Essential Utilities Inc (WTRG) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Philadelphia Suburban Corporation's first quarter 2002 earnings call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your hostess, Ms. Barbara Cummings. Ma'am, you may begin.

Thank you, Holly. Good morning, and welcome to Philadelphia Suburban Corporation's first quarter 2002 earnings conference call. If you did not receive the copy of the press release this morning please contact Kevin Birdsey [phonetic] at 610- 645-1196, and he will fax a copy to you immediately.

Presenting today is Nicholas DeBenedictis, Chairman and President of Philadelphia Suburban Corporation. Joining us also is David Smeltzer, our CFO.

As a reminder, some of the matters discussed during this call may include forward-looking statements involving risks, uncertainties, and other factors that may cause the actual results to be materially different from any future results, expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K, and other SEC filings for a description of such risks and uncertainties.

At this time, I would like to turn the call over to Nick for his formal remarks, after which we will open the call for questions and answers.

Thank you, Barbara. I assume everyone can hear me pretty well. I'm on a speaker phone. If not, please let the Moderator know. Earnings per share were 17 cents this quarter, versus 19 last quarter as reported in 2001. However, last year we had a large land sale in the first quarter which had a post-tax gain of 1.7 million. Absent that, earnings were basically flat, 17 cents versus 17 cents, which I'm pleased with in the sense that this year we're facing industrial sales down, and drought restrictions in two of our bigger divisions, New Jersey and Pennsylvania, which have adversely affected sales. The actual net income without the land was actually up over four percent, and that's on, that's net income. And then on shares outstanding of about a percent and a half higher than last year. The revenues increased two percent for the quarter, and they were impacted in a number of ways, positively and negatively. Rates accounted for about two percent increase in revenue. And you can look at that as basically half from our Pennsylvania surcharge to disk [phonetic], and the other half of that increase from all the other States' rate cases, which I'll go over later. Acquisitions and other revenue also helped us, but they basically offset the percent, percent and a half of decreased consumption that we found from our industrial sales and our individual homeowner usage. So although we have more homeowners this year than we did last year, they all used a little less, at least in Pennsylvania and New Jersey, because of the drought. And industrial sales company-wide were down significantly. As a matter of fact, 10 percent on their sales. Now, fortunately, the industrial portion of our revenue base is less than 10 percent, so it doesn't have a great impact. But you can see the effects of the slow-down in the economy, and how it's affecting us.

I think it started, when I looked at our numbers, it really starts showing-up in the third quarter of last year. So we have probably another quarter of possible bad comparison, unless the economy turns around rapidly in the second and third quarter.

But it shows you the benefit of having the steady rate program through surcharges, and also the fact that by growing our customer base four percent a year that absorbs some of the downturns which normally would affect a utility that is either, has a bad economic time, bad weather time, or is out of the rate cycle, which I want to get into a little later. So that's really been helping cushion. So we're very happy with the net income up four percent for the quarter, and also the 17 cents versus 17 last year without the land sales.

The other thing we're doing constantly is containing costs. That's difficult in a time period where you have insurance, and health insurance, and also liability insurance going the wrong way on us. But everything other than those two we've been able to hold pretty tight.

Expenses were up four percent for the quarter. And if you figure you have natural growth in there of at least a couple percent you can see we're holding the overall expense increase pretty steady, other than those two mentioned items, insurances. Our operating expenses, once again, were in the 36, or 36.6 for the 12 months, and that's versus 36.8 for the 12 months last March. And so you can see we're holding a nice steady line on expenses. The EBITDA continued to improve. We were up to 56.7 on a trailing 12, up from 55.3, so another 100 basis point increase. And, of course, that really is affecting it as how your revenue stream comes in too. Which, of course, will again be dependent on weather and rates as we go through the year. We're at the five percent level in Pennsylvania on our disk, and we'll remain there until the award of our rate case. And clips [phonetic] began in Illinois on January 1, so this is the first quarter it's been in . It added about a percent to the Illinois revenue stream, annualized. And I think the key thing there is that the receptivity of the public, just like in Pennsylvania there have been very few complaints to us, or to - I think none to the Commission. Very few to our customer call center. And as soon as people realized that this money is being used to improve the infrastructure, i.e., the pipes that carry drinking water to their homes, it gets great receptivity. So we're off and running in Illinois now. New Jersey is seriously considering it. And Ohio is considering legislation as we speak. So I think this is starting to become more of a nationalized program, although as you know we started in Pennsylvania, and it's in now five States.

Great awards during the first quarter. Consumers had well, I guess about a half percent of their base increase, about a couple hundred thousand dollars on two small systems, Struthers and Mahoning [phonetic] Township. And they anticipate two other cases coming in, one in July, one probably in August or September, of more significance. A run rate of about a million and a half, which would be about two and a half percent base rate increase on those there. In Ohio we have five divisions and they don't all come in at the same time, but you can see we're trying to get steady stepped increases in a couple of them. So that would be a nice run rate increase in Ohio of about 2.5, 3 percent of rates for Ohio as we go forward. In Maine, we are continually successful at getting what we ask for. Our President there issued two rate cases in, I think, it was January or February. They were both awarded to her in March. Both at what - as a matter of fact, 102 percent of our request, because there was an adjustment at the end. Not significant dollars, less than $100,000 run rate, but that's about a percent on Maine's revenue stream. And we have three or four more we're going to be considering going in. We're just going in steadily as we deserve increases. We ask for it, and they've been very fair with us. The other, the big case, of course, is Pennsylvania - two big cases, Pennsylvania and New Jersey. New Jersey's case was filed in March. We asked for 16.7 percent increase. It's a big rate case. However, our rates in New Jersey are very low, much lower than most of our States, because not much capital had been invested in these groundwater systems. And the rates even with a large rate increase like a 16.7 will still be much lower than the other three major water companies in New Jersey. The rate impact would be 2.7 million on about a $15 million, or actually $13 million revenue stream. So you can see it's a significant, if we're successful, rate increase. We anticipate that won't be finalized till the end of the year, but so far, so good. Very little controversy. In Pennsylvania we, after the last five cases settled, this time around we think we are going to go to litigation because there's two key points that Dave Smeltzer and his, and Kathy Pape, and his staff feel, we really want to get on the record and win. And although we will probably not get our rate case as early as we would have liked, if you do a settlement you get it sooner, obviously. On the other hand, we anticipate that we will win these key points, and therefore, get a higher percentage increase than we would have gotten through a settlement. And once and for all, have those issues resolved. Those issues involved depreciation and use of short-term debt in between rate cases. The, so we're anticipating Pennsylvania's case to be decided probably at the mandatory nine-month time period which will be sometime in August.

Acquisitions, we continue the acquisition stream. We've announced seven, a couple of small ones, and a couple of good-sized ones. Three of those were, four of those were announced in the first quarter and that list is attached to your press release. And three so far this year. The largest two, White Haven, and another one in the Poconos. And I think it's interesting to note, although most people don't see the Northeast Pennsylvania as a growth area. What we're starting to see is it's becoming a growth area now that we're putting water and sewer, and having company's with capital investing in the Northeast. It is becoming a haven not only for retirees from New York and North Jersey, but people who work in New York, and want to move further away from New York for both the taxes and also, I guess after 9/11, the fear of security. It's about an hour and a quarter bus ride. People leave up there at 6:30, 6:00 in the morning, and get home late at night, but I guess they feel that bus traffic is no different than when they leave their house in car traffic. And there's developments growing as year-round residences now, versus the traditional Poconos area which was seasonal.

We did the White Haven, and in that one we got a sewerage operation where we'll be the key sewer area for the whole 940, Northeast Turnpike 940 exit and 80 exit, right there. The other one is in North Carolina. This is another significant growth of our base there. We start small, but every one increases, but it's also a big increase on the base. We're up to about 25,000 residents now we serve after the acquisition of the Piedmont Water Company which is in two counties, Iredale and Katoba County [phonetic]. Once again, groupings of small systems. 300 homes here, 200 homes here, that sort, all on well systems. But they complement very nicely with the other two systems we bought earlier this last year.

And of course, we announced, although it's not in this count because it's not obviously closed yet, the merger with Penachuck. I think that was about a week ago. And that's, so far, so good. It's gone very well. We've met with the Commissions, the Mayors, the Governor, and the receptivity has been very positive to PSC, and the way we operate in each of the other States, and how we plan to run Penachuck, which I think fits in with the corporate culture of the existing Penachuck Company.

So I think we're very fortunate to have these surcharge which happened because you're doing your capital, and get paid for it as you go. A constant stream of rate cases being filed and entered, and successful, so you're not waiting all for one year, or two years. It's happening all the time now as you can see. Although Pennsylvania, still, their rate case still is a dominant factor in anything we do. And our constant growth helps cushion, bringing in revenues regardless of rates, to help you weather a downturn in weather, drought, or industrial sales. And of course, watching the bottom line through expenses is always crucial, and there are certain things you just can't control, healthcare costs, and insurance costs after 9/11. But we're looking at all kinds of different policy changes, things like that, to eremite some of the impact that every company is feeling today.

But on the other issues, labor, electric costs, chemical costs, those are right in line with what our estimate was, and you can see they're running at a run rate of less than three percent, which is less than the rate, right around the rate of inflation.

I think that's about it. I'd probably like to answer any questions you may have.

CALLER INSTRUCTIONS.)

Timothy Winters, A.G. Edwards & Sons.

Good morning, Nick.

Good morning, Tim.

I was wondering if you could talk to us a little bit about the outlook for the drought and consumption in New Jersey and Pennsylvania for the summer?

Sure. Although it's been dry and the other states, not so much Illinois, but a little bit in Maine, we haven't seen any impact really, or drought restrictions. So it really is concentrated on New Jersey, and in Pennsylvania. New Jersey is a much smaller base. Total revenue is 36 million versus almost 200 million in Pennsylvania. So it gets dwarfed. But New Jersey will probably have a bigger percentage impact if the drought continues because of their high peak in the summer with lawn watering. Mostly residential in New Jersey.

We got good news last week. We had been arguing the fact that groundwater levels have not gone down as much as some surface water levels in New Jersey. And therefore, we should not be, you know, Draconian in the measures which, you know, we felt they had started. And last week, New Jersey lifted the complete ban on lawn watering, which is really the issue for us in residential. To odd, even which means you can water your lawn half the days, not every day, but half the days at certain times, which is when you water it anyhow, you know late in the afternoon, early evening, and early in the morning.

So that's a big, big plus for us. And takes a little bit of the real sting out of it. Although I would say that it won't be as good a summer as last summer where there was no drought restrictions, hot and dry, and everybody was watering their lawn all the time. Pennsylvania, we have filed for wavers so that we can isolate our system from the overall drought restrictions on the State. The impact so far, Tim has not - I would say the industrial sales have had more of an impact on revenue stream. And that's economic. Than the drought restrictions, because first quarter you don't have a whole lot of lawn watering in the Northeast. And secondarily, there just, it's mainly timing. But now, as we start the planting season and the summer season it could have much more of an impact.

We're fortunate in the sense that our reservoirs were about 80 percent company-wide. And really, if you take the one out in Delaware County that's around 50, 55 percent, they're almost all in the 90's. So we have plenty of water in most of our region.

And we have had, as soon as of course we sent our letters out reminding people of the drought it started raining like anything in our area. We've had a little bit above normal for the last two weeks, which is a good sign. Which means the grass is growing, and people are remembering now about lawn watering again.

So I think it won't be a disaster. On the other hand, I would say that with a drought end there are people who are not going to water their lawn even if they're allowed to, and so on, even if we ask for the waver, and so on.

So I would anticipate probably worst case, I think I may have mentioned that I think through the drought, because of the drought, we probably lost about maybe a half a cent the first quarter, along with industrial sale, got it a little over a penny. So somewhere between a half and a penny on the drought. I would say at worst case maybe two cents in the second quarter, and maybe worst case three to four cents in the third quarter. And then the fourth quarter will be back to normal. And that would be reversed, obviously, if the drought restrictions are lifted, or if they're eremited by the, you know, on, of watering, lawn watering.

Now that's based on everything else being the same, and of course, we're going to hopefully have some growth, have some rate cases in there, and so on. So I don't want you feeling you take last year's earnings, and move them down that much. But if the drought continues it clearly has an impact on us.

Okay, thank you.

Hi, good morning everybody.

Hi, Dave.

I had my question about the drought answered, but on a related question hasn't the mild winter weather been - I know that this may not be in a quarterly comparison. Maybe it's both 2002 and 2001, but hasn't the mild winter weather also helped in terms of keeping, you know, O&M down in terms of pipe breakage, and so forth?

Yes. We had less breaks this year than even last year, although not significantly less. But much less than a normal winter. Two reasons. First of all, last winter was also mild. For us at least. They sold a lot of oil last year, but that's because they had a couple real cold days, or it was an average cold. But ours has to get to a certain level before the expansion in the pipes mix and breaks the cold weather. So we actually were down significantly last year, and this winter even more so.

But I also attribute that, Dave, to some of the work we've been doing in the area, especially on the old cement pipes, which when they break they really cause a lot of breaks all the way down the line. And that's because of all the new pipe we've been installing, 40, 50 miles a year. But `yes' that did help. Overtime was down in the first quarter, and that's all now accounted for. I mean basically the pipe break season is done.

Okay. Another thing I wanted to ask about was, after the announcement of the Penachuck merger I happened to notice that on the web, I was looking at the local press up in New Hampshire. The initial reception wasn't exactly open-armed. I was wondering, you know, whether or not you folks had a campaign started up there to try and educate the people on who you are, and what you plan to do?

Yeah, the first day we met with the Mayor. He was fine with it, because he said `there's no way they could come up with $100 million,' and so on. The Mayor of Nashua, this is.

That's right.

Which is about, oh, 60 percent of the system. And when we met with the Commissioners they were very, very open-minded in the sense of they were looking - they know of our company from all the national meetings, plus they were I would say one of their questions was `are you going to, you know, are you staying a domestic company.' Which the answer is `yes' we are a domestic company. And I think there's a subtlety in that question, as you can anticipate. So I think that gives us a heads-up. Now on any of these, as soon as something like this occurs, usually the public works director, which is probably the article you read in New Hampshire, comes up with a theory `maybe we should buy the system.' And Moe has met with the Mayor there and Council. They're looking at it, they're going to analyze it, which is the right thing to do. It's been 150 years in private hands.

But there's two things which I think is going to make it very difficult for Nashua to want to purchase it. One is the cost. It's not a big town. It would be like, well, Nashua would be like the size of 20,000, probably be the size of Springfield Township, Delaware County, if that helps. And that's a big, that's a big bond deal to try and do if you have other things like two schools you're building, and things of that sort. And the Chairman of Penechuck, Moe Orel, is the former Mayor of Nashua. So he has some feel, I think, for the community.

The second issue, probably more important is Penechuck will not sell. And I don't think we're interested in buying a piece of a system. So, therefore, if Nashua were to purchase it they can't purchase anything outside Nashua. That's an interconnected system, so I think it would be very difficult. So I think it's more important that they study it, and come up with the answers themselves. And that's what we're encouraging.

Moe and I were up Friday for the Annual Meeting of Penechuck Shareholders. We visited the local paper. They have now editorialized, which I think in a positive way, and we'll send you all these clips.

Great.

And feeling that there's too many other things for Nashua to spend their money on then to spend a lot of money on a study. They should be able to determine right away whether they can afford it, or should run it, and make a decision not to spend a quarter of a million to study it.

Great. Last question, Nick. Anything new on resnic [phonetic], or is that where we left it at the end of the year?

Well, exactly where we left at the - the EPA, the range was five to 15 from the EPA study. The Clinton Administration at the very end, the last day of their term, issued an order for 10. Christi Whitman, and I honestly belief she didn't check with the White House because it would have probably been a lot smoother, decided that - that she said `well, this is a last-minute regulation. We should analyze where it should really be. Should it be five or fifteen?' And, of course, that was viewed as interference with an environmental rule, and she took a lot of heat on that. It's amazing what was important before September 11th, and what's important today.

But since that time, there's been numerous other studies, hearings, and the EPA has come out, and the Administrator, Christi Whitman, has come out saying 10 will be the number. So it's two years now to get the regs through, and things built, and so on. So it won't affect communities right away. They've come up with a lot of Federal money to help communities. Mainly Southwestern United States communities, where the resnic is endemic to the soil. We have, I think, one area where it's even close, and that's in Maine. One well in Maine. When I say close, in other words, the difference between nine parts per billion, and 11 parts per billion is like finding a penny in $10 million. If I gave you $10 million worth of pennies, and told you to `go find the one I just marked.' That's what you'd have to find, so I want to give you a scope of how small that difference is. But theoretically, if you're at 11 you have to treat, and if you're at nine you don't have to treat.

Great, thanks.

CALLER INSTRUCTIONS.)

Ladies and gentlemen, there are no further questions. I turn the call back over to you for any additional or closing remarks.

Okay, thank you very much for listening, and if you have - think of any questions you can call Kia [phonetic], Barbara, or myself, or Dave. Thanks.