Essential Utilities Inc (WTRG) 2013 Q4 法說會逐字稿

Good day, and welcome to the Aqua America's FY13 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.

Thank you, Jason. Good morning, everyone. Thank you for joining us for Aqua America's full year 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 by calling Alex [Whitlom] at 610-645-1196. There will also be a webcast of this 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 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, 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. Good morning, everyone. Aqua is pleased to report this morning that 2013 was our 14th consecutive year of increasing earnings with a 10% CAGR over that time period, actually in excess of 10%, and 2013's 12.6% growth in net income allowed our board to raise the dividend in September of 2013 9%. That was our 23rd dividend increase in the past 22 years.

The stock performed well over the course of the year, returning shareholders 19% shareholder value and it was complimented by a 5-for-4 stock split on September 1, 2013. That was our seventh split in the past 18 years. Now, in 2013, Aqua's management team was able to deliver the same consistent, strong financial results of an increasing shareholder value that our investors have come to expect as a slow, steady, but profitable Company. As we look at 2014, that will be my 23rd year with the Company and I'm optimistic as ever about keeping the record of earnings and dividend increases intact.

2013 was one of my most satisfying times at the Company after, as I said, over two decades, not only thanks to the strong financial results but also due to the excellent execution of our management team which we reorganized in 2012 and is now producing what I would consider stellar results. Let me give you a couple examples. This last year we flawlessly executed on the $300-plus million CapEx investment program and other than just the financial numbers, there's a lot behind that.

One of the most important aspects of our continuing high investment level in our plans and infrastructure is the reduction of our environmentally driven expenditures to today less than 5% of our CapEx, used to be much, much higher, so that we can almost exclusively focus now going forward on the more discretionary infrastructure rehabilitation program we've started in all of our eight states. As we go forward, we'll continue spending at these levels. I estimate $1billion over the next three years, but the majority will be in infrastructure investments eligible for the applicable distribution system surcharges that we now have in six of our eight states.

The reality of this is that we'll keep our future rate requests in the single digit even though we're investing two to three times depreciation versus the high double-digit [ask] and of course there's risk with that, that we've been required to get our returns in the 2008 through 2013 time period. The positive effect of these infrastructure investments came just in time as in January and February of this year we have experienced one of the coldest winters ever and not to practice -- I know a lot of companies are using what we call frozenomics excuses for things, but at Aqua Pennsylvania we have had 300 breaks just in the first two months versus 200 last year, but nowhere near what some of our large cities are experiencing or even closer to home.

Just 10 years ago at the old Philadelphia Suburban we experienced 600 breaks in January and February. So, as we keep investing infrastructure, again, $1billion over the next three years almost exclusively on pipes and transmissions, this hard-to-predict operating expense should be reduced further, but however regarding the tough winter we've had this year and the increased breaks and equally snow removal costs, it could shave a penny, maybe two off your first call projections for 2014 which I'm still comfortable with.

Due to our continuing focus on expenses, again, our management team really shone through in this year. We maintained an industry-leading efficiency record of 35%. Now, I'm using the same metrics that you've been using when you compare the American -- largest in our industry, and ours is 35% if you want to use a comparable, but equally important we're continuing to successfully recover our investment through rates thanks to the fact we've been able to lower the ask because of our most efficient standing in the industry.

In 2013, we had $12.5 million in annualized rates and we have 2.8% already received and $21 million in cases pending. Now, remember, in Pennsylvania we had this unique repair tax policy which has allowed us to continue investing record amounts in Pennsylvania infrastructure and not having to raise rates. Therefore, our rate requests are down year-over-year, but equally important this slows down the revenue growth because even though we're producing record earnings, we are not using rates to get there in Pennsylvania and, therefore, revenue growth has slowed.

I think to put it in perspective, and Dave will explain much more to you if you have questions, I would say for 2014, a 2% to 3% revenue growth will still let us achieve what we're trying to do with the earnings side because of this very, very favorable repair tax policy for both the rate payers and also for our shareholders. The -- another aspect of what I would consider management's abilities is the very efficient portfolio rationalization program that this year produced $89 million and a $14 million profit, or $0.08 in the exit of our troubled Florida operations. And of course in this sense, many times when companies go discontinued and say we're going to sell something off, it's usually not tracked this closely and, therefore, if you lose money on it or actually hurts your GAAP earnings it really, most times, it's not noted by the analyst in the record.

In our case, both in 2012, 2013, and I would predict in 2014 with our Fort Wayne, GAAP earnings will actually be enhanced, not hurt, by the discontinued operations sale and I think that's credit to management, looking at every penny on the way out the door in our rationalization program. And of course when you consider that our record $221 million profit this year, when you roll everything else, it allowed us to internally generate $60 million cash in excess of our CapEx spending and that's the third straight year of this positive result which obviously negates the need for any equity dilution in 2014 or for the foreseeable future.

Interesting perspective, regarding our net income this year it took Aqua and its predecessor companies 122 years to earn $100 million in net income and it's only taken us five more years, through 2013, to reach the $200 million mark. This is a stat we're very, very proud of. 2013 was also a successful year for labor negotiations. We usually don't talk about these things on the calls, but I thought it's important to see the fundamental operational strength of the Company.

We negotiated four contracts allowing for some reductions in some benefit programs while granting our average -- our employees a fair, average wage increase of 2%. We have always had a good working relationship with our union membership. That represents about one-third of our work force and have never had a strike in the modern history of the Company. I would predict 2014 will bring no surprises in this area as we only have three contracts up for renewal which only represent 60 employees, so very low number.

Another area we never talk about on these calls are Aqua's record of having clean books and efficient information systems which are the back bone of any public company. During my tenure, we have also foreseen clean audit letters from the independent accounting firms, which our firm currently is PWC, one of the big four. We have never had a SOCS material weakness and we recently completed the upgrades of our financial information system and our customer information system and now a brand new purchasing system and these upgrades were on time, on budget, and most important they all work.

We're optimistic in 2014 and going forward that the new systems, especially the purchasing system, will allow our CFO, Dave Smeltzer, and our management team to enhance our industry-leading cost initiatives program. Now, when you're predominantly a regulated company, your customer service and reputation is the real value-added as you execute your strategic growth plan through capital investments, cost controls, and growth through acquisition, which has been our strategic direction strategic direction for the last 20 years and continues today.

Tonight, we're honored as the Philadelphia region welcomes in spring, believe it or not, with 8 degree temperature by the world renowned Philadelphia Flower Show. Aqua is the honoree for this evening's event and we're very, very surprised and honored about that. And the reason they picked us was for our efforts in tree planting as part of our water shed management program. These are the extra steps we've taken environmentally at the Company that give us recognition but we very, very seldom talk about it.

We also received recognition this year for our solar fields which we have four now which steadily produce 4 million kilowatts hours saving our electrical operating expenses. And we also got an environmental award for implementing the conversion to compress natural gaffes our entire southeastern Pennsylvania transportation fleet over the next couple years. This is not only a money-saving project, but it also helps us reduce our carbon footprint. And just this year, we received the NAWC award and, believe it or not, second to IBM in competition for the prestigious Platts Energy award given at the Waldorf Astoria in December, and that was for our energy efficiency programs to reduce peak response and energy demand response on the PGM grid.

We have experts in electric distribution and cost controls and they are making a difference in our bottom line. Now, how do we do this? We do it predominantly through an investment we've made in standby generators which have been installed throughout our system. These generators allow us to keep, especially during this last storm, they allowed us to keep 100% of our customers served despite up to six days of electrical outages in Pennsylvania and New Jersey during the recent snowstorm. Now, 100% reliability is something our customers and regulators expect, take for granted, and we have to deliver and we're proud to say we were able to do that during this storm.

One of the bright spots of 2013's results, which I think bodes well for 2014 and beyond, is the uptick in organic and acquired customer growth. We did 15 acquisitions and our customer growth grew from under 1% over the past three years to 1.3%. Still not back to the hay days of the 1990s and early 2000's, but we're seeing an uptick in activity in both regulated and unregulated and we believe we're going to grow 1.5% to 2% in 2014.

Now, of course acquisitions are only a growth engine if you can integrate them profitably into your operations. Our largest recent acquisition was mid-2012 and that was $125 million to expand our Ohio operations. The acquired operation the one that we bought from American, was losing money in 2011 and in 2014 we expect to make $4.5 million in profit at a 7% ROE. Now, there's still room for even further improvement, but we think this turnaround really has made a difference for current and future prospective earnings.

This is a good example of the value added through growth through acquisition program which has produced almost 300 acquisitions over the past 15 years. It's just part of our DNA. As mentioned in our release, the Aqua unregulated results generated $3.5 million in cash but lost about $0.5 million in our net results.

For 2014, we are comfortable with your first call of, I think it's 120 or 121, it's somewhere between those two numbers, with the reduction in the first quarter of 2014 due to our budget expense, if you can acknowledge that due to the extreme weather. And this assumes in our mind and our budget a contribution from the unregulated Aqua resources of -- help me with that, flat in 2014. And I think there's some upside on that because just in the recent two months the gas prices have risen from $2 to over $4.

Of course Marcellus problem is getting the gas out, not producing the gas. Pennsylvania is now the second leading producer of natural gas in the country. It surpassed Louisiana this year. The problem is getting it out. The wells are more prolific and productive than they ever expected, but you have to get it to market. And with this recent run-up in usage of natural gas for energy but also for heating this cold winter, gas has shot up to $4. So, we anticipate an increase in drilling which is where the water is used in the process.

To wrap up, 2013 was an exceptional year financially for us, but equally important was operationally strong with our very strong financial capabilities now built with our A plus rating and the cash generation. And with growth returning, it should allow us to maintain our record of increased earnings year in, year out, and dividend increases in 2014. Also, I saw an early headline on one of the services and I want to make sure I clarify it. The headline said that we -- they acknowledge that we beat first call and then they said that we were going to increase the dividend, at least I interpreted it that way, and stock split.

What we were talking about is the history of 2013. Obviously, any stock split or more important dividend increase is the Board's responsibility and we have not had our strategic meeting where we used to take the dividend increase up, but I assume -- you can assume it's a high priority when we've done it 23 times in the last 22 years. We did issue a revised release to clear, make it clear that we didn't raise the dividend at yesterday's Board meeting. Could I answer any questions?

(Operator Instructions)

We'll go first to Jonathan Reeder with Wells Fargo.

Hi, good morning, Nick. Thanks for taking the call.

Could you clarify the expectations on the shale pipeline in 2014? You said flat. Did you mean just break-even or still a little bit of a loss?

About $0.5 million loss, but cash should drop -- jump up to about to (inaudible). That's what we're budgeting.

Okay. And then what was the gain on the Florida sale?

$0.08.

$0.08? And that was all in 2013?

Yes. A little bit in the first quarter. That's why the first quarter was higher than most of the analyst estimates, although you were just working continually and then the last quarter it was also in the last (inaudible) which we tried to true up on the -- in the quarterly and year-end analysis (inaudible).

Do you have the breakdown between Q1 and Q4 or no?

I think it was $0.02 in the first quarter and $0.06 in the fourth quarter. And remember, the other noise last year was in 2012 all the repair was brought in, in the fourth quarter but when you spread it out over the four quarters, which we tried to do, that's what we tried to true up in the end and how we came up with the 26 versus 22, but it's still a healthy quarter.

Yes, and then on the customer growth expectations, 1.5% to 2%, is that driven more through M&A expectations or is it strong underlying organic growth that you're seeing?

We're seeing some strong organic growth now again (inaudible) too much in Texas. A real rebirth in North Carolina. The rest are pretty standardized, 0.3, 0.5 (inaudible), but we are seeing much more activity on the acquisition front.

We just signed a deal with Chicago Height to do an O&M which is hopefully a get your reputation out and allow us to maybe look at acquisition later, although this is strictly O&M. But we are seeing some larger midsize municipal governments interested in working with us, be regulated or unregulated.

Okay. Do you expect to file a K later today?

Dave?

Probably Monday.

Probably Monday.

Okay, great. Have a great weekend, guys.

Thanks, Jonathan.

(Operator Instructions)

We'll go next to Jerry Sweeney with Boenning.

Good morning, guys.

Good morning, Jerry.

Two quick questions just on the repair tax accounting. Is there any way you can talk a little bit on the tax rate and maybe how we can look at it on a go-forward basis? Just on the modeling front comfortable until we hit the tax line and then that shifts around.

And I know there's moving targets where you spend your CapEx during the quarter as to where it falls into buckets for the repair tax. So, any comments on that?

Yes, that's the real dilemma, depending on what project gets done at what time, some are eligible for 100%, some 70%, some zero. And so just saying we're going to spend the same amount of capital doesn't necessarily mean you're going to generate less or more. It depends on what projects you can spend them on and obviously that's management -- the challenge of management.

But Dave can express what his assumptions were. You talking about this year's tax align?

Yes, the shares in 2014, yes.

Okay.

As much as you can.

Yes, well, we -- when we look at the repairs, as Nick said, it's a little bit hard to predict, right? It's based on specific projects that qualify and obviously they have to get done during the year, but we actually see the repair being fairly consistent from 2013 to 2014.

Okay.

We saw it jump up in 2013 over 2012 and that was related to some new areas of deduction that we took, some of which were actually 2012 portions that were booked in 2013. That was about $0.05.

We also saw in 2013 the initiation of the catch-up deduction amortization, right. So, that started off and that will continue. We expect each year going forward.

And in 2013 we saw a greater percentage of our projects qualify because we began the year understanding what the rules were versus in 2012 when we kind of worked up the rules during the year. So, that explains the increase in 2013 but, like I said, we would expect going forward to be reasonably consistent in the level of deduction here and, therefore, our effective tax rate.

Okay. That's helpful. And then, Nick, I think last time we spoke in terms of Pennsylvania, you were -- the earliest you'd do anything would be (inaudible) and it was probably -- I mean, there's still some time off later in 2015 at a minimum. Is that accurate or?

You faded out right when you said the dates.

Late 2015 is what I was looking at in terms of -- yes.

We don't see right now the need for a rate increase in 2014. We don't see the need for a [disc] in 2014. Now, that could change, but as of now it looks like we go into 2015 and if that's the case the first step would be a disc and that could be mid to late 2015.

Okay. Perfect. That is it from my end. I appreciate it. Thank you.

Good.

(Operator Instructions)

And there appears to be no further questions at this time. I would like to turn the conference back to Mr. Nick DeBenedictis for any additional or closing remarks.

Thank you, everyone, for attending the conference.

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