Essential Utilities Inc (WTRG) 2015 Q2 法說會逐字稿

Please stand by, we are about to begin. Good day, everyone, and welcome to the Aqua America Inc. second-quarter 2015 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen, Chief of Staff. Please go ahead, sir.

Thank you, Dana. Good morning, everyone. Thank you for joining us for Aqua America's second-quarter 2015 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 Scott Szczygiel at 610-520-6361.

The slides we will be referencing can be found on our website. There also will be a webcast of this event available on our site. We may be experiencing technical difficulty on the WebEx version of the slides, so please refer to the PDF if that happens.

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 10Q, 10K and other SEC filings for a description of such risk 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.

Presenting today is Nick DeBenedictis, Chairman of Aqua America, along with Chris Franklin, the Company's Chief Executive Officer, and Dave Smeltzer, the Company's Chief Financial Officer. After the presentation we will open the call up for questions. At this time, I would like to hand the call over to Nick.

Thanks, Brian, and thanks to everyone for joining us today. This is an exciting time as it marks the transfer of leadership to Chris Franklin, Aqua's new CEO. And I am very excited with the direction he plans to take this great Company, which Chris will present later in the call.

I'll note this call will be slightly longer than usual for Chris to be able to discuss the team he is establishing, his philosophy, and his views on growth.

I'll start with by commenting on the second quarter's results. Chris will then discuss the progress of the transition, the CEO transition, and the Company's operational performance. Dave Smeltzer, our CFO, will then review the Company's financial results. Then Chris will recap our guidance for the remainder of 2015, and then we'll open the call up for questions.

Let me start with the quarter. Pleased to announce another strong quarter and, as we've predicted in the past, another strong solid year.

On the acquisition pipeline, we're continuing to build off our strong start for the year and have acquired eight systems year-to-date, which when coupled with organic growth increased year-to-date number of customer growth to 1.2% for the first 6 months.

For the quarter, we reported $0.32 in income from continuing operations, which compared favorably to the $0.31 in the second quarter of 2014. Operating revenue of $205 million represents an increase of 5.4% from the $195 million reported in 2014.

Yesterday at our Board meeting, directors declared an increase to the quarterly dividend of 8% to $0.178 a quarter, and that will be effective September 1. As you know, the Company looks to reward its shareholders with quarterly dividends, and we're now in our 70th year of paying consecutive quarterly dividends. The September 1 increase will be the 25th increase in the dividend in the last 24 years, something we are very proud of.

Now, I would like to hand over the call to Chris who will discuss the progress of the transition and the performance of Aqua's operations. Chris?

Thanks very much and good morning, everyone. I appreciate both Nick's confidence and the confidence that the Board has placed in me and more recently my new team. The first 30 days have been extremely busy, and during that time I've had the opportunity to meet with some of you and [have had] good interactions, also looking forward to meeting the rest of you and building strong relationships as we move forward.

We, meaning the team and I, are looking forward to continuing the success that we've experienced under Nick's leadership over the past 23 years. I'm personally happy that Nick's agreed to stay and is continuing his role as Nonexecutive Chairman of the Board.

Now as we turn to the next slide, I'd like to discuss some of the organizational changes we've made during my first month as CEO. The chart shows the reporting structure for our senior management team. Let's start with Dave Smeltzer.

You all know Dave. In addition to Dave's current responsibilities, he now has three additional vice presidents reporting to him. His responsibility for the Company will include supply-chain management, customer operations, and the IT departments, in addition to what he already had.

Earlier this month we also announced that Rick Fox was appointed to replace me in my previous role as Chief Operating Officer of Regulated Operations. In his new role, Rick will be responsible for managing our [state's] day-to-day operations which includes field services, engineering, and environmental compliance.

Prior to accepting this position, Rick served as Regional President of Aqua's Midwest and Southern operations. He's been a very close colleague of mine for nearly a decade and a half and has played a key role in the success of this Company. Rick's formal education was in chemical engineering so he is well-suited in many ways for his new job.

Next, there's Christopher Luning. Chris is our General Counsel. He's been a key part of the management team for more than 12 years now. He will continue to oversee the Company's legal group and support the entire business providing thoughtful leadership. Chris has also been an integral part of our corporate development effort and will play an important role continuing in that area.

Finally, Dan Schuller, our most recent appointed manager, accepted the newly created position of Executive Vice President of Strategy and Corporate Development. Dan will assist me with developing and communicating and executing our strategic initiatives. He will also be responsible for overseeing our Company's regulated and market-based growth strategies.

Prior to serving in his role, Dan worked at JP Morgan Asset Management in the infrastructure investments group. And while at Morgan Stanley, Dan developed the technical background and expertise and experience that we believe is necessary for our corporate development team to be successful.

By the way, Dan is also an engineer and, in fact, has his PhD in engineering. I'm confident that both Rick and Dan will be valuable new assets to the leadership team as we continue our excellence in operations and our strong growth.

Now, if we turn to the next slide, I'd like to share with you some of my early vision for the Company and where we'll place our focus.

I firmly believe that sustainability is one of the foundational elements on which the Company's success is built. To be sustainable, we must be customer centric. This means continuously optimizing our overall service and our service reliability, which, as you probably already know, is nearly 100%.

I expect to maintain the Company's role in environmental stewardship with both water and wastewater operations. Our business is unique in that water is the only utility that delivers a product which is ingested.

It's our responsibility to produce and treat water so that it meets the EPA standards for drinking. Now we also take wastewater into our plants and filter it to proper standards so that we can safely return it to our environment. These will continue to be among our very top priorities.

Next, I expect to continue to develop and foster the depth of talent that we have at this Company. We have a great, highly proficient team that I'm very proud to lead. We strive to continue to provide opportunities for professional development for all of our nearly 1,700 employees.

Additionally, I expect to continue to invest the needed capital that's required to improve our water and wastewater infrastructure throughout Aqua's footprint. And, finally, I expect to grow the business so that we can provide even more people with our high-quality utility service by employing our well-known operational efficiencies and meeting the results our shareholders have come to expect.

Now, let's discuss a little bit of Aqua's growth platform. Aqua has a proven earnings growth model. It's built on three pillars: capital investment; customer growth, both organically and from acquisitions; and growth from our market-based activities.

The capital investments we make and the fair rate of return that we earn on those investments really helps drive the success of Aqua's growth strategy. In a few minutes I'm going to show you a slide that shows the Company's investments in the past and the projected investments in the next three years, demonstrating nearly two decades of substantial investments in our communities.

Customer growth is a key driver of our revenue increases each year. While our customers are growing organically, let's call it between 0.5 and 0.75 of a percent each year, the bulk of our customer growth comes from acquisitions of both private and municipal water and wastewater systems. Not only do these acquisitions add customers, but they also provide the opportunity to invest additional capital and improve water and wastewater infrastructure.

Our market-based activities also play a factor in the Company's growth strategy. While still only a small portion of the total revenue, let's call it 4%, our market-based activities provide complementary services to our water and wastewater units. Our history of success has been strong and the new leadership team is reviewing our current market-based portfolio in addition to new potential investments to further enhance our performance on the market-based side.

Now, with that said, let's turn to the next slide and talk about the Company's operational performance. Year-to-date, we have invested $150 million in our capital investments to improve our aging infrastructure and better serve customers.

I'll go deeper into our rate activity in just a minute, but thus far for the year, we've received rate awards and infrastructure surcharges that are projected to provide $5.2 million in annual revenue. Additionally, we're having a strong year in terms of acquisitions, which coupled with organic growth represents a total increase to our customer count of 1.2% year-to-date.

Finally, we're continually working to optimize both our regulated and market-based activities by managing expenses and maximizing profitability. As we've said before, we're a leader in our industry with an adjusted regulated segment proficiency ratio of 34.2%, an improvement of 60 basis points from last year, same time, where we were at 34.8%. This is something management will continue to focus on and it's really part of our culture.

Moving to the next slide, let's take a look at our current capital investment plan. This is the slide I mentioned earlier. It shows over the last two decades, our CapEx program has grown significantly, and we're not slowing it down.

In just the second quarter alone, we invested $80 million in infrastructure improvements. We're on track to invest over $325 million again this year. We expect to continue this pace and invest over $1 billion over the next three years, which should grow our rate base about 6% to 7%.

Now let's talk a little on the next slide about our year-to-date rate activity. This is in regard to rates and surcharges. Year-to-date, our regulated subsidiaries have received rate awards and infrastructure surcharges in New Jersey, Pennsylvania wastewater, Illinois, North Carolina, Ohio, and Texas, with an estimated increase to annualized revenues of about $5.2 million.

The Company has $4.3 million of rate proceedings pending in Ohio and Virginia, and Aqua America's state subsidiaries are expected to file rate requests or surcharges of approximately $5 million within the remainder of 2015. Additionally, our customers and shareholders continue to benefit from the tax repair program in Pennsylvania.

As of quarter end, we have invested $700 million in infrastructure improvements in Pennsylvania since the last rate case filing for Pennsylvania back in 2011. I expect Aqua Pennsylvania will not file -- not [be in for] rates for least another year.

On the next slide, let's talk about acquisitions year-to-date. As I mentioned before, acquisitions are a key contributor to our long-term growth, and our 2015 acquisition pipeline remains very promising. Our growth through acquisition strategy benefits the customers that we serve in the form of improved service along with growing value for our shareholders.

Year-to-date, the Company has acquired eight water and wastewater systems, three of which were municipal and five were private. Together, these acquisitions added approximately 8,700 customers and, combined with organic growth of about 3,100 customers, we've achieved an increase of 1.2% in overall customer growth thus far this year.

Our North Maine Utilities acquisition in Illinois combined water and wastewater acquisition is our largest deal of the year, and also represents our largest municipal deal closed in the last 16 years.

Currently, we're on pace to close a total of 15 to 20 deals by year end, which combined with organic growth is expected to contribute 1.5% to 2% in customer growth, representing the highest growth rate the Company has achieved since 2008.

Now I will hand the call over to David Smeltzer who is going to touch on the key drivers of the second-quarter financial results. Dave?

Thanks, Chris, and good morning, everyone. As we move to the next slide I'll talk about the Q2 financial results and some of the driving factors that affect the Company's performance.

So first, you see the P&L on the chart, the revenue for the quarter increased 5.4% from the prior year. Our market-based acquisitions were actually the most significant contributor to our revenue growth this quarter, providing about 2 percentage points of that total increase in revenue. Regulated operations, including regulated customer growth, consumption, and revenue from rates and surcharges combined to provide the other 3.4 percentage points of that revenue growth.

O&M expenses were up an uncharacteristic 13.3% to $79.7 million from $70 million in 2014. Our market-based acquisitions contributed the most to the total O&M increase. Our Tri-State Grouting acquisition, still in its first year, was by far the leading contributor to O&M expenses in this category, up about $2.6 million.

Another leading factor was employee-related costs, and there were two components of this. One was a one-time credit tied to vacation expenses in 2014 of about $1.6 million. Second was about $1.8 million in expenses tied to the recent senior leadership transition.

Also we placed a reserve on some nonregulated assets that was about $2.2 million. O&M growth in our regulated acquisitions, most of which came from purchased water in our new North Maine Utilities acquisition led to an increase of about $1.8 million or 2%.

Finally, production expenses contributed 1% in total O&M increase, which gets us to the $79.7 million or 13.3% unfavorable increase from 2014. Now, absent the one-time or unique items that we've just talked about, you'll note that the O&M increase was fairly minor for the quarter.

From an EPS perspective, there were a couple of key components that drove that $0.01 increase. First, our regulated growth and consumption increased earnings about $0.01. The tax repair benefits increased earnings a little less than $0.01. The market-based results and our rate results, each were about a $0.05 increase in earnings, and they were all offset by our increased O&M expense, which was nearly $0.02. That all nets out to the $0.01 increase in earnings.

Turning to my last slide, we'll look at the 2015 year-to-date financials. Our year-to-date performance shows similar trends to our quarterly results. Year-to-date, the Company has seen a 4.8% growth in revenue, and 7.6% in increased expenses compared to the same period in 2014.

So we've had a solid first half with a 9% growth in earnings. And next Chris will discuss expectations for the balance of the year. Chris?

Thanks, Dave. I'll take a minute to review the Company's guidance for the remainder of 2015. In summary, we expect earnings to be in the range of a $1.25 to $1.27.

However, I want to mention that we've been experiencing a relatively warm but sporadically wet summer, which has not prompted the level of irrigation we would have expected. This could potentially have a negative impact on our third-quarter consumption.

We expect customer growth to be between 1.5% and 2%, with 15 to 20 acquisitions, that I mentioned. We're off to a great start so far this year with our North Maine Utilities, Mount Jewett, and the five other private acquisitions. We expect to invest at least $325 million in 2015 capital, and more than $1 billion in capital through 2017.

On the market-based side, we expect to see 2015 revenue increase to $30 million. Finally, we expect to see the same-store O&M to grow between 2% and 4% for the full year of 2015.

With that, we're ready to open it up for some questions.

(Operator instructions). Richard Verdi; Ladenburg; Thalmann & Co.

Great quarter and thank you for taking my call here. Just a couple of quick questions here. I did jump on the call late, so excuse me if you've addressed it, the first one. But in New Jersey -- Aqua has been very successful with acquisitions in the past -- and New Jersey is coming forward now with the Water Infrastructure Protection Plan Act, where it will eliminate the taxpayers, and municipalities can somewhat freely sell their system to players such as yourself. That being said, is there any thought about becoming more aggressive in New Jersey on the acquisition front because of that, that potential there?

Hi, Rich, this is Chris. I think the short answer is, yes. I think we will play in all of the potential opportunities in New Jersey, as well as the other states. I think the ideal would be to see that legislation or similar legislation get passed in the other states where we do business as well.

As you know, it's already worked really well in Illinois and, certainly, we'd like to see it in Pennsylvania and some of the other states. I know it's already being considered in several of those areas as well. But with New Jersey, specifically, I think you'll see us active in any opportunity in New Jersey.

Okay, great. And just one other quick item, and maybe, Dave, this might be geared towards you best. In the past, we've spoken a lot about the repair tax and Chris in his prepared remarks had mentioned that you won't see a filing until next year likely. Beyond that in 2017, 2018 and 2019, what does the repair tax issue look like out there, Dave?

The repair tax is a function of some key categories of capital spending. The repair tax is a permanent change in the way we do our accounting for those projects and will be a component of our results for a very, very long time. So it's not going away.

What we expect will happen, however, is that over time the benefits of the repair tax will simply serve to support the additional rate base that's being added. As Chris mentioned, we've added $700 million in projects in Pennsylvania since we last increased rates and are suggesting we are not going to increase rates yet for a while, right?

Over time, the rate base that's added will support that repair tax benefit that is now allowing us to earn a slightly higher level of net income. And then when we reach that point, we'll be ready to go back in for our next rate case, and that rate case will then incorporate those repair tax benefits going forward. So that's really how we expect it to unwind; it's just that the timeline is a little uncertain because of all the variables that go into the calculation.

Okay, great. But it's a benefit that will be, like you said, it will benefit Aqua America for many years to come, though, right?

Right. Right. And the customers, in particular.

Okay. Excellent. Thank you, guys. I appreciate an excellent quarter again.

(Operator instructions). Jonathan Reeder; Wells Fargo Securities LLC.

Good morning, gentlemen. First off, I wanted to send my appreciation for the slide deck and the annual guidance. Great improvements there, Chris, right off the bat. Appreciate it.

Questions that I have, the indicated 6% to 7% rate base growth, is that corresponding over the next three years to your CapEx budget? And then, what is the year-end 2014 rate base amount that you're growing that off of?

Yes, Jonathan, it's Dave. Yes, the 6% to 7% is very much associated with our CapEx and the billion dollars we expect to spend over the next three years. So it's right in line with that. What was the second part of the question? Yes, rate base. Our rate base today is in the neighborhood of $3.4 billion. It is fairly straightforward to calculate right off the balance sheet, but there are some anomalies, so you might be off by $100 million or so, but it's in the neighborhood of $3.4 billion, Jonathan.

Okay. Perfect. And then is there any reason, Dave, to believe that the annual CapEx spend beyond the current three-year period would not continue to grow? I mean, how should we think about it, I guess, directionally?

Yes, as Chris said, we expect the spending to be strong for a while. Clearly, there could be a point in time where we feel we're on top of our infrastructure rehabilitation and it slows down, but as we've seen those times coming in the future from in prior periods, they were typically offset by acquisitions and the need to devote further capital in improving those acquisitions. That's certainly how we would expect it to roll going forward.

Okay. Then last question on the comment for PA rates for at least another year. Does that include the disk filings or might those be within a year?

Yes, that includes the disk filings. Yes.

Okay. Great. Thanks so much for the additional clarity.

(Operator instructions). Spencer Joyce; Hilliard Lyons.

Nice quarter. To second some of Jonathan's comments, thank you for the slide deck. Very helpful on some of the items here.

Just one really quick almost housekeeping question for me. Can you go back to the slide 15? Which of those deals were municipal? Specifically, that Northeast Maine, that was not a municipal purchase, correct?

The North Maine Utilities of Illinois, yes, that is municipal.

Okay. So Maine is municipal. And then also, is it Venter Heights that would also be?

The Mount Jewett is the other municipal. But the North Maine is the one that we talked about, Spencer, that's the largest we've done in 16 years. That's the key one there.

Yes. Yes, perfect. That's good. Perhaps following a bit on the muni purchase side. But again, good quarter. I just needed that little bit of clarity. Thanks.

And with no further questions in the queue, I would like to turn the conference back to Chris Franklin for any additional closing remarks.

Thank you all for joining us, and we appreciate your time.

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