Essential Utilities Inc (WTRG) 2015 Q3 法說會逐字稿

Good day and welcome to the Aqua America Third Quarter 2015 Earnings Call. Today's conference is being recorded.

At this time Id' like to turn the conference over to Mr. Brian Dingerdissen, Chief of Staff. Please go ahead, sir.

Thank you, Levon. Good morning, everyone. Thank you for joining us for Aqua America's third 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 Siegel at 610-520-6361. The slides that we will be referencing can be found on our website. There will also be a webcast of this event available on our site.

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.

Presenting today is Chris Franklin, Aqua America'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 Chris.

Thanks, Brian, and thank you everyone for joining us this morning. For today's call, I'll start by commenting on the third quarter's highlights, then I'll review where we stand for the first 125 days since the leadership transition. And finally conclude with the company's completed acquisitions thus far in 2015. Dave Smeltzer, our CFO will review the company's financial results, and after that, we'll recap our guidance for the remainder of 2015 and provide some details on our upcoming Analyst Day in 2016. Of course, after the presentation, we'll open up for questions.

Before I get started though, I want to acknowledge that today's call is the -- the first time that Nick DeBenedictis has not participated in a call since our very first earnings call. Throughout the transition, Nick has been a great advisor to me and the team, and Aqua continues to be fortunate to have Nick as our Non-Executive Chairman of the Board.

With that said, I'll start with the third quarter highlights. Year-to-date, we've increased our customer count by over 1.5%. This includes additional customer growth through acquisition and organic growth. Aqua's operating revenues for the quarter increased to $221.1 million, which is up 5% from the $210.5 million reported in the third quarter of 2014.

For the quarter, we reported $0.38 per share in income and continuing operations, which matched the results of the third quarter in 2014. I want to mention that in September Standard & Poor's reiterated its long-standing A plus rating and stable outlook for our largest subsidiary Aqua Pennsylvania. Now, before I talk about acquisitions, I want to briefly share with you some of the experiences we've had during the first 125 days, as I settled into my new role as CEO.

First, I really need to mention the support and dedication demonstrated by our employees during this transition. I couldn't be prouder to lead such a talented group of people. With the exception of few key positions, the majority of our leadership team has now assembled and we've been able to set our goals and begin reshaping and evolving the culture of the Company.

Many of you have already heard me speak about the principles I have and it will continue to guide me as CEO. But let me remind you just a couple of those principles. First, the customer. Customer is the center of our efforts. And we remind our employees that no matter what our role in the company, we must always remember the importance of the customer. We should not vain that we will continue to invest capital in our aging infrastructure to ensure that we not only deliver a quality product to the communities we serve, we also treat wastewater and return that water safely back to the environment.

Next growth. Growth will continue to be our top priority. Both on a regulated and market-based business side, we haven't intensified our strategic planning process, and we're in the process of developing a framework to identify and then evaluate potential transactions to further enhance our growth efforts. And finally, communication. Between management and all of our stakeholders, it is essential. And I'll continue to meet with our various stakeholders, which include many of you.

So now, let's move on with the presentation starting with an update on our acquisitions. The majority of our customer growth has come from acquisitions of both municipal and private water and wastewater systems. These acquisitions not only increase our customer base, but also provide opportunities to invest additional capital. These investments both improve service for our customers and drive revenue.

Year-to-date, the company has acquired 14 water and wastewater systems, four of which are municipal systems. Of the 14 acquisitions, 11 were water systems and three wastewater systems. Over the next few years, it's our goal to see acquisitions of a much larger size than you see on this chart.

However, you all know that larger requisitions and larger opportunities take more time. Together, our acquisitions in 2015 have added over 9,000 customer connections and combined with the organic growth of about 5,500 connections, we achieved year-to-date our customer growth of 1.6%. Total customer growth is expected to increase by 1.7% to 2% for the whole year, representing the highest growth rate the company has achieved since 2008.

Now, I'd like to turn the call over to Dave Smeltzer, who'll provide an overview of the third quarter financial results. Dave?

Thanks, Chris, and morning, everyone. Today, I'd like to review the Q3 financial results and some of the driving factors that affected the company's performance, along with our year-to-date rate activity and capital spending.

Let's move to the next slide and take a look at the quarterly and year-to-date financial results. Year-over-year revenue for the third quarter increased by 5% to $221 million compared to just over $210 million in the third quarter 2014. Weather led to an increase in consumption, which account for approximately 40% of the increase. Acquisitions on the regulated and market-based side accounted for another 40% of the increase, and the other 20% is attributed to rates or charges on organic growth.

Operations and maintenance expenses were $78.5 million for the third quarter of 2015 compared to $72.4 million in the third quarter of 2014, an increase of about 8.5%. Of that, acquisitions accounted for about 5% of the 8.5% increase in O&M expenses. For the year, we expect same system O&M expenses to increase in the range of 1% to 3%. This resulted in reported income from continuing operations of $67.4 million, or $0.38 per share, which matched our results in Q3 2014. Our slower earnings growth is related to two matters.

First, the Pennsylvania repair tax continues to perform well and has produced incremental earnings in each of the first four years of its use. However, further incremental earnings via this mechanism will likely slow as qualifying PA Capital approaches its optimal level. Second, our top three states, which provide a majority of our net income, including Aqua Pennsylvania, our earning market returns, and as such, are unable to generate incremental revenues through surcharges or rate increases.

To turn to the next slide, I'll go over the 2015 year-to-date financials. This table shows how we're performing year-to-date. As of September 30, the company had seen a 4.9% increase in revenue and a 7.9% increase in O&M expenses year-to-date compared to the same period in 2014. It's important to note, of that 7.9%, nearly 6% is related to our acquisitions. Through the first three quarters of the year, we saw 5.4% increase in earnings per share from continuing operations.

Let's move to the next slide and take a look at our capital spending, which has grown significantly over the past two decades, and will continue to and we will continue to invest record amounts of capital in the future. Now, you can see on Slide 12, this chart shows the company's CapEx average spending by year in different time periods since 1997, including our expectations through 2017. In 2015 at quarter end, Aqua had invested $257 million in capital investments to rehabilitate our aging infrastructure, which not only improves service reliability for our growing customer base, because there's a chance to increase revenues in the long run as well.

In the third quarter alone, we invested $107 million. We're on track to invest over $325 million again this year. We expect to continue this pace investing over $1 billion over the next three years, which will help us grow our rate base at our guidance level of 6% to 7%.

Now, turning to next slide, I would like to discuss our 2015 year-to-date rate activity. Year-to-date, Aqua America's regulated subsidiaries have received rate awards and infrastructure surcharges for Aqua New Jersey, Illinois, North Carolina, Ohio, Texas, and Aqua Pennsylvania wastewater with an estimated increase in annualized revenues of approximately $7.7 million. The company has $2.4 million of rate proceedings pending in New Jersey in Virginia.

Aqua America's state subsidiaries are expected to file rate requests or surcharges of approximately $4.3 million during the remainder of 2015. Additionally, our customers and shareholders continue to benefit from the tax repair program in Pennsylvania. As of quarter end, we've invested $743 million in infrastructure improvements in Pennsylvania since the last rate case filing in 2012 with no increased rates or surcharges, and I expect Aqua Pennsylvania will not be in for rates for at least the next year.

So with that, I would like to turn the call back to Chris who will discuss expectations for the remainder of the year.

Thanks, Dave. Before we take our questions, I'd like to review the company's guidance for the remainder of this year and then provide a couple of details on our upcoming Analyst Day. As we previously mentioned, we expect earnings to be in the range of $1.25 to $1.27 for the full-year of 2015. We expect total customer growth to be between 1.7% and 2% for the year. We're on track, as Dave said to invest, at least, $325 million in 2015, and more than 1 billion through 2017, which is again Dave mentioned will continue to help our expected long-term rate base growth of 6% to 7% per year.

On the market-based side, we expect to see 2015 revenues increase to $30 million range. And finally, we expect to keep the same system O&M to 1% to 3% year-over-year increase over last year. Now, if we go to the Analyst Day, we'll hold an Analyst Day on Thursday, January 14 in New York City. Several members of our senior leadership team, including myself will discuss the opportunities and challenges at the water and wastewater industry bases, as well as Aqua's current operations and other [ph] future strategic plans.

This will be -- give you a chance to meet the full leadership team. In addition to Dave Smeltzer joining us will be Rick Fox, our Chief Operating Officer; Dan Schuller, our Executive Vice President of Corporate Development; and our Senior Vice President and General Counsel, Chris Luning. We're going to hold it at the New York Stock Exchange and a live webcast will be available on the Investor Relations section of aquaamerica.com. It will announce additional details in the coming weeks.

With this time, I'd like to open up the call for any questions.

(Operator Instructions) Thank you. [Operator Instructions] And we'll take our first question from Michael Gaugler with Janney.

Thanks for the update in terms of what's been invested in Pennsylvania as far as since the last rate case? Just wondering, if you can give guidance for PA investment for 2016, and on the back of that, if you'd expect to be instituting the disk next year?

Yes, Michael, thanks. It's Dave. Yes, we -- of our $350 million, over 200 million -- 200 million to 250 million is invested in Pennsylvania each year. As I noted, we look out 12 months in a very detailed fashion for our rate planning purposes. And so, as we look out 12 months, given the magnitude of earnings that we see in Pennsylvania and the likelihood of our capital projects being eligible for repair tax treatment, again, we believe it's unlikely that we would need rate relief in that next 12 months.

For Analyst Day in December -- in January, we'll try to look at it a little further and provide more clarity on what might be the case as we roll off of the repair and back into rates again. But at this point no more than that 12 months out for now.

(Operator Instructions) We'll take our next question from Richard Verdi with Ladenburg.

Good morning, guys. Thanks for taking my call and good quarter. I wanted to talk a minute. You touched on the acquisition front there in your prepared remarks, I want to discuss that for a second. When I look back over the years, Aqua has been successful all the way around on that acquisition front, including wastewater opportunities.

But lately, we're hearing from your peer companies and also conferences that acquisitive activity on that wastewater front will likely heat up. So I'm wondering did you guys subscribe to this thing and see there's an opportunity for Aqua, or do you see something that might impede the company's growth now that more players are really focused on that wastewater side?

I guess, what I think about this Rich is, if the municipal market continues to open up and we've seen significantly more activity since some of the legislation has passed in states like Illinois, New Jersey, the legislation is pending in Pennsylvania. There will be plenty of opportunity for all of us. I mean, let's think about it. It's still 97% of wastewater -- the wastewater portion of the industry is still in municipal hands.

And so, I tend to think that the opportunities are going to be there for all of us. There certainly maybe some level of competition. But I think, as we look at them too, we're looking at a little bit notch up in size much of what we've done in the past, it's slightly smaller, I think, our sides are set a little bit higher too. And so those become available. I would expect that we and maybe other big players in this as well.

Okay, great. And what you said just there first, kind of, ducktails into my next question, you had mentioned about the acts implemented in Illinois and New Jersey. And I'm thinking about that Water Infrastructure Protection Act that was implemented in New Jersey. I know, New Jersey is small for Aqua. But do you think because of that Act, it might be a little bit better to pursue Aqua as a little bit easier, I should say, to pursue acquisitions in New Jersey. And that maybe because of that Act in that that somewhat easier ability to acquire municipal water systems in that state, may be Aqua might look to expand that New Jersey footprint?

Yes. I think, you'll find us to be a player in whatever becomes available in New Jersey. I think, you'll find us, Rich, knocking on doors. We really like the regulatory environment in New Jersey. We think it's a really good growth state. And to your point, I think, the legislation is only going to help facilitate that growth even further. I think, as it -- looking at Pennsylvania across the river as the legislation passes, we fully expect it to. And I think the same opportunities will exist in Pennsylvania, and maybe even to a greater extent, the field of opportunities appears to be even greater in Pennsylvania.

Okay, great. And just last question from me, kind of thinking about the non-regulated side. Could you maybe please discuss if there's an expansion strategy for that sort of the business? And if so to what degree the overall company would you target that non-regulated business to be in relation of the consolidated company? And kind of also what kind of timeframe would you look at in terms of the years if you were targeting the growth at non-regulated side?

Yes. Good questions. I'll say a couple of things about it. The first one, we've said that we don't see it growing beyond about 15% of Aqua America's total revenue. And so that's not to say that 15% is a target. We just don't see it at this point growing beyond that. And so, as we mentioned in our -- in the scripted portion of our discussion, we've really spent a lot of time and continue to spend a lot of time on strategic planning, and in the consideration of what the opportunities are in the market-based business side.

The other part that I would say though is, we said we want to stay very close to the core piece of our business. We know we do well, right, we are a very good wastewater utility, and to the extent that we grow in the market-based business we like it to supplement that effort in the sense that we know it is close to our core. The other part is we like it to compliment, right to the extent that we could work more closely with municipal governments that might be an opportunity for us to supplement the already working efforts on the acquisition side. So those are sort of the broad framework Rich we think about market-based business.

That's excellent. Okay great. Thank you, Chris. Thanks for taking for questions again and great quarter guys.

Thank you.

We'll go to our next question from Tim Winter with Gabelli & Company.

Good morning. Chris, Dave, I wanted to just follow up on the O&M increase for the quarter, you said it's related to the acquisition, I was just wondering what specifically was going on there and what sort of the targets are going forward for O&M as a percent of revenue?

Yes, we haven't introduced a target Tim for O&M as a percent of revenue, what we've said is we expect our O&M growth for the year on a same store basis to be between 1% and 3%. So we've had a number of acquisitions, including acquisitions on the non-regulated side of the house. The market based activities, which as you know come with different margins then the regulated utility right, so that the market based acquisitions have a much higher O&M to revenue rates than we're seeing. So that really along with some of the utility acquisitions were the key drivers in O&M expense for the period. So we would expect there is no change in the way we manage our O&M expenses on the utility side. We expect to keep them tight and continue to drive improvement where possible.

In fact just this year our COO, Rick Fox has launched an initiative of what we call our 7:1 projects and this is the situation where we have the opportunity to make a $7 capital investment and reduce O&M expenses by $1 and that's rounded and that can vary from project to project, but it is a generic example and where we do that it is really a win, win for everyone because the customer gets typically an improved service with that capital investment and the company sees a reduction in its O&M expense, but there's no change in revenue. And the revenue then therefore is supportive of the capital project and allows an income component whereas the O&M expense was just a dollar in and a dollar out. So we are looking at those kinds of projects very hard, all is part of our overarching process of watching and controlling our O&M expenses and providing the best service that we can for our customers.

We will go to our next question from Andrew Gay with Verition.

Hi, good morning. I was just wondering outside of acquisitions what is the same system customer growth rate?

I think we run under a percent. So somewhere between 0.5% to 1% on the average year. It's been obviously lower as we came through 2008, but it has been heating up, we have seen some of our developments that have been slow to grow. We have seen those start to take off, we have seen growth in Texas organically, and have seen some new growth in North Carolina organically. So we are starting to see some of that organic growth go a little bit, but I would say it's more around a 0.5% than more than that.

Got you, okay. And then just looking ahead to the Analyst Day, what are your thoughts on providing a few more years out of CapEx guidance and also what are your thoughts on providing maybe a multi-year earnings per share or dividend per share guidance sort of, you know you have your rate base growth out there, but what about maybe moving to an EPS growth rate as well? Thanks.

Yes, it is good question Andrew and a lot of discussion taking place inside, we are a--a new team is in place for roughly 125 days here, so we've made some changes to our approach on the first two analyst calls already and we, we would like to continue our effort towards even more increased transparency. I think as we think about some of the things we are dealing with now for example the repair tax and its implications. Some of those things have a longer term view, are a little bit more difficult to predict, so we are doing the best we can and I think that topic will be on the front of our discussion plate for the coming month as we prepare for our Analyst Day.

Okay, thanks. That's all I had, thanks.

(Operator Instructions) And we will take our next question from Spencer Joyce with Hilliard Lyons.

Hi, just a couple of quick ones from me perhaps first one for you Dave, thanks for breaking out the weather impact on revenue, could you give us a little more color on where weather this year in Q3 was versus normal, I guess for my checks precipitation was maybe similar versus last year, but perhaps temperatures were a bit higher, can you kind of discuss that just a little bit?

Sure. It is always fun to talk about revenue. Looking at the quarter, I mentioned the revenue increase was 5% and we are looking at almost half of that is related to consumption. And so if I look at the states, let me see if I can find the states here, yeah, okay. Okay so consumption at the states, it looks like a very big chunk of that was actually in Oklahoma, Pennsylvania and that makes sense because it is our largest subsidiary, we have the most customers and the highest level of revenue there and we did have fairly favorable weather throughout the quarter. And the year-to-date in particular, but we also had contributions related to weather this year in Ohio and New Jersey.

Okay. So the --

Maybe, obviously I build in Texas.

Okay. Switching gears a little bit, I know Chris when you initially came in you were excited about revamping the approach or institutional approach for consummating acquisitions and just from our vantage point here it's been a very successful year on that front and I'm wondering if you are perhaps seeing some dividends from some changes that you have implemented or the northeast main helped us which I know was initially talked about last year, but can you discuss if perhaps we just had a good pipeline coming into this year or if you are seeing some real bottom up improvement to the approach there.

Yes, I guess I would characterize that in this way. We have a -- and I think if you talk anybody on the team and probably layers into the company, we have an underscored focus now on growth. There is no question that growth of the company is for most on peoples mind. We say our, we take our highest priority is obviously delivering high quality water and processing wastewater in a high quality way were our two highest priorities, but beyond that we -- our desire is to grow this company.

So I think if you look across Spencer, you would say people really feel the elevated priority of growth. At a new level, in other words we are looking at larger possibilities and so while we are still finishing up a pretty nice pipeline of smaller ones to what I think you would see if you look at our pipeline looking forward is an increased size of those potential deals. And so I think it is a combination of the two, right, pretty strong work being done leading up to now, combined with a new focus looking forward.

Okay, perfect. So we had some smaller deals that were in the pipeline, but maybe we are feeling good about some larger deals that may be a function of a new or renewed focus there.

I think that's well said.

All right. Thanks guys that's all I had. Nice quarter.

Thank you.

(Operator Instructions) And it appears there are no further questions at this time. Mr. Franklin, I would like to turn the conference back to you for any additional or closing remarks.

Thank you so much for joining us today and look forward to catching you in the future. Thank you.

That concludes today's conference, we appreciate your participation.