Essential Utilities Inc (WTRG) 2014 Q4 法說會逐字稿

Good day, and welcome to the Aqua America, Inc.

Q4 2014 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.

Good morning, everyone.

Thank you for joining us for Aqua America's fourth-quarter and full-year 2014 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 Whitlam at 610-645-1196.

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

Presenting today is Nick 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 up the call for questions.

Nick?

Thanks, Brian.

And thanks, everyone, for being on.

Greetings from Philadelphia, where our most recent snow squall just flew through.

And I'll apologize personally for our famous Pennsylvania groundhog's bad prediction on February 2. But good news is coming -- tonight the world-renowned Philadelphia Flower Show opens, which is the traditional start of spring here in Philadelphia.

So, fortunately, for the past 23 years, it's always been a little brighter for me at Aqua, weather-wise and numbers-wise.

And 2014 was no different.

So, happy to report our update this morning.

We ended the quarter and year-end on a strong note.

We finalized our portfolio rationalization program with a signed public/private partnership with Fort Wayne, which allowed us to profitably sell our water system and settle all the various litigation, while expanding our wastewater system, assuming a portion of Fort Wayne's wastewater flows, and providing for growth into the future in Allen County.

That would be equivalent of 10,000 dwelling units, which compensates for the sale of the water system to the Fort Wayne.

We also closed three water system acquisitions in December -- two in Ohio, one in North Carolina -- bringing to 16 for 2014.

We had predicted we would do 15 to 20.

And customer growth at 12,000, a little over 12,000, or 1.3%, which is in the high end of our last two, three years.

Today's financial update reinforces the consistent and solid results our investors have been used to, as a result of our executing on our proven business model of over two decades of investing capital and infrastructure, while keeping customer rates reasonable through industry-leading operating efficiency, and using those savings to help put more capital in without having to raise rates.

Spreading our overhead over a growing customer base through our growth through acquisition program, the value of acquisitions not only is for capital infusion, but also the fact that they help pay the bills for your existing customers and keep rates modified.

We continue to maintain one of the strongest financial positions in the utility industry, S&P A+ for Pennsylvania.

And, this year, we hit a new landmark -- we lowered our embedded cost of debt on over $1.6 billion to 4.85%.

And with today's filing of our 10-K, this is the business time of year when all the proxy material has to be reviewed.

And I have to let you know it's a pleasure leading a company with clean books and a clean company.

We have little goodwill on the books; have never had a reportable SOX control issue, and that's a tribute to our CFO, Dave Smeltzer, and our CAO, Bob Ruben, who are with us this morning.

Our environmental compliance remains one of the Company's highest priorities.

And we have -- I think we are down to 3% spending on of our capital that has to be spent on environmental compliance.

And now we are beginning investing in a growing and complementary nonregulated business line, which I'll talk about a little later.

And in the theme of consistency, I am pleased to report our 15th straight year of record earnings at Aqua, with net income at $233 million or up $12 million or 5.4%.

EPS for 2014 is $1.31 versus $1.25.

And for the quarter, net income due to the Fort Wayne sale was $0.38 versus $0.32.

But I think equally important, and probably a better indicator of ongoing business, now that our successful portfolio rationalization program -- which was all sold at a profit, by the way; there were no losses taken -- is basically completed.

Our income from continuing ops for 2014 was $2.14 million, up $11 million or 5.4%.

Income from continuing per share was $1.20 versus $1.15.

And for the fourth quarter, we were at $49 million, up 5.8%, and EPS was $0.28 versus $0.26, up 7%.

So, pretty healthy numbers.

Operating revenues were up 2.4% over last year, despite some adverse weather influences.

And also recognizing that this slowed revenue growth is actually a testament to the solid performance and operating efficiencies of our regulated utilities, now that we've been able to continually invest over $300 million a year without any significant need for major base rate cases using -- by using the state adopted water wastewater infrastructure surcharges, tax policies and, of course, efficiency.

Our net income results remain strong, due to the Pennsylvania tax repair program -- even though the Pennsylvania program has no direct effect on revenue levels; actually it diminishes the revenue growth in 2014.

But due to the continued success of this program, which was outlined in our 2012 state rate order, we have now gone over three years since the Pennsylvania rate filing or the water disc.

And during this period, we have invested over $575 million on water quality infrastructure without having to raise rates.

So this treatment required in the order has been a steadying influence on customer rates, and Aqua's earnings in addition, even though it hasn't increased our revenues.

With the cost efficiencies we are finding in both our capital and operating expenses in Pennsylvania, I honestly believe we may be able to continue to stay out of rates through 2015 -- obviously, absent anything unusual or unexpected.

Now, although we only get 3% of our total revenues, I don't want to overstate this -- our non-regulated revenues grew 40% last year up to the $24 million mark.

More importantly, net income from these businesses grew 75% from not a very healthy level, but up to $1.6 million.

And, of course, they generate free cash.

In late 2014, we acquired two new non-regulated businesses to supplement our other water and wastewater services business in the Aqua Resources subsidiary, which we run separately.

And these new business lines include the cleaning and repair sanitary wastewater lines, installation and testing of devices that prevent contamination of potable water that's called cross connection control or backflow; and specific training we give now to water utility operators.

Given the magnitude of where water and wastewater infrastructure spending is going over the next 20 years, depending on which estimate you want to believe -- $0.5 billion to $1 billion in the US alone -- we believe there are sound growth opportunities in these key service business lines.

And we are hoping to expand these business lines, and expect to grow the revenues with these two new late-year acquisitions to over $30 million in 2015.

Regarding our Marcellus, which is our other non-regulated investment, we remain confident in the long-term prospects, but don't really expect 2015 to see anything more than the same depressed levels we saw in 2014.

Last year, this operation lost $0.02 a share, and we see it being about the same in 2014.

And that will be in any kind of numbers we talk about at the end, regarding our first call.

As usual, cost controls remain a very important part, an integral part of our business model.

Our industry-leading efficiency ratio, the regulated only, adjusted for purchased water, was 34.7% for 2014.

And not only were our O&M expenses held in check, but the combined results of our depreciation amortization, other taxes, interest, and the O&M, actually resulted in a 0.6 million -- $600,000 decrease in costs between 2013 and 2014.

We are very proud of that.

And our industry-leading EBITDA as a percent of revenue grew to 56% for 2014 -- again, an industry-leading ratio.

And that's where we get the financial wherewithal to conduct our healthy CapEx program, which is a multiple of depreciation.

CapEx spending for the year was at our target, coming in at [$3.29 million]; I think we said [$3.25 million] was our target.

For the next three years, we expect to spend approximately $1 billion in capital.

And once again, cash generation achieved through our growth in EBITDA, complemented by low borrowing costs -- I'd mentioned earlier the 4.85% weighted cost.

And on new placements, we're actually getting much better than even that.

We -- once again, our cash generation exceeded our capital spend for the year.

We expect it to do again in 2015.

This reinforces our earlier statement and consistent statement that we don't see any need for new equity in our five-year plan.

And we actually bought back 560,000 shares during the year to avoid dilution from our management equity programs.

We have 125,000 shares remaining from the former buyback still available.

And in late December, our Board authorized an additional 1 million share buyback.

And just as we planned in 2014, we expect the new plan will offset any natural share dilution and be accretive to earnings.

Very pleased with the pickup in our Growth Through Acquisition program, which is showing increased activity in all our states.

I mentioned earlier, we completed 16 acquisitions of regulated water and wastewater systems.

And that includes organic -- about half is organic, half is new.

The organic really perked up in two states, North Carolina and in Texas.

More importantly, we have a solid backlog of acquisition opportunities that we expect will lead to greater customer growth in 2015.

And recently, we've done a comprehensive study of our water and wastewater utilities residing -- those that are in the states we already served, these states.

And the analysis suggests a number of appropriate acquisition opportunities worthy of our view.

And it's a point of refocusing our effort on certain ones, versus just chasing every operation in the state.

So I honestly remain more bullish than ever.

I mean, I've been talking about this for over two decades.

And for two decades, we've been churning out over 300 acquisitions.

But I do remain bullish regarding the ability to continue to grow through acquisition, and facilitate long-term earnings growth at Aqua.

In 2014, we received $12.3 million in rate increases.

Key cases were North New Jersey earlier in the year, North Carolina midyear, and Ohio later in the year -- it was September.

And given the solid returns in our regulated operations across the board, and the lack of rate activity possibly needed in our largest state, we don't expect 2015 to be anything more than similar to 2014 levels.

On the regulatory front, we are pleased that our state regulators continue to recognize the benefit of new mechanisms to streamline the recovery of key capital costs, and facilitate the acquisition of municipal water and wastewater systems.

Just recently, the New Jersey Water Infrastructure Protection Act was signed into law.

And that intends to facilitate the acquisition of municipal water and wastewater systems.

Similar legislation was enacted in Illinois.

In 2014, a new disc was approved in New Jersey.

And in Pennsylvania, wastewater, we have always had the water mechanism.

And North Carolina approved a new disc mechanism in -- for the North Carolina subsidiary.

It was done as part of a rate case.

We filed for, and are in the process of supporting, the request for a disc mechanism in Virginia, which again, was done through the regulatory mechanism.

And the Illinois legislation is working.

We signed a deal in Illinois as letter of intent and agreement to acquire a municipal system made possible by this new Illinois process of valuation.

And hopefully, that deal will close in 2015.

And we are looking at some other possible transactions in Illinois.

For shareholder value, our third-quarter -- we raised the dividend for the 24th time in 23 years.

Dividend went up 8.6%.

The CAGR over the last 10 years of dividend growth has been 8%.

And we delivered 15.9% shareholder value compared to 13.7% for the S&P 500.

Something timely is my contract, which ends on June 30.

We've talked about this in a number of recent calls -- recent earnings calls.

The Board and I are actively working with an outside consultant on the succession process and project, to ensure a timely and appropriate transition.

The project is on track.

We fully expect to name a new CEO before I retire.

Having said that, I plan to retire as CEO; I still will stand for reelection to the Board in May.

And, if elected, plan to continue to serve as Aqua's Chairman.

And our thinking is, this plan would allow for a smooth transition in responsibilities and leaderships for Aqua's next CEO.

I remain excited about the future.

I believe 2015, a base 5% growth rate is attainable -- even though we are going to remain out of rates in our largest subsidiary, and therefore, remain comfortable with the present first call consensus of [1.27%], although quarterly first call estimate sometimes need some fine-tuning.

Two questions that have come up on a lot of calls, I thought I'd hit them upfront.

One is the weather.

In that sense, all of you on the East Coast know all too well what it's been like.

Although we have seen fewer breaks this year, it's been a colder winter -- less snow, but colder winter, for at least for the greater Philadelphia area, and Ohio and so on.

But the extreme cold has caused a lot of in-house breaks and so on.

We call them no water calls -- that means your pipes frozen.

And that expense on our part to serve customers and help them out, even though it's on their side of the service line.

So I think that you always look for a silver lining.

Still less breaks than last year.

And of the -- let's take our biggest subsidiary -- of the 216 main breaks we've had so far in 2015, none have been on any new ductile iron pipe that we have been installing over the last 20 years, under our Disc and Infrastructure program.

So, let's hope for hot weather.

And then the other question that comes up quite often is pension costs.

Like everybody with -- that's 100-year-old company, they have pensions.

We had a mortality table extension, which meant more liability; a discount rate drop of maybe 75 basis points, which means the liability APBO goes up.

The good news is we're still 80% funded.

The fact that we froze the pension on one of our plans, and eliminated anybody new getting into the defined benefit plan as early as 2003, our effect on earnings and cash or anything else is minimum, and would not affect the guidance that I gave you earlier.

We can absorb the pension without as much problems as some companies.

I think that pretty -- covers pretty much everything.

I'll open it up for questions.

Spencer Joyce, Hilliard Lyons.

Good morning and thank you for taking our question.

This is Jeremy Roane for Spencer Joyce.

First question is -- with Aqua Resources, what did the revenue in that segment look like in 2014?

And also, my second question is -- was the Marcellus pipeline cash flow positive in 2014?

The Aqua Resources -- which we actually booked separately, because the Aqua infrastructure, which is the pipeline, it comes in through a JV line on the sheet.

And that's the difference.

You asked about revenues.

Revenues in 2014 were $24 million.

We are anticipating revenue growth of 20%-plus, so we are looking at $30 million in revenues, with, hopefully, maintaining or improving the margins that we saw this year.

Regarding the cash, the -- although we did lose $0.02 net income in 2014 with the Aqua Infrastructure group pipeline, because of fewer sales in 2013, the cash was still positive.

And I'm going to say it was about $2 million positive -- $1.2 million.

Aqua's piece.

Yes.

Okay, Aqua's piece.

Yes.

It was -- I'm sorry, yes.

It was $2.4 million for the whole JV; $1.2 million for us cash.

Thank you very much.

(Operator Instructions).

And at this time, I'd like to turn the conference back to Mr. Nick DeBenedictis for any additional or closing remarks.

Okay.

Just thank everyone and, hopefully, we will be out of this winter soon.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

We appreciate everyone's participation today.