Essential Utilities Inc (WTRG) 2010 Q3 法說會逐字稿

Good day and welcome to the Aqua America Incorporated third-quarter 2010 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Brian Dingerdissen.

Please go ahead, sir.

Thank you, John.

Good morning, everyone.

Thank you for joining us for Aqua America's third-quarter 2010 earnings conference call.

If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website, at aquaamerica.com, or call Fred Martino at 610-645-1196.

There will also be a webcast of this event available on our site.

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with Dave Smeltzer, the Company's Chief Financial Officer.

As a reminder, some of the matters discussed during this call may include forward-looking statements that involve 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.

During the course of this call, references may be made to certain non-GAAP financial measures.

Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the Company's website.

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

Nick?

Thank you, Brian, and good morning, everyone.

This is a pretty good news conference call.

Actually, it's one of the best quarterly earnings reports of the 73 I've given, as CEO of this Company.

Not only was revenue up 15%, net income up over 30% quarter to quarter, and that's a great deal of recognition of returning to a good old-fashioned hot summer in the Philadelphia and New Jersey area.

But more importantly our core operations, which make Aqua, I think, a unique growth utility story, are all clicking.

And I'd like to hit some of those.

Cash generation.

Of course, a good quarter always helps cash.

This quarter we were up over $20 million, over 20% over last year's third quarter.

And we're on target this year now, to achieve over $400 million of EBITDA, versus roughly a little over $350 million last year.

A nice healthy 13%, 14% pickup.

And in line with what we always look at, which is a steady 10% growth in EBITDA, as we generate more and more internal cash with our program.

Our capital spending is on target, to achieve a record $300 million plus this year.

This is almost going like clockwork.

$240 million has been spent through three quarters.

And we are addressing all our environmental and water quality issues, in compliance with the EPA's of each of the state, and the federal EPA.

But we are also simultaneously continuing our long-term program, to rehabilitate the infrastructure and improve service reliability, which is really the bigger part of the capital expenditures as we go forward, even though they are somewhat more discretionary.

Our operational efficiency.

We're on track to bring our O&M to revenue ratio.

Down at least 150 basis points, which is much more than I projected this time last year, from the '09 level, which was over 40% -- 40.4% to be exact.

And that'll keep our record intact, of being one of the lowest efficiency ratios of any major utility in the country.

I would not take this quarter's 35% as an indicator we can keep that pace, but when you have a hot summer, it always drives down your O&M to revenue ratio.

Our customer to employee ratio, which is something that doesn't just move around with the weather, is around 600 now.

And that puts us, again, as one of the best and most efficient, and productive utilities in the country.

And our compliment control programs are really driving the productivity into our numbers, because labor and even faster rising benefit costs, are two of the key cost elements in any company's -- especially utilities -- expense column.

Our cost control and operational efficiency is also being recognized by regulators.

And it actually helps us with our active rate relief program, as most of our rate cases are being driven by capital investment, and then re-bracketing of customer usage, versus being driven by -- heavily, by expense increases.

Now 2010 has been a very busy year for rates.

And to date, we've been awarded 48.6%, which represents about 7% of trailing 12 month revenue.

And they've been spread across 11 states.

So you can see it's been a very active and widespread program.

We continue with our, I think, unprecedented access to the credit markets.

We borrowed well over $200 million this year, at very good rates.

And we were just reaffirmed last week, as an A+, at Aqua's largest subsidiary, Aqua Pennsylvania.

And I think it was yesterday morning, we just released details on our latest bond offering, which is $141 million.

And in that, we stayed well below 4%, 5%.

I think it was 4.75% blended.

All along 30 year average.

And that lets us approach for the year on all our imbedded cost of debt, which is $1.6 billion, as embedded cost of interest debt of 5.35.

So that will be helping us for a long time to come.

And we do have a very long tail on our long-term debt.

I don't have the exact years, but I think it's well in excess of 15.

That's not bad for a company that's been cash negative for 18 straight years, because of our major capital program.

But of course, that's part of our model.

But the S&P understands it, obviously, or we wouldn't get an A+ rating.

But bond buyers also understand it, obviously, or they wouldn't be giving us such good rates on our bonds.

We are poised to increase our dividend again.

We announced this earlier, but it's effective December 1.

This will be a 7%, 6.9% to be exact, increase in the dividend.

It's the 20th dividend increase we've been able to do in the last 19 years.

And we do believe dividends are a key reason our shareholders are so loyal, and long-term, in their nature of investment in Aqua.

Our customer growth story continues, even in this no-growth environment for the nation.

We've done 14 small acquisitions to date this year, and we still believe that we will end the year around 25.

We're starting to see some life.

Nothing like it was in the '05, '06 era, but some life, in our organic growth program.

And we are confident we should achieve about a 1% growth in 2010.

Not what we're used to, back in the mid-part of this decade, but still, 1% is a very comfortable pace in today's environment.

Our revenue, which is up 15%, is above our normal model.

And that is chiefly due to better than normal weather in two of our states, Pennsylvania and New Jersey.

It was very interesting.

We had -- New Jersey was up 30%, year-over-year on water sold.

Pennsylvania up a strong 10%, and Ohio coming off a very weak year in '09, was up about 12%.

But we actually went down in a couple of states, Texas, Illinois; Indiana was up just slightly.

Florida was down.

Virginia was flat.

So, it's really a very interesting part of us being so diversified, that it's good on the upside, it's good on the downside, in the sense that it cuts the extremes on either side.

But it gives you a nice balance.

So we project -- if you take our -- and this is really a 20,000 foot look -- but if you look at our 15%, and 1% is from growth, you really can almost equally divide the remaining, into what was as a result of consumption, and what was a result of rates, due to the investments we're putting in the business.

And as I said earlier, the rate ties in what I said earlier, about a 7% increase in revenue through rates, this year's active rate program.

Our O&M expense for the quarter was up 6.5%.

Now that's much higher than I'm usually talking to you about.

Part of that is -- excuse me -- is because we sold a lot more water.

It does cost more to sell more -- but not at that pace.

Now the 6.5% is still about 40% of our revenue growth, so incrementally it didn't help our O&M to revenue ratio.

But if I can dissect the expense side for you.

O&M was negatively affected this quarter by about $1 million in write-offs in two of our states, where we've gone through the last, hopefully, true up of ratebase, from where Aqua Source, when we bought the Company, and now under us when we go into these states.

And this book true up cost us about $1 million.

And if we adjust for the increased expense due to the revenues being better than normal because of the weather, and obviously subtract for acquisitions and growth, to make it same-store sales, between this quarter and the third quarter of '09, the actual adjusted O&M would be about 3% for the quarter, which is more in line with what we're used to.

So once again, staying at 20,000 feet.

If we want to look at this quarter, you can argue that it's up considerably.

And I can break down that increase of 30%.

Last year's fourth was -- I'm sorry, last year's third, was negatively affected by weather.

We booked $0.24, about $0.245, $0.246 to be exact, last year.

Round it up, obviously, to $0.25.

If you want to take between $0.02 and $0.03 for the negative effect of a bad summer in New Jersey and Pennsylvania last summer, you can come up to a base that we should have been growing from at $0.27.

That's how we targeted it.

And then we said we should grow 10%.

So we were hoping for a $0.30 quarter, you know, six months ago, when we were talking about the forecast.

The extra $0.02 truly came from the sales above normal, due to weather.

And we're very happy that that $0.32 that we achieved, exceeded all the first call estimates, which were around $0.28.

Now if we take a look at the year results, we're very comfortable with the current $0.89.

And deducting from that, you can look at a $0.21 fourth-quarter, which we're comfortable with, as it represents an 8% growth, year-over-year.

And we don't ever really get much help either way from the weather in the fourth quarter.

However, there is some upside to that, in the sense that acquisitions, continuing cost control, debt interest reduction programs and all that could allow us to slightly exceed this, you know, [actually the] growth rate.

I think Dave Smeltzer, earlier in the forecast, said 5% to 7% in the first two quarters, which we were able to exceed.

And he said 7% to 10% would be a normal range for the second two quarters.

And of course, we did that 10+, even if you subtract the various things for the weather.

And we're hoping we can do something similar in the fourth.

I'll answer any questions.

(Operator Instructions) We'll take our first question from Michael Gaugler with Brean Murray, Carret.

Congrats on a very nice quarter.

Yes, it was a little bit of tailwinds with the weather and that helps a lot, but you can keep the money so that's what counts.

(laughter) Indeed.

Listen, I'm not going to drill too much into the quarter.

I'd kind of like to get your thoughts a bit on the Aquarian properties.

You know, there's talk in the market that they are available and obviously that would be a pretty good fit for both Aqua and American as well.

And where I'm going with it is, I know that you have been probably the most disciplined buyer of assets of anyone in the industry, and what I'm wondering is, do you still stay with that disciplined approach, or is the property worth a premium to Aqua such that maybe you give a little bit on price to get a premium property?

Well I can't confirm anything that is happening, but in the case of Aquarian, it was sold to private equity and put into a number of different funds about five years ago.

So, if and when we are approached, and I don't want to confirm if we have been, I'll say generically there has not been one deal in the last three years that has been then publicly announced afterwards that we weren't involved in.

Obviously you have to sign confidentiality agreements, you can't discuss them, and we were very close on a couple.

Way, way down on others.

But we have historically, as you've noted, taken a disciplined approach because you can't create value other than growth and any cuts in operational cost are given back.

So it makes you a better company and better for the customer in rates, but you can only keep the cuts on the operating cost, i.e., synergies in between rate cases.

So we're very careful that we don't pay too much -- or bid too much, I should say, for any of these facilities.

We are so used to buying at book or less that I think a lot of people think we will not go over book.

That's untrue -- we have.

You can see a little bit of goodwill on our books -- in North Carolina, the heater acquisition and some even smaller acquisitions, where we just have to pay more.

Sometimes the regulators want us to take them over so much that they actually give us an adjustment on that.

I don't think that would be available to a publicly traded company so we are not going to bank on that.

But we will be realistically disciplined but also realistically aggressive for a core property.

And that's probably all I should say at this point.

All right.

That's all I had.

Thank you.

Move on to our next question from Ryan Connors with Janney Montgomery Scott.

Hey, good morning, guys.

This is C.J.

filling in for Ryan.

Hey, congratulations on the quarter.

Nick, I was just hoping you could talk a little bit, you know, bigger picture about the political landscape in your territories and what impact, if any, this week's events could have on the business going forward?

Well, we have seen a couple new Commissioners appointed in New Jersey one year after the election.

I am very -- I know both Commissioners and have known them prior.

They're excellent choices by Governor Christie and we are starting to see ideas like why aren't we involved in infrastructure incentive programs in New Jersey?

We could use it; we're an older state and so on.

So these are big picture, long-term issues but they make the difference, and Pennsylvania has always been one of the premier water utility regulatory states.

I don't see that changing after this election.

The House changed hands becoming Republican versus Democrat.

The Senate was solidly Republican.

The Commission -- the Commissioners are all very bipartisan -- nonpartisan, maybe that's a better word.

And we - it's just been an excellent experience in Pennsylvania.

I would anticipate changes in Florida with the Governor changing and the Attorney General changing, and the Legislature becoming solid Republican.

That has been our toughest state.

We have done pretty well with our last two cases from a standpoint of size of the cases, but the process is very, very cumbersome in Florida, and a lot of money in our rates go right back to the bureaucracies and the lawyers in trying to get the rate cases.

And I think that's something -- you asked for big picture; that's one of the big picture things I intend to bring up to the new Governor, just to make the process more efficient.

I think that helps everybody.

The Illinois situation is still up in the air.

I understand that Governor Quinn has been declared or he has declared himself the winner and the other person has conceded, so I don't anticipate, therefore, much change in Illinois from the status quo currently.

We have been treated fairly in Illinois and it's one of our better performing states, so I think we are -- I guess, the bigger you are, like the electorates, the more chance there is of tough actions.

So we have been treated pretty fairly and I think so has American, the other water company in Illinois.

I think they are the key states -- most of these major elections you see discussed by the pundits, C.J., are at the federal level which wouldn't affect us as much; albeit, I don't anticipate, with the new Congress, I can't comment on the next 60 days what could happen, but I think the new Congress, issues like higher electric bills because of cap and trade I think are less likely and electric as you know is our second or third largest cost center.

Probably some readjustment and maybe even some cost controls in the healthcare program, which has been the fastest growing aspect of our program, of our expenses.

I think we're going to see at least a moderation or addressing the cost side of the healthcare bill other than just the inclusions side.

Third issue which I am hopeful on is that there won't be any more time wasted on some major multibillion-dollar, trillion-dollar program to give taxpayer money to cities to build sites that they should be able to do on their own, by just either privatizing or by raising the rates and doing it themselves and not looking for federal grants versus just borrowing money like we have to.

And the fourth issue is I do think they will be more likely to address tax codes, which will be favorable to all business; but at least address the inconsistency and indecision left by the 2010 tax policy that expires in 2011, goes from very good to very bad one fell swoop.

I think there will be some moderation in that.

And for you, that would be important following utilities because of the fact the impact capital formation, it has on the future of all utilities.

And without solid investors, many of which are individual retail and many of which are not wealthy but happen to be seniors who like the sleep at night type viewpoint of the stocks, I think they will be heard in this next -- we are hoping they will be heard because we are going to be pushing it, and what they are going to do with the dividend taxation policies.

And then, Nick, this is Ryan -- a question kind of in a similar vein -- you just came off of your big annual industry event down at NAWC, and I am curious whether, from a regulatory standpoint or otherwise, whether you have a couple or three kind of bullet points things that you came out, you know, if not new things, things that were focused or are key takeaways from the proceedings there?

Well, I thought our association -- that was just the Water Association -- didn't have any of the other utilities.

I think the fact that we are addressing the fact that although we are small, we should be heard.

There was a lot of sessions talking about getting the word out about privatization whether it's the triple P type, which is own, operate, build, or whether it's privatization that we make is our mantra, which is actually own and buy it up and tuck it in.

And I think that is needed because we, for too long, just talked to ourselves.

I think there is going to be a much more focused legislative agenda.

I have already talked to the new Chairman of -- actually two new Chairmans -- the new Chairman of Southwest Water and the new Chairman of American Water, and there is laser focus on this dividend issue, which you have been bringing up on two or three calls, Bryan - Ryan, excuse me.

And I think the third was really to address the regulators who were there, to explain how important capital formation is and getting reasonable ROE's for the water because we have to spend more, and a larger percentage of our depreciation -- actually we are cash negative; some of the utilities are still cash positive -- but we are spending at a minimum two times depreciation; that is higher than most electric utilities and gas.

And you can't continue to be cash negative if you don't get good returns on equity so that the investor is willing to see that they will get paid back someday through increased dividends.

So I would say they were the three points I took away.

Super.

Thanks for your time.

(Operator Instructions) And our next question will come from Jonathan Reader with Wells Fargo.

Hey, good morning, Nick.

Great quarter.

Just wondering if you can kind of break down the -- I guess customer usage year to date?

I think you said for the quarter it was up 9%.

What are we looking at on a year-to-date basis?

And kind of by -- if you have a by-customer class, that would be great.

I'm going to let Dave -- we have some charts here we can look at.

Industrial is pretty flat.

Of course we're up 70-some percent residential.

You start with -- that's the most important.

You're looking at the year-to-date?

Yes, correct.

If we look at the year-to-date water sales to our customers, that is up about 5% from last year.

So that is nine months year-to-date up about 5%.

And the vast majority of that 5% took place in the third quarter, as you might guess, which is the most volatile of quarters relative to consumption and, you know, reaction to the weather.

Okay.

And then I guess on the O&M, Nick, you kind of gave a breakdown that same-store sales I guess would have been about 3.5% up, so I guess on a weather induced basis, where does that kind of break down?

Is it like something like $2 million or something was due to the higher weather and just the higher sales?

Yes, I think - yes, about $2 million sounds about right.

If you take the 6.5% and say how did you get to the 6.5%?

The core was about 3%, the consumption increases about 1.5%, and then the $1 million write off was probably I guess about 2%.

That would get you up to 6.5%.

That is very rough but that's about where it was.

The write off's one-time; we would love to have the increased consumption forever.

We wouldn't mind then having a 4% plus O&M if we are growing 15% all the time.

Okay, that's all I had.

Thanks.

Yes, I don't want to leave you with the impression that water sales -- they were actually gallons, Dave, we gave, not revenues, right?

Yes.

This has been a pretty good year but it really was all in the third quarter.

It has been pretty flat.

And one of the advantages I would argue for the water utilities, we are spending so much money in capital that we are forced to go in for rates more often than the electrics, which like to stay out a long time.

And that allows us to re-bracket.

I think the long-term trend, although it is reaching an -- so, pretty soon -- is more conservation and less usage.

And as long term ramifications for your engineering planning, you know, how big do you build plants?

You don't calculate 5% growth anymore and so on; but it also has pricing issues because although the bill stays the same, the rate per gallon has to go up to keep the same revenue requirements.

And if you're not rebracketing every year or two with rates, you could actually find yourself way behind in the long run.

Now we did find in two of our states where we raised the rates, I forget how much it was -- 40%, 50% in Florida, it's on -- the usage dropped precipitously and we had to go right back in, which we have.

Now I think we are levelizing.

So probably '08 and '09 are good base years to work off of.

I hope that answered your question.

Very much.

Okay.

(Operator Instructions) And our next question will come from Stuart Sharp with Standard & Poor's Equity.

Can you talk a little bit about the solar farm projects, where you are looking?

Oh yes, great.

Yes, I'm glad you brought it up.

I had it in the release but we didn't really hit it during the presentation.

I am a big believer in solar, especially if it is in the regulated arena because a lot of the risks on how much the RECs -- do you know what a REC is?

Yes.

That's what you get paid for the generation on the open market trading market.

You take some of that volatility and risk out of the business because you are able to rate base the entire amount.

And for the ratepayer, it really is a big positive; if the RECs are high, their payback is sometimes as low as four or five years on a 20-year life project.

The good news is it all goes back to the ratepayer, it keeps rates down.

But we are earning on the assets which are very expensive.

I mean we are spending -- without the ITC, which is the investment tax credit, the R&D and the bonus depreciation and grants that we sometimes get when we do solar, you are looking at about $6,000 a kilowatt.

And so it's not inexpensive, probably on the keel with a new coal plant today with all the controls that are going to be required; but when you get the -- all the reductions, you are down probably in the $4,000 range, which is competitive.

But the good news is you don't have any production costs and we are seeing a little better projection on how much energy we are generating from what we estimated originally.

These are a little more efficient than we thought.

So long term we are going to do -- we already did one, we got all kinds of awards for it and it's already generating electricity, and it's feeding the pro forma -- that's good news -- and the RECs are holding around -- this in Pennsylvania -- around $250 to $260.

We are looking at another one where we got a grant from the Governor -- Pennsylvania, that is -- and we are going to be putting a 1.1 megawatt plant up, break ground early next year.

We are also going to do three solar projects in New Jersey which are much more aggressive on the REC program.

The RECs there give you as much as $600 a kilowatt.

So we are excited about it.

We think it's a perfect fit for an environmentally conscious company that has good cash that can spend it, because I think we are going to be around in 20 years and get the benefits of it.

I think if I was buying a home and going to invest $50,000 on my roof, I'd better make sure this is my home for the next 10 years and I'm not going to move or get my job transferred.

But with a water plant, it's a lot easier.

Does that answer what you wanted?

Yes, and regarding organic growth and just general housing market, new connections, is there any light at the end of the tunnel?

Well, that is a macro question, because that is national.

We are not burdened with as many foreclosures in our areas except for Florida.

Nevada, Arizona, those states are very high on the supply side.

A foreclosure to me means supply.

Before somebody's going to build a new home, they're going to buy a recently built home that's foreclosed.

We didn't see that type of rampant growth in our core states of the Midwest and the mid-Atlantic, so we didn't -- we're not going to see the oversupply for years.

On the other hand, jobs are going to be the key element, and customer confidence.

I am starting to see -- I'm Chairman of our local Convention and Visitors Bureau and we are starting to see hotel rates climbing, airline usage up, so you're starting to see business travel and some residential travel moving up.

That tells me, that's a good leading indicator as to people are feeling a little better about the economy.

Also if you look at your apartment rentals, they had dropped to a very low ratio, record low ratio in the 70's -- high 70's, low 80's.

And you could have 1000 theories on that, but I think it's younger people moving home just to make sure until they get their first job or second job, they have the money.

And then they're -- but you are starting to see apartment vacancies down now 5%, 6%.

And the next step out of an apartment is a house.

So with interest rates at record low, with housing values stabilizing to probably 20% below where they were, i.e., affordability, and I think you are going to see less McMansions and more affordable housing in the $200,000 to $250,000 range.

Doesn't matter to us.

The same number of toilet flushes, the same number of dishes have to be washed and the same -- mostly the same size yards.

But they're --the big McMansions were on postage stamp yards.

So having said all that, I think it's going to be another year before we get out of where we are, although we are starting to see a little bit of uptick; we are back to '08 levels versus '09, which was a disaster level, and it didn't really start dropping until '07.

So I think we've got another six months.

I think the next building season, which is now, you know, spring of '11, we are going to see a little bit of an uptick.

Okay, thank you very much.

(Operator Instructions) And it appears we have no further questions at this time.

I'd like to turn the call over to Nick DeBenedictis for any closing remarks.

I just wish it would stay hot all year long but we can't promise that.

It was a great quarter and I appreciate everybody's attention this morning.

Thank you.

Ladies and gentleman, that does conclude today's conference call.

Thank you for attending.