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Korea Electric Power (KEP) Q2 2015 Results – Earnings Call Transcript

Korea Electric Power Corporation (NYSE: KEP ) Q2 2015 Earnings Conference Call August 5, 2015 3:30 AM ET Executives Weon-Gun Ko – Vice President and Treasurer Changyoung Ji – Senior IR Manager Analysts Pierre Lau – Citibank. Jiyoon Shin – KTB Securities Jae-Hyun Ryu – Daewoo Securities Heedo Yun – Korea Investment & Securities Minho Hur – Shinhan Finance Investment Joseph Jacobelli – Bloomberg Intelligence Josh Bae – UBS Kang Seongjin – KB Investment Securities Operator [Foreign Language – Korean] Good morning and good evening. First of all, thank you all for joining this conference call. And now we’ll begin the conference of the fiscal year 2015 second quarter earnings results by KEPCO. This conference will start with a presentation, followed by a detailed Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2015 second quarter earnings results by KEPCO. Weon-Gun Ko [Foreign Language – Korean] Good afternoon. This is Weon-Gun Ko, Vice President and Treasurer of KEPCO. On behalf of KEPCO, I would like to thank you all for participating in today’s conference call to announce earnings results for the first half of 2015. [Foreign Language – Korean] We will begin with a brief presentation on the earnings results, which will be followed by a Q&A session. Today’s call will be presented in both Korean and English. [Foreign Language – Korean] Please note that the financial information to be disclosed today is on a preliminary, unaudited and consolidated basis in accordance with K-IFRS. Any comparison would be on a year-on-year basis between 2014 and 2015. Business strategies, plans, financial estimates and other forward-looking statements included in today’s call will be made based on our current expectations and plans. Please be noted that such statements may involve certain risk and uncertainties. [Foreign Language – Korean] Now Senior IR Manager, Mr. Changyoung Ji, will begin with an overview of earnings results of the first half of 2015, first in Korean and repeat it in English. Changyoung Ji [Foreign Language – Korean] Now we will provide the overview in English, starting with operating income. In the first half of 2015, KEPCO recorded a net operating income of KRW 4.33 trillion. Taking a closer look, operating revenues increased 4.1% to KRW 28.79 trillion. This was attributable mainly to 2.1% increase in power sales revenue totaling KRW 25.89 trillion, and 38.2% increase in revenues from the overseas business amounting to KRW 2.11 trillion. Moving on to main operating costs, cost of goods sold. SG&A expense decreased 4.4% to KRW 24.47 trillion. Fuel costs decreased 25.9% to KRW 7.98 trillion. Power generation is affected by the low power demand, decreased 4.2%, and unit cost of fuel declined by 22.6%. Meanwhile, purchased power cost increased 3.5 % to KRW 6.19 trillion. Unit cost of purchased power decreased 20% because of the decrease of S&P, caused by the increase of new highly efficient power plants, and purchased volume increased 29.3%. Depreciation cost rose 5.3% to KRW 3.55 trillion, mainly due to the newly constructed substations and new facility addition by power plants. Now let me explain KEPCO’s non-operating segment. Net financial loss was KRW 1 trillion in the first half of 2015, which was improved by KRW 125 billion. As a result of foregoing, we recorded a consolidated net income of KRW 2.57 trillion in the first half of 2015. This concludes the overview of KEPCO’s earnings results for the first half of 2015. [Foreign Language – Korean] Now let me move on to the Q&A session. Q&A session will be hosted by Mr. Weon-Gun Ko. Weon-Gun Ko [Foreign Language – Korean] This is Weon-Gun Ko. I’m joined with our IR committee members in charge of major business areas at KEPCO. We are prepared to take any questions. [Foreign Language – Korean] Since we are presenting in both Korean and English, all the Q&As will be interpreted. Please make sure your questions and answers are brief and clear. [Foreign Language – Korean] Please begin. Question-and-Answer Session Operator [Foreign Language – Korean] [Operator Instructions] The first question will be given by Pierre Lau from Citibank. Please go ahead sir. Pierre Lau Hi. Good afternoon, KEPCO management. Congratulations to your good results. I’m Pierre Lau from Citi Bank. I have three questions. The first question is what is your generation mix from nuclear and coal respectively in 2015 for the full-year? Second question, what is your forecast of your unit coal and LNG costs, practically also in 2015 full-year? And finally for 2015 full-year, how much electricity that you expect to purchase from IPP? Thank you. Weon-Gun Ko [Foreign Language – Korean] To answer your first question on the generation mix for the 2015 full-year, we believe the LNG will be 11% and coal will be 49% and nuclear will be 37%. [Foreign Language – Korean] And as for the unit cost for the fuel for the generation, it is as follows. For coal, it is KRW 102,001 per ton and for LNG, it’s KRW 827,000 per ton and for oil it’s KRW 576,800. [Foreign Language – Korean] And to answer your third question on our electricity purchase from IPP, we plan to purchase 19% of our power from IPP, and the overall budget in 2015 will be KRW 11 trillion. Pierre Lau Okay. Thank you. For the unit coal costs, would you mind me take the number? Weon-Gun Ko [Foreign Language – Korean] It is KRW 102,001 per ton for coal. Pierre Lau Okay. It’s KRW 102,000. Weon-Gun Ko KRW 102,000 per ton. Pierre Lau But I calculate the number in the first half was only seems to be much lower than that, less than KRW 1,001. So do you expect coal cost to be higher in second half this year compared to first half? Weon-Gun Ko [Foreign Language – Korean] As of July 1, we are going to be affected by the coal tax by the government. Therefore per kilogram the impact would be KRW 24 from KRW 18 per kilogram. Pierre Lau Okay. Thank you. Operator [Foreign Language – Korean] The following question is by Jiyoon Shin from KTB Securities. Please go ahead sir. Jiyoon Shin [Foreign Language – Korean] I have two questions. My first question is rather similar to the previous question that was asked before me. For the LNG unit cost for the first half you mentioned that it’s KRW 810,000, and for the second half of the year your guidance is KRW 660,000. So throughout the year the overall guidance for LNG unit cost amounts to KRW 820,000. So do you – so it means that there will be foreseeable increase in the second quarter of the year to come up with that guidance number. Given that we are affected by the consumption tax that will increase from KRW 18 per kilogram to KRW 24, that still get us rather high level of LNG unit cost number. So I would like to hear more on that. Given that the oil price is declining, and in November and December there will be also additional downward trends for the LNG price. So how would you explain this trend? And the second question is on the overseas business, which has very high revenue generated in the term. I believe it is mostly coming from the UAE business under KEPCO, and in the first quarter it was announced that there has been about KRW 620 billion generated from the UAE business. And second quarter then gives us – it should be over KRW 1 trillion. So I just like to confirm what has driven this growth of the UAE business? Weon-Gun Ko [Foreign Language – Korean] To answer your first question, we had rather conservative assumption when it comes to LNG, which was $62 per barrel. And in the third quarter our forecast that the LNG price would drop to KRW 770,000 per unit and in the fourth quarter then it goes up again to KRW 800,000 per unit. So the price drop is not happening as fast as we have anticipated and we bought bulk of LNG in the first quarter at a price of KRW 879,000 at the highest and that’s where we had the most purchase of LNG for the year. That’s why if you annualize that, that gives us about KRW 820,000, which was an accumulated number that goes back to the first quarter. [Foreign Language – Korean] To answer your second question on the UAE business, for the first half of this year, our revenue for the UAE business is KRW 1.7329 trillion and year-on-year – in the previous year it was KRW 1.1372 trillion. So there has been increase of about KRW 600 billion year-on-year. [Foreign Language – Korean] Our annual guidance for the UAE business is KRW 3.4 trillion. [Foreign Language – Korean] And as you have mentioned for the second quarter alone, our revenue from UAE business is KRW 1.1 trillion. [Foreign Language – Korean] I hope that answered your question. Jiyoon Shin [Foreign Language – Korean] A follow-up question to my first question is you mentioned that the LNG price is $62 per barrel. Is that annual number or annual guidance for the LNG price? Weon-Gun Ko [Foreign Language – Korean] Yes, our guidance for the oil price is $62 per barrel and that’s correct. [Foreign Language – Korean] And because oil price continues to go down, our fact strategy team is revealing to adjust our assumption for the oil price and lower that to $58 per barrel rather than $62. Operator [Foreign Language – Korean] The following question is by Jae-Hyun Ryu from Daewoo Securities. Please go ahead sir. Jae-Hyun Ryu [Foreign Language – Korean] On a stand-alone P&L, it seems that your net asset is higher for the stand-alone than the consolidated basis. What has driven that change and what is the reason behind that in the second quarter? My second question is what is the utilization that you are foreseeing for the second half of the year for the nuclear, coal and LNG valuation? [Foreign Language – Korean] And also another follow-up question is that for the second half of the year, could you also share your guidance and the overall trends by comparing the consolidated financial statement as well as the stand-alone financial statements? Weon-Gun Ko [Foreign Language – Korean] To answer your first question on the stand-alone P&L. The most of the driver was coming from the sales of the electricity. Unit price for electricity went up by 0.4%, whereas the sales volume went up by 1.4% resulting in increase of KRW 300 billion on our bottom line. Also the S&P price was dropped by 25% and therefore our power purchase cost was lowered by KRW 2.4 trillion, which is the largest sector driving up the performance. As for the guidance for the 2015, for the stand-alone P&L, we believe the operating profit to be KRW 3.4 trillion and with recognition of sales of assets which was our own headquarter in September, you could see annual number for the net profit would be KRW 9.1 trillion. On consolidated basis, our operating profit is expected to be KRW 8.3 trillion, whereas our net profit is expected to be KRW 11.4 trillion. [Foreign Language – Korean] As for the generation utilization, as per the nuclear power plants, E&C overall utilizations would be 84.8% for year 2015, which is similar to the previous year which was at 85%. With the third quarter and fourth quarter this year, our expectation is that it would be 82.7% and 88.8% respectively. And as for the coal-fired power plant, we expect mid-80% in utilization. We have a confirmed number for the first half of the year for the coal-fired power plant, but there are certain uncertainties involved for the second half of the number. So that’s our projection for now. For LNG power plant, we expect it to be the early 14% utilization or the mid-30% utilization for the year. Operator [Foreign Language – Korean] The following question is by Heedo Yun from Korea Investment Securities. Please go ahead sir. Heedo Yun [Foreign Language – Korean] I have two questions. First question, if you look at your consolidated P&L for the second quarter under the line item, other operating profit, it recorded KRW 2.36 trillion and there has been increase of about KRW 670 billion. I know this may have been influenced by some of the changes coming from the provisioning required for decommissioning the nuclear power plant which took effect since the July 1. So could you elaborate on what is driving that? And also my second question is that last week you have submitted the total cost or a tariff report to the government to adjust tariff moving forward. So could you share with us the timeline moving forward? And Mr. Treasurer, would you be kind enough to share with us your perspective on whether it is possible for additional tax decrease? Weon-Gun Ko [Foreign Language – Korean] Out of the KRW 3.3 trillion, we’ve seen increase of KRW 870 billion increase year-on-year. And if you break those numbers down, it was slightly driven by increased facility or equipment purchase costs for our UAE business as the business appreciated for significant amount of period, and that number adds up to KRW 410 billion. And also we are adjusting numbers for provisioning for the decommissioning of the nuclear power plant. We are setting aside the waste disposal costs for the low and intermediate radioactive waste treatment and we are currently adjusting the discount rate and interest rate that is affected in that liability. So that number added about KRW 139.8 billion to the number. And also we are setting aside liability or provisioning for the IPS, which is another KRW 140 billion, which totals to KRW 3.3 trillion. [Foreign Language – Korean] On your question on the potential tariff discount moving forward, we have had a one-time discount already when it comes to our electricity price. So in the second half of this year, of course we’re going to adjust our tariff depending on the total cost and also the overall power sales profit. And we have submitted that based on our management accounting in fiscal year 2014. So it has been submitted to the government but nothing has been determined as of this point on the total cost. When the results come out after government reviews this, we will be adjusting the tariff looking at the overall cost, as well as the overall sales profit from electricity sales, but nothing has been determined yet. But we’ve had this one-time discount of our electricity in July already. So any additional discount or decrease in tariff will be something that will lead to discuss with the government once everything becomes more concrete. Operator [Foreign Language – Korean] [Operator Instructions] The following question is from Minho Hur from Shinhan Finance Investment. Please go ahead sir. Minho Hur [Foreign Language – Korean] So last year there was plan to fix the cost for your fuel disposal but as far as I am aware, it has been just delayed to June of this year, but it seems that that cost still has not been determined yet. When do you believe that the disposal cost would be clear or ways would be determined and when if it is determined, how much of the cost do you expect? Weon-Gun Ko [Foreign Language – Korean] So the cost requirement for the nuclear waste disposal has been amended as of June 30 and it will be taken into effect since the second half of this year but in next two years. There hasn’t been any significant changes to the amendment. However, for the low and intermediate nuclear waste disposal, the cost would be change per barrel and it used to be about KRW 11,930,000 per barrel, but the number is going to be increased by about KRW 200,000. So the overall cost therefore will be increased from current KRW 603.3 billion to KRW 643.7 billion moving forward. So we believe the cost impact would be somewhere around KRW 250 billion to KRW 300 billion per barrel, per dron [ph] that is for the unit cost for the radioactive – for the low and intermediate radioactive waste. Operator [Foreign Language – Korean] [Operator Instructions] The following question is by Joseph Jacobelli from Bloomberg Intelligence. Please go ahead sir. Joseph Jacobelli Good afternoon. And thank you very much for the time and this presentation. Couple of quick questions with regards to your debt management going forward. So we’ve seen the level coming down in last couple of quarters. Do you have any specific targets with regards to either your net debt to equity by 2015 and by 2016, or long-term debt to equity whichever number you feel comfortable with? And the other question is, could you give us a quick update on your nuclear build-out over the next few years? Any more delays or are any plants coming in a little bit more quickly than looks this year? Weon-Gun Ko [Foreign Language – Korean] On your first question on the debt ratio, our goal or target for the consolidated basis for 2015 is 164% and for 2016 is 149% and for year 2017 is 133%. On a stand-alone basis, our target for 2015 is to lower the debt ratio below 100% level. [Foreign Language – Korean] As far Shin Wolsong 2, we have gone live as of the July 24 of this year and for Shin Kori #3, our target date for operation is first half of 2016, and for Shin Kori #4 nuclear power plant is targeted to go live by first half of 2017. Operator [Foreign Language – Korean] The following question is by Josh Bae from UBS. Please go ahead sir. Josh Bae Yes. Hi. Thank you for the opportunity. I have two questions. First, I think you mentioned consolidated operating profit target of KRW 8.3 trillion for this year. Could you please share with us what the FX and oil price forecasts you’re using for this target? Second question, just to follow-up on the previous question regarding the Shin Kori #4. I think you were previously expecting this nuclear plant to come online sometime in 2016. Is there a particular reason for the delay to first half of 2017? Thank you. Weon-Gun Ko [Foreign Language – Korean] As for the assumption that we were using for our financial guidance for 2015 is we assume that the electricity sales will grow by 1.8%, whereas the foreign exchange rate against dollar would be KRW 1,121 per dollar, and for oil price we expect it to be $62 per barrel in Dubai price. And for bituminous coal, our assumption is $75 per ton. [Foreign Language – Korean] As for your second question on Shin Kori #4, it is being delayed because there has been some incompliance on the technology side that some valves, so some of the components, for example the valves needs to be replaced because it failed to meet the technology qualification. Therefore the operating date for Shin Kori #4 has been delayed to the first half of 2017 instead of our initial schedule which was July of 2016. Operator [Foreign Language – Korean] [Operator Instructions] The following question is by Kang Seongjin from KB Investment Securities. Please go ahead sir. Kang Seongjin [Foreign Language – Korean] I have a question on the overall power purchase cost. It seems that the power purchase unit cost for your GENCO has gone down significantly in the second quarter. What is your expectation for the third quarter, and could you also share with us your perspective on the adjustment coefficient when you also explain the unit cost trend you will be followed? Weon-Gun Ko [Foreign Language – Korean] As far this year if you look at the adjustment coefficient for the GENCOs reflecting on the last year’s number, the S&P price was very high in the first half of the year and very low in the second half of the year. So there has been fluctuation if you look at the whole year. And I have to score at the overall profit and loss of GENCOs over the period. So what we have decided to do this year is that we are going to split the adjustment coefficient being calculated separately for the first half of the year and the second half of the year. So what we see as a result is that the S&P is high in the first quarter, therefore the GENCOs profitability appears to be very high in the first quarter, whereas in the second quarter the KEPCO’s profitability appears to be high. We have recalculated the adjustment coefficients at the end of June again. And in the second half of the year, we believe the fluctuation of the S&P will rather be stable. So in the second half of this year, the coefficients or settlement types – unit types will be high and stable. So all in all, we are going to see stabilized number with higher settlement price. Operator [Foreign Language – Korean] [Operator Instructions] The following question will be given by Joseph Jacobelli from Bloomberg Intelligence. Please go ahead sir. Joseph Jacobelli Just a quick follow-up question with regards to several coal costs. Given we’ve seen coal prices very low for quite some time and unlikely to get any – go any higher. Will this price trend of coal influence your decision in terms of future capacity planning or will you just say for example taking 1% coal-fired power plant by – to gas-fired power plant to a coal-fired power plant, or are you trying to secure longer term contracts for coal, or are you trying to diversify some of the coal costs – coal sources? Thank you. Weon-Gun Ko [Foreign Language – Korean] Last month we have announced the seventh basic plan for the electricity supply and demand by the government. And there LNG makes this so much similar. It has increased by about 0.3% and for coal, we assume that the coal price will go down and its mix would be about 32%, whereas the nuclear power plant we are adding two more nuclear power plants and that will take up about 28.5% in terms of our generation mix. As for the coal-fired power plant, we have initially planned for adding for a coal-fired power plant in our sixth basic plan for electricity supply and demand but that has been withdrawn. [Foreign Language – Korean] And as for the GENCOs, they have – when they plan for the purchase of coal, their target is to have 80% of the coal purchased under the long-term contract with their suppliers. So even if there is drop in coal price, they would not necessarily move to diversify their coal purchase sources in East [ph]. The GENCOs are looking into various method and ways to have competitive pricing, sourcing price for their coal. Joseph Jacobelli Thank you. Operator [Foreign Language – Korean] The following question is by Jae-Hyun Ryu from Daewoo Securities. Please go ahead sir. Jae-Hyun Ryu [Foreign Language – Korean] I have one short question on dividend payment. Now that we are wrapping up the first half of the year, has there been any internal discussion on the dividend payout for the end of the year? One potential idea is that because you have the sales of your headquarter assets, are you reviewing to use that fund to include that in your dividend payout? I know it’s rather early to have a view on that, but could you mention or potentially share anything with us? Weon-Gun Ko [Foreign Language – Korean] On our dividend policy with dividend forecast for 2015, I regret to say that there has not been any concrete measure that has been determined yet. Our intention is to maintain our historical dividend payout ratio which was 30%. Of course for this year, because of our after-sales we have increased special profit and that may then lead to special dividend, but nothing has been determined yet and we are in the process of discussing that with the government. When we consider the special profit into our dividend policy, then that will significantly drive up our dividend payout. So our basic stance is to maintain our historical dividend payouts, but that’s something that we are still discussing with the government. But what we are keeping in mind is that we will act on behalf of the investors’ interest and in leading that discussion with the government. Weon-Gun Ko [Foreign Language – Korean] All right. We will conclude this conference call. Once again thank you for joining us today. Thank you. Operator [Foreign Language – Korean] [Operator Instructions] This concludes the fiscal year 2015 second quarter earnings results by KEPCO. Thanks for the participation.

American States’ (AWR) CEO Bob Sprowls on Q2 2015 Results – Earnings Call Transcript

American States Water Company (NYSE: AWR ) Q2 2015 Results Earnings Conference Call August 5, 2015 2:00 PM ET Executives Eva Tang – Chief Financial Officer Bob Sprowls – President and CEO Analysts Jonathan Reeder – Wells Fargo Operator Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company’s Second Quarter 2015 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 p.m. Eastern Time and run through August 12, 2015, on the company’s website, www.aswater.com. After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] This call will be limited to an hour. As a reminder, certain matters discussed during these conference call maybe 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. At this time, I will turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Eva Tang Welcome, everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. I’ll start with our quarterly financial result. For the second quarter of 2015, diluted earnings were $0.41 per share, compared to $0.39 per share for the same period in 2014. While earnings at our Water segment remained flat for the quarter, earnings for the Electric segment decreased by $0.01, earnings at our Contracted Services segment increased by $0.02, and our parent company’s earnings increased by $0.01. I will now discuss major items impacting the comparability of the two periods. For the quarter Water revenue increased about $1.3 million to $87.6 million as compared to the same period in 2014. The increase is primarily due to the third year rate increases and increases generated from revenue recovery on capital projects approved through advice letter filings. These increases were partially offset by an $842,000 decrease in surcharges during the quarter to recover previously incurred costs approved by the California Public Utilities Commission or the CPUC. Most of these surcharges were implemented in 2013 and expired during 2014. The decrease in revenue from these surcharges is offset by a corresponding decrease in operating expenses, largely in administrative and general expense, resulting in no impact to pretax operating income. As a reminder, a change in build consumption, which decreased 13% during the second quarter as compared to Q2 last year, does not have a significant impact on the company’s revenues or Water gross margins due to the CPUC authorized Water Revenue Adjustment Mechanism or the WRAM. The WRAM mechanism is in place for all of our Water service areas, excluding the effect of surcharges our Water gross margin approximately authorized Water margin approved by the CPUC. We expect Water consumption to continue decreasing during the remainder of 2015 as compared to the same period last year, because of mandatory Water conservation and rationing, which Bob will discuss in more detail later. Again, any continued decrease in Water consumption will not impact our earnings significantly because of the WRAM. For the second quarter of 2015, revenues from Electric operations were $7.9 million as compared to $8.3 million for the same period in 2014. The decrease is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC’s November 2014 final decision on our electric general rate case. Differences in the monthly allocation of the annual adopted revenue for 2015 versus 2014 are expected to reverse during the year. Revenues for our Contracted Services business, American States Utility Services, or ASUS, decreased $1.9 million to $19.1 million for the second quarter of 2015. This decrease was due to lower construction activities, as compared to the second quarter of 2014, due largely to the completion of several large capital projects during 2014, which did not recur in 2015. These decreases were partially offset by higher construction revenues during the second quarter of 2015 due to favorable changes in cost estimated for certain capital work in progress. These new capital upgrade projects and cost estimates are continuously evaluated and revised accordingly. Revenues for these projects are recognized based on the percentage of completion method of accounting. There was also increasing monthly operation and maintenance revenue due to successful price redeterminations in September 2014. Our water and electric supply costs were $27 million for the second quarter of 2015. Any changes in supply costs for both the water and electric segment as compared to the adopted supply costs are tracked in balancing account, which will be recovered from or refunded to our customer in the future. Administrative and general expenses for the second quarter of 2015 were $20.5 million, as compared to $19.4 million for the same period in 2014. Excluding surcharges which has no impact on earnings, A&G for our utility segment increased by $1.2 million during the quarter. The increase was due primarily to higher legal and other outside service costs related to condemnation and drought activities at our water segment. We will continue to incur legal costs to defend our water systems from condemnation actions. Furthermore in connection with our efforts to meet California Governor’s orders to use overall water usage by 25% as compared to 2013, Golden State Water has been authorized by the CPUC to track incremental drought-related costs incurred in a memorandum account for possible future recovery. Such incremental costs are being expensed until future recovery is approved by the CPUC. Despite higher A&G at water segment for the second quarter, on a year-to-date basis the aggregate A&G, other operations and maintenance expenses were lower in 2015 than for the same period in 2014 after excluding surcharges. In addition, A&G expenses for contracted services increased by $482,000 for the three months ended June 30, 2015 primarily due to a shift in labor and other indirect costs to A&G related activities in support of various functions for all military bases. This increase was largely offset by a decrease in such costs included in construction expenses as compared to the second quarter of 2014. ASUS construction expenses decreased by $3.4 million to $10.4 million during the second quarter of 2015, as compared to the same period in 2014, due primarily to the completion of large capital projects and programs in 2014, which did not recurred in 2015. In addition, as just discussed, there was a shift in labor and other indirect costs incurred as A&G activities. While in Q2 of last year, a higher year percentage was incurred for construction activities. Income tax expense decreased by $728,000 to $9.5 million as compared to the same period in 2014, driven by an overall decrease in the effective income tax rate. Although very effective tax rate at Golden State Water’s company was due to differences between book and taxable income that are treated as flow-through adjustments. The effective tax rate at ASUS was lower as a result of the state income taxes which vary among the jurisdictions in which it operate. There were also favorable permanent differences, not just the tax deduction related to the introduction and construction activities, which also impacted the effective tax rate this quarter. AWR’s consolidated effective tax rate was about 38% for three months ended at June 30, 2015 as compared to 40% for Q2 last year. Let’s moving on to — move on to the liquidity and capital resources. Net cash provided by operating activities decreased by $27.9 million to $63 million for the six months ended June 30, 2016. The decrease was primarily due to a decrease 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, 2015 as compared to the same period in 2014. During the first six months of last year, significant cash payments were received at ASUS with completion of several large capital upgrade project that did not recur in 2015. Cash flow from construction activities may fluctuate due to timing differences of when the work is being performed or when the cash is received for payment of the work. There was also decrease in customer water usage resulting from conservation efforts, which lowered customer billings for Golden State Water. These decreases in the consolidated cash flow from operating activities were partially offset by lower income taxes payment made during 2015, due in large part to the implementation of the new tax repair regulation in the first quarter of 2014. In regards to Golden State Water’s capital expenditures, we spend $32.5 million in company funded capital expenditures during the six months ended June 30, 2015. We expect to invest $85 million to $90 million in capital project due in 2014. For additional details on our second quarter and year-to-date performance, please refer to our earnings release and Form 10-Q issued yesterday. With that, I will turn the call over to Bob. Bob Sprowls Thank you Eva. I appreciate everyone joining us today. The company delivered solid earnings in the second quarter. During the quarter, we implemented water conservation measures and through the month of July, all of our service areas are meeting the mandated reductions. In addition, we continue to support our positions in the general rate case application that we filed with the CPUC for the water segment of Golden State Water. We also recently received the CPUC’s approval to acquire all of the operating water assets of Rural Water Company. Let me address the drought situation in California. As you’re aware, on April, 1st of this year, the Governor of California issued an executive order, directing mandatory conservation measures to achieve a statewide 25% reduction in urban water use as compared to 2013 levels. State Water Resources Control Board adopted emergency regulations in early May of this year to meet the governor’s executive order. The State Board also set reductions, which vary by area, depending on the historical per capita water use for the area in order to achieve the 25% reduction goal. In June 2015, Golden State Water filed updated drought response actions with CPUC for each service area to meet the new mandates. In July, the CPUC approved the filings. As a result, all of our water service areas have implemented our mandatory water conservation and rationing plan, which outlines restrictions for outdoor irrigation for water customers. If these restrictions are deemed insufficient to achieve the water use reductions, water allocations and additional mandatory rationing maybe implemented. Through the month of July, each of our service areas are meeting the mandatory reductions. During the second quarter, billed water consumption decreased by 13% as compared to the same period in 2014, due to our customers’ conservation efforts. As Eva mentioned, a change in consumption does not have the significant impact on the company’s results due to the CPUC authorized water revenue adjustment mechanism in place for all of our water service areas. The commission has also authorized a drought memorandum account to track incremental costs incurred in promoting conservation and implementing restriction measures for possible future recovery. In other regulatory matters, we continued to work with the PUC on the pending general rate case for all of our water regions and the general office. The rate case will determine new rates for the years 2016, 2017 and 2018. Golden State Waters’ requested capital budgets in the application averaged approximately $90 million a year for the three year period. For 2016, water gross margin is expected to decrease as compared to the currently adopted levels, due in part to a decrease in annual depreciation expense, resulting from an updated depreciation study and other expenses. Hearings for the rate case were completed in June and settlements for certain items and legal briefs were filed in July. A final decision on this rate case is expected by the end of 2015, with new rates effective January 1, 2016. Now moving onto other regulated business. As you may recall sometime ago, Golden State Water entered into an asset purchase agreement to acquire all of the operating water asset of Rural Water Company. This transaction was subject to commission approval. In June of this year, the commission approved the acquisition, including recovery of the purchase price through customer rates. A confirmation of the transaction, contemplated by the purchase agreement is subject to customary conditions, including, among other things adjustments to the $1.7 million purchase price for changes in utility plant since entering into the agreement in 2013. On completion of this transaction, Golden State Water will serve approximately 960 customers in the City of Arroyo Grande in the county of San Luis Obispo, California, which is near Golden State Water, Santa Maria customer service area and Coastal California. Under the terms of the purchase agreement, Golden State Water will take over operations 30 days after remaining conditions to closing are satisfied. Turning to our contracted services business at American States Utility Services, or ASUS, we continue to work closely with the U.S. government on the remaining price redeterminations. Just last week we received final resolution on the third price redetermination for Andrews Air Force Base in Maryland. We expect the second price redetermination for Fort Jackson in South Carolina and the second and third price redeterminations for the military bases in Virginia to also be completed during the third quarter of 2015. Filings for these price redeterminations, requests for equitable adjustment, and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. 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. In addition, we are actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years. We remain optimistic about the future of our contracted services business. I would like to turn our attention to dividends. On Tuesday of last week, our Board of Directors approved a third quarter dividend of $0.224 per share on the common shares of company, a 5.2% increase. We are pleased with our Board’s decision to once again increase the dividend, which reflects their ongoing confidence in the company while balancing the need for continued investment in our systems for our customers. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year for 61 years. Given American States current payout ratio compared to the companies that we compete with for capital and our high shareholders equity ratio as a percent of total capitalization, there is room to grow the dividend in the future. Additionally, pursuant to the first stock repurchase program approved by the Board in March 2014, we have completed the repurchase of 1.25 million shares of AWR stock on the open market. On May 19th, 2015, our board approved a new stock repurchase program, authorizing the repurchase of up to 1.2 million shares of our common stock from time to time. We have repurchased 387,000 common shares on the open market through June 30th under this program. The repurchase programs are intended to enable the company to achieve a consolidated shareholder’s equity ratio as a percentage of total capitalization that is more reflective of appropriate equity ratios for Golden State Water and ASUS. As of June 30, 2015, our current equity ratio is 59%. Before I close with my prepared remarks, 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. Question-and-Answer Session Operator [Operator Instructions] The first question comes from Jonathan Reeder from Wells Fargo. Please go ahead. Jonathan Reeder Good afternoon, Eva and Bob. With the WRAM in place to protect your margins at the utility, I was just wondering if you could give us a little bit of guidance how we should be thinking about the distribution of GSWC’s adopted gross margin throughout 2015? Such as maybe what percentages fall in each quarter? Eva Tang Jonathan, we usually just look back three to five years history to determine that allocation. So if you look through the quarterly sales in the past few years and average those out, that should give you pretty good allocations for the quarter. Jonathan Reeder Do you have any idea like roughly what percentage of the margin, I guess, remains for Q3 and Q4, is it 50% greater than that? Eva Tang We think more than 50% because the third quarter is our highest sales quarter in summer. First is the lowest usually and then… Bob Sprowls Third will be greater than the second, and fourth will be greater than first. So it’s more than 50% of the last half of the year. Eva Tang Half of the year, yes. Jonathan Reeder Okay. Fourth is greater than the first still. Okay. That’s helpful. And then have your expectation for ASUS increase the bid now for 2015 due to these favorable changes in the cost estimates for the projects, or are we still thinking about maybe $0.26 or so, I think that’s what you cited last, Bob, kind of for the full year expectation? Bob Sprowls Yeah. We think that $0.26 is still a pretty good number for the entire year. And you will recall we got to that $0.26 by taking last year’s $0.31 and backing out about a nickel fourth of sort of items that were not perspective but were impacted by prior year as well. But we had a retroactive price, re-determination for instance that contributed I believe $0.03. Jonathan Reeder Correct. Yeah. Okay. And then just kind of last question. On that front with the projects that I guess, you booked those favorable changes, were those like — at all those multi-year large projects, were they some of the projects that were awarded? I think it was at the end of September of last year. When did those projects kind of get completed just kind of wondering a little more detail on that? Eva Tang Jonathan, I think majority of our current projects are not multi-year projects. We finished quite a few multi-year projects last year. So most of the projects, we are currently working on is probably 12 to 18 months project I would say. Jonathan Reeder Okay. And then the next kind of update on, where you stand with the projects we should be thinking Q3, that’s when the government I guess kind does the budget. Bob Sprowls Yes. That’s usually in sort of that September — late September timeframe, early October, the amount of additional capital work that we can do, sort of through the next 12 months, next 12 to 15 months. Eva Tang And we usually work with them, what kind of projects and we can do on the base and September 30 is really when funding comes down that we would know which paths to go forward. Bob Sprowls Yeah. I mean that’s consistent with the government’s budget. I’m sure there is more dollars being asked more than we’re going to get but it’s usually a very sizable chunk. Last year, I think we got $27 million, yes. Jonathan Reeder Okay. And then are there any — I guess, kind of large multi-year project somewhere to the three that you recently completed that might be in the near future or nothing you are aware of at this point? Bob Sprowls Yeah. Nothing we are of at this point. There are a lot of small projects that we are working on and that should keep a good solid revenue stream. Jonathan Reeder Okay. Great. I appreciate the additional clarity. Thanks. Bob Sprowls Thank you, Jonathan. Eva Tang Thank you. Operator [Operator Instructions] This concludes the question-and-answer session. I’d now like to turn the conference back over to Bob Sprowls for closing remarks. Bob Sprowls Thank you, Danielle. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company. Everyone have a good day. Eva Tang Thank you. Operator Thank you. This concludes today’s American States Water Company Conference Call.