulated water business, we continue to focus on our ongoing infrastructure improvements, operational efficiency and evaluating various cost containment measures to minimize cost to our customers while still providing the highest standard of service.
In our electric division, we continue to work with the CPUC to move forward with the review of our electric general rate case. A proposed decision is expected in early 2014.
Turning our attention to our Contracted Services business. As Eva mentioned earlier, we experienced lower construction activity during the third quarter of 2013 for this business segment due to unusually high rainfall in June and July at Fort Bragg, which hindered construction work for the quarter.
In addition, the renewal and replacement work at Fort Bliss occurred at a slower pace during the third quarter. Also contributing to the lower third quarter earnings were higher administrative expenses in part to pursue new military base utility privatization opportunities.
Due to the wet weather in the third quarter, the $58 million water and wastewater pipeline replacement project at Fort Bragg is now expected to be completed in the first quarter of 2014. Also at Fort Bragg, the backflow preventer and meter replacement project, totaling $23 million, and the $17 million infrastructure project at a new area are all scheduled to be substantially completed by the second quarter of 2014.
Additionally, there are various construction upgrade projects of smaller magnitude that will continue across all military bases. During the government's fiscal year-end, ASUS was awarded approximately $18.5 million in new construction projects, the majority of which are expected to be completed during 2014.
Though many new projects are typically awarded at the end of the government's fiscal year, other new projects are awarded by the government throughout the year. ASUS also receives new work from other prime contractors at various bases that are awarded separate from government modifications.
While earnings from these new contracts can vary, currently, we expect new construction work for the next year to be fairly consistent with what we completed during the past 12 months. There are also various price redeterminations under negotiation with the U.S.
government. In September of this year, ASUS received a modification for the first price redetermination for Fort Bragg, effective retroactively to March 2010.
The modification provides for a nominal increase in operations and maintenance revenues above the interim level previously in effect, and a $4.2 million increase in annual renewal and replacement funding. ASUS will file the second price redetermination for Fort Bragg this month with an anticipated resolution by the end of this year.
We are currently in negotiations on the first price redetermination for Fort Jackson in South Carolina, which is expected to be completed by the end of this year. An interim operations and maintenance fee increase of 3.4%, retroactive to February 2010, is currently in place pending final resolution of the price redetermination.
The second price redeterminations for the military bases in Virginia are expected also to be completed before the end of this year. An asset transfer filing for Fort Bliss, with an annual increase in operations and maintenance fees of approximately $815,000 compared to the amount previously approved, is effective this month.
Asset transfer filings provide additional funding to us for assuming more infrastructure at the military base. Lastly, for Andrews Air Force Base, the second price redetermination will be based in part on the finalization of asset transfer filings that are currently underway.
These asset transfer filings are expected to be finalized by the end of this year. We also continue to actively engage in new proposals and expect the U.S.
government to release additional bases for bidding over the next several years. In regard to potential government funding limitations, as we've noted during previous calls, we have not experienced any earnings impact to our existing operations and maintenance, and renewal and replacement services provided by ASUS as such contracts are not subject to the provisions of the Budget Control Act.
Any future impact will likely be a possible delay in the timing of payments from the U.S. government, delays in the processing of price redeterminations and issuance of contract modifications for new construction work not all refunded, and/or delays in the solicitation and/or awarding of new utility privatization opportunities under the Department of Defense utility privatization program.
With that, I would like to thank you for your time and interest in American States Water, and I'll now turn the call over to questions.
Operator
[Operator Instructions] The first question we have comes from Ryan Connors of Janney Capital Markets.
Kenneth J. Dorell - Janney Montgomery Scott LLC, Research Division
This is actually Ken Dorell for Ryan. I just have 1 question regarding the government shutdown that you alluded to in your comments.
You mentioned an $8.5 million reward for new construction projects expected in 2014, but given the shutdown and kind of the piecemeal spending in place, is there any effect that you are seeing or anticipating, whether it be on 4Q project activity or just your outlook in 2014? Or is it really ancillary or separate from those concerns?
Robert J. Sprowls
Yes. First of all, it was $18.5 million, and so far, we have not seen any impact from the government activities.
The services we provide are accepted services under the Department of Defense. And as a result, they're not impacted, at least the work we're doing, is not impacted by government slowdown activities.
To a degree, it may adversely impact payment at times or may delay price redeterminations, particularly contracting officers at bases or contracting officers either at bases or at the Defense Logistics Agency Energy, which is where a number of our contracting officers are. If they get furloughed, that could slow the process down a bit.
Does that answer your question?
Kenneth J. Dorell - Janney Montgomery Scott LLC, Research Division
Fair enough. Yes, absolutely.
Operator
Next, we have Heike Doerr of Robert W. Baird.
Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division
I wondered if we could talk a little bit about your thoughts on what revenue from Fort Bragg would we see in the fourth quarter, and how much of that should we be thinking about coming in the first half of 2014. If I recall correctly, the fourth quarter of last year was a pretty strong quarter for ASUS.
Should we be looking for this year's fourth quarter to match that?
Robert J. Sprowls
Yes. Heike, I would be happy to answer that question.
In the fourth quarter of last year, our earnings, on an adjusted basis for the stock split from ASUS, were $0.115. And this past quarter, we had $0.06 a share versus $0.10 last year, so that was a variance of about $0.04.
Looking at the fourth quarter, are we going to see a similar variance? It's possible we may see sort of the same variance in the fourth quarter that we saw on the third quarter, though we are hustling to make up some ground on some of the construction projects that were delayed because of the weather during the third quarter.
As we look into 2014, of course, we do have those 3 substantial projects at Fort Bragg that are going to continue into 2014, but not for the full year. And those 3 projects are the $58 million water -- wastewater pipeline replacement project, the $23 million combination backflow preventer meter replacement project, and the $17 million infrastructure project to serve a new area of Bragg.
We expect the $58 million project to be done during the first quarter of 2014, and then the other 2 projects to be done by the end of the second quarter 2014. So we will see a drop-off in earnings from these 3 projects in 2014 versus 2013 because as I said, there will be partial-year projects for 2014.
However, we do expect to have a number of additional construction projects for 2014. So individually, probably not as large in size as these 3 projects.
So as I previously mentioned, we do have this $18.5 million set of new construction projects, the majority of those projects, we are expecting to be completed in 2014. Assuming work on these additional projects, and if we have successful price redeterminations, we're thinking 2014 could look a lot like 2013 in terms of total earnings contribution.
Of course, understand, this is -- isn't a very precise estimate as numerous factors outside of our control, including the government funding limitation, can impact the timeliness of new modifications and existing proposals at new bases. So again, looking to 2014, right now, and it is always dangerous to look 12 to 15 months down the road in this business given what's going on, but we think 2014 might look a lot like 2013.
Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division
Okay. And any new contract wins for new bases, when would be the earliest that any benefit from that would be seen?
Robert J. Sprowls
We could see some benefit as early as 2014, might be the tail end of 2014.
Eva G. Tang
Early though [ph] in '14.
Robert J. Sprowls
Yes, might be the fourth quarter-ish. All depends on when we would get notification of the win.
Right now, as of -- there's like a 6 to 9 month transition period after you get the win, so there's a little bit of start-up time there, which gives us chance to hire folks to do the work at the base, et cetera.
Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division
And how many RFPs do you have outstanding that you're waiting to hear answers on about who the contract is going to?
Robert J. Sprowls
Well, there are many, but you have to understand, there are several phases in the RFP process. I would say, we've got 1 particular contract that's probably close to the end, the others are at various stages in the process.
So we are looking at a number of bases, so we've been hitting this really hard. I would say we're at somewhere in the process in at least, I would say, 10.
Operator
[Operator Instructions] Next, we have a question from the location of Jonathan Reeder, Wells Fargo.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Appreciate the additional guidance here on ASUS, specially looking forward to 2014. That's really helpful.
Bob, you said, I guess, construction expense for '14, you would say are similar to the trailing 12 months. Is that around like $75 million?
Or what would that level be?
Robert J. Sprowls
Let's see, the...
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
I know your guidance going into the year was like $79 million or so for 2013, but obviously, a little got shifted.
Eva G. Tang
Year...
Robert J. Sprowls
Go ahead, Eva. I mean, it's...
Eva G. Tang
I think year-to-date, construction expenses is at $59 million.
Robert J. Sprowls
That's the year-to-date number?
Eva G. Tang
That's the year-to-date number, yes.
Robert J. Sprowls
So that's -- we have to tack on the fourth quarter of last year. That's the number I don't have off the top of my head.
Eva G. Tang
Well, we're looking for that, Jonathan. Fourth quarter last year, in terms of revenue, I think we had -- I don't have the cost, I have revenues.
It's about, I think $30 million, $35 million in the fourth quarter for all the construction work. So I can get you that number, Jonathan.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Okay. But I mean, would you say, Bob, I mean, overall it's similar to your total construction expense, I guess, for 2014, or do you think it's going to be similar to where '13 comes in at, or?
Robert J. Sprowls
Yes. I would say '13 would be a -- would be probably the best picture of where 2014's going to be at...
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Okay. Now, your award of $18.5 million for 2014 or for the next 12 months doesn't sound all that high.
So I mean, I guess from our perspective, it doesn't seem all that unusual. Is that -- I mean, how does that compare to, I guess, your ongoing expectations for construction work that's kind of possible, where you don't have these necessarily very large projects like the ones that you're wrapping up right now, but more of the smaller kind of cats and dogs.
Can you still get to $75 million, $80 million per year in construction expense? Or would you expect that to kind of tick down then in '15?
Robert J. Sprowls
Well, '15 is -- that's aways out there in this business. And we are going to, as you know, have the benefit in the first quarter and the second quarter of the larger projects at Bragg.
But the sense is that we'll have enough other construction work to kind of offset as that sort of drops off in '14. As we get to '15, it's a little more difficult to predict whether that same level of earnings and construction will continue.
Just because we don't know where the government's going to be at 12 months from now on funding issues, et cetera. It could be very positive, but it could also be difficult.
So '15 is much more difficult to predict at this point. I think we're comfortable saying '14 could look a lot like '13.
In '15, there's a -- it could look like '14 as well, but it would -- there, we have to see some additional modifications that come through and additional asset transfers, that sort of thing.
Eva G. Tang
Jonathan, the $18.5 million is at the fiscal year end. We do receive modification from government throughout the years, so it would be on top of that.
And we have subcontract from prime contractors on the base, like housing contractor on the base. If they need to do something, they would come to us.
Those kinds of are -- a little bit hard to predict, and we have works coming from last year that we still have to finish, continue next year. So the work to be done is not just that $18.5 million-plus those big projects.
There are other projects come along during the years.
Robert J. Sprowls
And the $18.5 million this year is comparable to a number like $7 million to $8 million last year. But that's not to say we're going to see a $10 million ramp-up, it just -- these projects that come at the end of the fiscal year.
This year $18.5 million, last year, I think it was between $7 million and $8 million. But there's a lot that goes on sort of between fiscal year end as well.
So we don't want you to say, "Oh, I'm going to get $10 million more work to be done there," but at least it's a higher number than it was last year.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Right. Which helps to offset some of the large project kind of completion thing.
Robert J. Sprowls
That's right, that's right.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Okay. Yes, that kind of commentary is helpful.
I guess the other thing that kind of jumped out as I was going through the Q, you talked about the 9-month results for ASUS and saying some of the, I guess, year-over-year decrease was due to lower profit margins on certain construction projects compared to 2012. In general, I mean, how should we think about, I guess, the margins on the construction business?
Have -- are they being compressed at all or is that just kind of a one-off thing for some of those projects?
Robert J. Sprowls
I think, at this point, the margins are not being compressed. I think in 2012, though, we had extra margin.
I think the standard margins are -- that's what we're going to see going forward.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Okay. So 2012 were just a little higher-than-normal?
Robert J. Sprowls
Yes. I think what we had there was we had the -- because of the economy, our subcontractors were really hungry.
And as a result, we made a little more money on some of those projects than is standard, and that hasn't been the case in 2013.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Got you. And then kind of last question, I'll let someone else jump in.
If we're trying to get to kind of a year-to-date ongoing EPS number, you're at $1.31, but then we would need to back out, I guess, the kind of $3 million onetime recovery in Q1. The Q2, $835,000 kind of renewable energy cost recovery thing, and then, I guess, the $1.4 million from the employee benefit program tax benefit in Q3, is that kind of accurate?
Am I missing something?
Eva G. Tang
Yes.
Robert J. Sprowls
Yes. I mean, that tax benefit though, we are going to -- it's going to be, what, $300,000 a year going forward.
So we may want -- may not want to take the full...
Eva G. Tang
Entire.
Robert J. Sprowls
The entire $1.4 million out. You may just want to take $1.1 million out.
Of course, that is bottom line. Since it's tax benefit, it's bottom line impact.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
Right, okay. So you booked $1.5 million, I think, in Q3, so maybe take out $1.2 million, is that, I guess, the way to look at it?
Robert J. Sprowls
Yes, I think the run rate on that is going to be $300,000 per year...
Eva G. Tang
And Jonathan, the construction cost for ASUS fourth quarter is about $23 million last year.
Jonathan Reeder - Wells Fargo Securities, LLC, Research Division
$23 million? Okay.
So I guess it's -- yes, right, in the low 70s then?
Eva G. Tang
Yes.
Operator
Well, with no further questions at this time, we will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Bob Sprowls for any closing remarks.
Sir?
Robert J. Sprowls
Okay. Thank you, Mike.
Again, I just wanted to thank all of you for your participation today and for your continued interest and investment in American States Water Company. Everyone have a great day and a great holiday season.
Operator
You also have a great day, sir, and also to Ms. Tang.
This concludes today's American States Water Company Conference Call. As a reminder, this call will be archived on our website beginning Tuesday, November 5, 2013, at 5:00 p.m.
Eastern time and will run through Tuesday, November 12, 2013. Again, we thank you, all, for your participation.
At this time, you may disconnect your lines. Thank you, and take care, everyone.