Essential Utilities Inc (WTRG) 2013 Q1 法說會逐字稿

Good day, and welcome to the Aqua America Incorporated fourth quarter 2012 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen, Director of Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us for Aqua America's first quarter 2013 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 calling 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 David 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 risk, 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 reference 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. Pleased to report on strong first quarter performance as Aqua is on its way to it's 14th straight year of record earnings. As a quick update, our annual meeting will be held next week, May 8, and signs are that all things will go smoothly, and we already have a quorum.

Going back to the earnings call, net income for the quarter grew 23% to $46.6 million. Corresponding earnings per share were $0.33, versus $0.27 in the first quarter of 2012 on 1.3% more shares outstanding. Incoming from continuing operations was up a strong 53%, represented by $0.29 per share in the quarter versus $0.19 last year.

During the quarter management executed on our strategic programs of profitable growth through region acquisitions, investment in infrastructure while holding down customer rates due to the use of the favorable tax policies that we explained in the last earnings call and we'll get into a little bit more today, successfully disposing of assets for sale, and maintaining our position as the most cost efficient utility and one of the strongest financially in the nation.

Revenues were strong in the quarter, up 10% to $180 million, positively driven by customer growth from acquisitions -- the comparison of the Aqua Ohio purchase of quarter-over-quarter last year was not in the numbers -- and 16 others that were bought during last year in six other states. That represented of the 10%, 6.5% of it. Great activities, [both] 2012, which come into 2013, and those in 2013 already -- mainly Pennsylvania and New Jersey where we had cases decided last April and June in Pennsylvania and New Jersey -- and four other states added 4% to the revenue growth. But they were negatively -- but the earnings for the quarter were negatively affected -- I'm sorry, not earnings, but revenues for the quarter were negative affected by consumption being down by about 0.5%.

In addition to the 18 acquisitions made last year, including the American Water properties in Ohio, Aqua closed on four system acquisitions so far this year, three in Pennsylvania and one small one in Virginia. The largest of these was Treasure Lake for about $12 million and gives us a foothold in a key county in the northern part of Pennsylvania. Management believes we're on target to close about 20 system acquisitions during 2013.

Operating efficiency continues to improve, although expenses on continuing operations were up 5.4% in the first quarter. That was due almost exclusively to the acquisition of the 59,000 new customers in Ohio, where there were no expenses last year and this year we had expenses to run that part of the system. And that represents 6% customer growth, so you can see the comparison of the 5.4% is in line.

If -- by the way, that acquisition continues to add earnings. It did last year and continues to add earnings in 2013. Management continues to focus on the expense side of the ledger, and what we looked at was our same system, if you take out the Ohio, and we believe O&M expenses increased about 2% year-over-year.

The third element improving first quarter earnings was the adoption of the repair tax method in Pennsylvania in December 2012, which lowered our effective tax rate in the quarter of 39% in Q1 of 2012 to 15% in Q1 of 2013. Now, you recall that last year $0.22 of positive impact from the repair tax was all booked in the fourth quarter of 2012 when we decided to take that tax election. And in 2013 it's being booked over four quarters. If you wanted to use an estimate of probably about $0.05, that would have occurred in Q1 of 2012 if we had taken it over four quarters last year, then you can get probably a more accurate comparison of quarter-to-quarter operating results -- continuing ops.

We reported because that's the accounting way to do it, a 53% gain, but if you do your own addition and subtraction, you'll see that it's probably closer to the 20% to 23% we're showing in the net income reporting. And still pretty strong, and we're very pleased with it. I wanted to point that out as an anomaly.

Net income in the first quarter of 2013 was also complimented by a $0.03 gain from the sale of two-thirds of our Florida assets to three different entities. This has not been an easy exit. We announced it last year about this time that we were going to exit Florida because of our concern over the lack of profitability and earnings on our assets. And the toughest two-thirds have been disposed of. These were the ones that were losing most of the money. As a matter of fact, our remaining operation is actually profitable.

Operations, because of depreciation no longer taken on discontinued, is one of the factors, but because also we tightened things up. It's amazing when you're selling something, it actually gets better. But anyhow, we earned $0.01 from the discontinued ops and $0.03 from the sale, and that got us from $0.29 from continuing up to the $0.33 on net income.

Now, the comparison in the first quarter of last year, because the $0.33 versus $0.29 on net income is not as dramatic as the $0.29 from continuing versus the $0.19. Last year's first quarter actually included $0.08 from the main that we sold to Connecticut Water. And Aqua is making progress on the sale of the remaining part of our Florida assets. As a matter of fact, in the second quarter, very early in April, we actually sold the Lake Suzy assets to Desoto County, that would be the second quarter event. And we're in negotiations with Sarasota County to merge Aqua's water and wastewater assets with the county's and that will likely be a third quarter event.

Another positive development in our pruning programs was the fact that we had property condemned in 2008 by the City of Fort Wayne, the portion of our operations there that was in the northern part of their city. We disagreed with their process during the condemnation, and after four years -- five years now of court battling, we won a significant ruling. Or I shouldn't say we won. There was a recent favorable in the Indiana Supreme Court ruling on our appeal to get a jury trial and being able to provide valuation testimony. We think this is a positive as we proceed, but we don't expect this to affect our P&L until 2014 at the earliest.

Two issues of temporary concern is the wet, cold spring to date in Mid-Atlantic and Midwest states. It has absolutely affected consumption to date in 2013. And the slow start to drilling in 2013, now that our Marcellus water pipeline joint venture with PVR is now in place. There's plenty of time for the weather to turn around in May and June, and we're still very confident.

An area that stands out in the first quarter results is our strengthening financial position. Our S&P A-plus rating for our Pennsylvania noted subsidiary was recently reaffirmed, and only one other utility has a higher S&P rating of the 229 S&P rates. We did some further refinancing during the second quarter, and that should lower our embedded cost of debt now below the 5.06% that was earmarked in the release.

However, it is not as evident as the growth that we've seen in internal cash generation. This is the first time I can recall in my 21 years as CEO of Aqua that we far exceeded our cash needs in a quarter as we continued to implement record capital investment programs. And as a reminder, we're doing almost 3 times depreciation, and it's over $325 million in 2013.

In the first quarter we internally generated $89 million, which easily covered the $75 million outgoing for the capital program for acquisitions, which were heavier in the first quarter than normal, and our pipeline venture, which is now completed. In addition, $52 million of the proceeds from the partial sale of our Florida assets came in during the quarter, and that enabled us to pay down $42 million in debt and actually improve on our equity to total capital ratio from 46.6 year end to 47.8 by March 31. That really is a jump in our equity capital.

Due to our pruning and repair tax initiatives in 2012 and continuing in 2013, I recognize the way quarterly earnings are jumping around and need so much explanation in light of something I'm not going to apologize for, and that's the rapid increase of net income since 2011, up over 30%. I'm still comfortable with First Call estimates for the year, which were $1.38 going into this call.

Of course, I would assume you're going to adjust them for the $0.06 beat in First Call that we announced this morning. However, I have to say your quarterly estimates, some are -- I mean, when you blend them all -- of the second quarter, which are averaging about $0.39, and the fourth quarter, which averaged $0.29, seemed to be disproportional. And a couple of pennies should be transferred from second to fourth to make them more levelized in the way our traditional business has always been producing.

I'll answer questions you may have on the release and on our operations. And Dave Smeltzer is here also.

Thank you. (Operator Instructions). We'll go first to Heike Doerr.

Good morning, congrats on a strong start to the year.

Good morning, Heike. How are you?

I'm doing well, thanks. I wanted to start with CapEx. I see year-over-year we're down. Is that a weather-related slow start to the year?

It's timing, a little bit of weather. It was a colder winter. Last winter we didn't have a winter, so we never slowed down. It's more of a tradition where you do less in the first quarter and you do a lot more in the second and third.

We're still on target to do the $325 million to $340 million level. In order to maximize repair tax, we've reassessed some of the work we were doing and made sure it met the standards of what we think are the IRS guidelines. So we moved some projects around. That's where the timing came in.

The other thing that's important to recognize is when we had the DISC, which we have to forgo because of the repaired tax [PUC] order we made, the DISC had to be done exactly by a certain date to be eligible. The date was, if I'm not mistaken, February, and there was a lot more pressure on our construction crews to get things done by a certain date. So I think a little bit of the timing is that way. They are doing a little bit more value engineering, and I think it's actually being a positive. But I'm not concerned over the -- it's not 25% is what you're looking at. It's are you going to make your numbers, and we're comfortable we will.

Got it. That extra clarity is helpful. As we think long-term, this $325 million to $350 million CapEx spending, what percentage of that is going towards DISC qualified infrastructure investment? Is it over half?

I'll get you that number. I believe it is, but we'll get you an exact number. And it's only relevant in Pennsylvania because we are still doing surcharges in the other states. So we'll give you a breakdown between the other states, where we have had traditionally done less pipe because we're still working on compliance, and in Pennsylvania, where our compliance is pretty much done.

I can tell you, because we're going to present it to the annual meeting, our capital budget needs have dropped -- [in other words] the $325 million. Only 4% is compliance related. In other words, only 4% of our budget would have to be spent in order to meet EPA rules, versus probably five years ago it was in the 30s or 40s. But the big shift in the priority setting in our capital, so it has shifted much more towards needed infrastructure. It's still prudent, but it's not EPA compliant driven.

Okay.

[I'll get you] the exact percentage.

Thanks. The Treasure Lake acquisition looks expensive, this $12 million based on the population served of 6,000 customers. Can you tell us a little bit more about this system and the value of it?

Yes, absolutely. First of all, it's in the heart of the area for the drilling. Second, it's a upscale -- near DuBois, upscale development that is probably one half or less filled out, so there's going to be a lot of growth. And the third is we had to outbid the local water company, which had [bid] actually higher than what we paid. So fair value is really what drove the price.

All right, that's helpful, Thanks.

Thank you. We'll go next to Jonathan Reeder with Wells Fargo.

Good morning, Nick and Dave. I was wondering, is there any change to the expected extent of the repairs tax deduction benefit for full year 2013? I think you previously said, including the amortization portion, it's about 125% to 130% of what 2012 was?

I think that's still -- until we see how all of the final capital projects come in, and this is constantly reviewed from both our consultant on this project, which is [DVMP], and our auditors, PWC. So we have one half of the national brain trust working on us doing it right. So if you give us that leeway -- if say something, do this differently, we will, but at this point, I think it's still accurate.

Okay. Then, Nick, you were you touching on the strong cash flow position that you're in. And with earnings and the dividend, I guess I was kind of surprised yesterday that the Board just increased it at your normal rate, didn't think about accelerating it. Can you just talk on that?

Sure. That's why I mentioned May 8 next week is our Board and annual meeting. We did not have time because of the record date and everything else to have a Board meeting just to look at the dividends, so we by unanimous consent approved the next dividend, so everybody would get their already increased dividend. Remember, we just increased it two quarters ago. But I think it will be a major topic of discussion at our annual and our Board meeting that follows the annual meeting on May 8.

As far as future growth, what sort of trajectory should we expect? Is it a one-time jump up, or would you take a couple of bites of the apple?

I don't want to preempt the Board. This is the most delicate decision you make as a Board member. We're going to be recommending three or four different options. They'll have to choose. You'll know in three days I guess. In three working days.

Okay, so you expect making an announcement following that Board meeting?

If they make a change, absolutely.

Okay. Just lastly, a little clarification. In Florida, once you make the Sarasota sale, which you said expected in Q3, that will put you completely out of the state?

Yes.

Okay.

[To break that up], that's the only -- let me see, Chris, that's one we have left because Desoto was actually operated. And we actually operated the systems we sold for about a month for customer service. That's done now too. So the only thing we're really doing in Florida today as we speak is running our Sarasota -- and owning -- our Sarasota, which by the way is about a third of the system and has earned its keep and has always earned its keep. It was the other two-thirds that lost the -- I think we said [the release] of over $12 million over the year. So there is not -- there is, because we decided to exit Florida, but this isn't one that was driving it, Sarasota.

All right. And then would you say this effectively ends your pruning program, or are there other properties that you're continuing to [eye] up?

No, I think as to what we would be able to say to you, literally, this is something we're going to look at, but management is looking at small systems within states, or every state is reviewed every year as we look at what its earning potential is. And we're going to look at what [can add to] shareholder value the most, running it or selling it, but there is nothing more now that we can tell you is on the table.

Okay, thanks for the comments, Nick.

Thanks, John.

Thank you. We'll go next to Gerry Sweeney with Boenning.

Good morning, guys.

Good morning, Gerry.

Just a quick question on the O&M side. Obviously, it was another great quarter in that area. Is some of that going to be benefitted by exiting those under -- I assume some of it is benefitted from exiting some of those underperforming assets in Florida?

Florida's O&M to revenue ratio, that is something we've always tracked. Florida's O&M to revenue ratio, its best year was probably 85%. And you're used to hearing me say 35%, 36%, so clearly it will help in that sense. But it was only 3% of our business, so it is not as relevant.

What we're doing to improve is really that some of the Aqua [source] states which are very, very spread out and small systems, which necessarily are more expensive to run than the large integrated systems, like you're used to here around Philadelphia, Gerry, just have to be higher. But they didn't have to be as high as they were, and we're bringing those down, and that is in the goals of our Vice President and each of the state Presidents to squeeze every -- as much as you can to make them efficient. Because that keeps rates down. That's the real reason we're doing it.

But in addition, it will help our overall Corporation's cash flow. And I think the -- we're closing in on efficiency in the Midwest states. When we bought those ten years ago, they were way out of whack, but we still have some room to go on the Southern states.

And the other factor on the O&M, the revenue that I would like to bring up is, because we're -- Pennsylvania was half of the Company and the rate cases were pretty routine, and DISC very routine, there's no revenue growth, because we're getting it all through the tax side. Remember on that (multiple speakers) --

Yes.

So using O&M to revenue isn't as relevant as it used to be because of the fact that we're losing our denominator, and that always helps. If you get more sales and raise revenues and watch your expenses, it's a double way to leverage that O&M to revenue ratio.

Now we have a couple of states which will be growing revenues and customer base and helping the denominator, but the numerator is the only place to go. So I'm going to start shifting to talk about how much overall expenses grow, with knowing that if you want to take the Corporate O&M to revenue ratio, I think we're still at about 500 or 1,000 basis points better than the next best company. So I don't think we have to prove ourselves in that area, but I think that's more relevant now.

You did mention on the repair tax accounting in Pennsylvania and not being able to -- going in for rates and DISC. And when you spoke about it a quarter ago -- I know it's only a quarter later -- it was a moving target as to when you could go back in for rates. Has that become any more clearer, with the caveat that we're [still] early?

We've told the Commission we will not be in in 2013, which was [the] normal filing, and there will be no DISC in 2013. 2014 will be a lot clearer after the summer. We're doing a five year planning exercise where we review every capital request of every engineer for the next five years. Put those in, and when you put those in the model, we'll be able see how much is tax repair eligible, at which point I can give you a better answer.

Okay. Then finally on the unregulated side. I'm sorry? I thought someone was commenting there.

On the Aqua infrastructure side, you mentioned the joint venture adding, we'll say, $0.02 to this year. You thought you're on track for that. Any other updates as to what's going on outside of maybe the JV in the shale areas?

Yes, we're talking to a number of people in Ohio. The Utica is where Marcellus was five years ago probably, and everything I read and hear from my electric company Board duties is that gas is replacing coal in generation. We just announced last week that we're moving our entire fleet to CNG, so you're going see more and more vehicles driven by gas.

The structural inherent demand pull is there. It's just timing.

And Karl -- as you know, our Vice President there is very confident it's just timing, between this first quarter where we saw very little and when Shell starts drilling and when some of the other people he's talking to -- they're still very bullish on gas, and they're still very bullish on gas in Pennsylvania and Ohio.

On that fleet conversion, I'm not sure if you've mentioned it in the press release. Are you converting, or are those all new vehicles?

No, we've decided to turn the whole fleet over, but using new vehicles so we don't get into retrofit.

Okay --

We're hoping that as more companies and individuals start doing it, and you get the chicken and egg and more infrastructure [to sell] the vehicles, that you will see the price come down of new original equipment manufacturer vehicles. Right now they're more expensive.

We're applying for some state grants. We expect to hear soon. [But we'll be] one of the leaders in the state doing this. We just did a press conference last week with legislators and there's been some press on it. We'll send it to you.

Okay, great. And then finally, obviously, any comments on Allentown? I thought that was an interesting process with the -- what was it, the Lehigh Valley group winning the bid?

Yes. Let's see, Billy Joel, does he sing Allentown? We gave it a college try, but the final cost and the requirements that were put on with no bend in the RFP turned out to be -- we just couldn't see how we could make any money out of it. We would have liked to have done it. I give credit to the mayor for standing up and doing what he thinks is right for his town, even though there's a lot of local opposition and council members are running on the issue both ways.

But we just -- Gerry, I'll tell you, we looked at the numbers 15 different ways, and you're locking yourself in for 50 years, and we couldn't see how you could do it. You might want to ask some of the bigger French companies how they looked at it, but the winner was a local authority, so [there obviously] (multiple speakers) [with] public money. But that local authority is very small compared to the size of Allentown let alone us, so the economy of scale doesn't help you either.

I think it's -- there are other strategic reasons for the authority -- the county authority to do it, obviously, but for those two reasons, you're bidding against a strategic bidder versus a financial bidder, and then the second piece was the numbers didn't work for us.

There was I guess -- $225 million is a large chunk, plus infrastructure improvements. I was just more curious --

Plus by the way a $0.5 million payment a year for 50 years, regardless of how you're doing, to the city coffers.

Yes. I just -- I find it interesting, a local authority. Yes, it sort of splits the middle between privatizing or a concession in -- a quasi-governmental institution coming in and -- splits the middle between the general public being opposed to private companies running the water systems. That's also -- but that's all on my part. I appreciate it. Congratulations on a great quarter.

Thank you.

Thank you. (Operator Instructions). We'll go next to Stewart Scharf with S&P Capital IQ.

Good morning.

Good morning, Stewart.

Can you talk a little bit about the housing market? [And it's been] -- [seeming] to recover? Are you seeing much organic growth coming from there?

I'll get you exact numbers by state, and we'll call you back. We're starting to see some infilling again in North Carolina. But I think job growth in North Carolina -- they have pretty high unemployment rate right now -- is going to have to precede a major boom in construction unless it is all vacation homes, which I don't think is going to happen in North Carolina. It was happening for a while when people were using it as a halfway spot to Florida from New York.

But we are starting to see -- in North Carolina, just to give you an example, of all of the developments -- we have a thousand systems in North Carolina, and a lot of them were developer systems, where you designed them and laid pipe and drilled wells for maybe 300 to 500 homes, and only 100 were built. And when you add all of that up over how many lots have infrastructure in front of them, there's 15,000 to 20,000.

And what our hope is and what we're starting to see is the larger national builders are going in and saying we'll take this development over from the bank or whoever, and rather than start with green land and start from scratch, plotting the acreage, just fill these in. And maybe even build housing that is maybe not the $1 million homes they're used to, but maybe the $300,000 to $400,000, which is the sweet spot now.

Texas is growing still organically, and we'll get you that number. Do you recall, anybody, the number offhand? See what we can give you.

But the Midwest and the more mature areas [we] (inaudible), Pennsylvania, New Jersey and so on, it's coming off the floor, with the floor being almost nothing in 2011 and 2012, but I wouldn't say it's -- I don't want to give you undo optimism, but we're starting to see some activity now, which is good news.

Okay, and the shale you -- you're looking for the [point] (inaudible) double in 2013. Do you still see that trend continuing, as you said in the past, over next few years?

On the shale?

Yes, the $0.01 from the shale --

Oh, yes. No, we're still optimistic that our original estimate over where we built the pipeline for, that was -- we weren't sure if we were going to earn anything in our first year, and then we ended up doing that. That $0.01 last year. Then we said we think we can double it every year going forward until we get to about $0.10 a share. And we're still confident on that, even though we had a soft first quarter. And I wanted to be honest with everybody and show them that was soft, but you'll see that in the JV number on the balance sheet.

It looks like Texas -- I'm going back to your question on organic growth. In the first quarter we grew about 1,200 customers across everything, but Texas has the largest organic growth annualized, and that's about 0.5%. We'd like to see that -- the country get back to the 1% we were seeing in 2008.

Okay. And just on the legislation in Indiana, the action has strengthened you said this year. Do you see these issues [biting] more based on the [rulings and] --

Oh, yes. I'll tell you why. Because -- and what we used was the case that was a Connecticut case on taking. And the Indiana Supreme Court really was a very, very solid decision, saying if you're going to condemn somebody's property, you have to give them fair value. Since the 2008 condemnation proceeding by Fort Wayne in Indiana against us, legislation in the Indiana legislature has also been passed, as it was also in Illinois, making it more difficult for condemnation of a private system by a municipal. And it's also being looked at in North Carolina.

So I think there will always be condemnation proceedings with -- between cities and between -- because of growth aspects in areas and so on, but I think this gives you the ability, if you have the ability, to fight back and maybe stall it, stop it, or at least if you can't, to get fair value. And that's what we -- this one was already done. It was lost. The law allowed them to do it. But now I think it gives us leverage as we go through the court proceedings.

Okay, thank you very much.

Does that answer your question?

Yes, thank you.

Okay, good.

(Operator Instructions). It appears there are no further questions at this time. I would like to turn the conference back over to Nick DeBenedictis for any additional or closing remarks.

Thank you very much. If anybody has questions that they didn't get a chance to ask now, just call us any time today. Thanks.

That does conclude today's conference. Thank you for your participation.