Essential Utilities Inc (WTRG) 2016 Q1 法說會逐字稿

Good day and welcome to the Aqua America first quarter 2016 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Zach. Good morning everyone. Thank you for joining us for Aqua America's 2016 first quarter 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 www.aquaamerica.com or by calling Scott Sigal at (610) 520-6361. The slides that we will be referencing can be found on our website. There will also be a web cast of this event available on our site.

As a reminder operating margin of the matters discussed during this call may include forward-looking statements that involve risk and 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 pass it over to Chris Franklin, Aqua's President and Chief Executive Officer.

Thanks, Brian, and welcome everyone.

Thanks for joining us this morning. On today's agenda we'll start with some recent news about the Company and then I will comment on some of the highlights from the first quarter of the year including our customer growth updates. Then Dave is going to comment on the Company's financial results and rate activity and finally we'll end the formal portion of the discussion of the presentation recapping of our guidance for 2016. Then we will wrap-up with some questions and see if we can answer whatever is on your mind.

So let's just start right in with the update on the Pennsylvania legislation. Many of you have already reported on this, but it's significant to our business and so I want to mention it again. You will recall that in mid-April house bill 1326 was passed in the Pennsylvania legislature which allows for fair market value to be used when acquiring municipal water and wastewater systems.

We believe this could be game-changer for us. We have said this before, but we really are optimistic about the results of this legislation. We think it could be much like the impact that the DSIC, the DSIC language that passed in the 1990's had on infrastructure. We're quite excited to see the opportunities that might open in Pennsylvania and also across the country as other states adopt similar policies.

As you may have seen in recent news as I come toward the end of my the first year as CEO we have rounded out our senior Management Team and just recently we announced that Sue Haindl was hired back in mid-March as our Chief Administrative Officer. She reports directly to Dave Smeltzer and is responsible for information services, customer service, fleet and supply chain. Sue comes to us with extensive experience and a particular skill set in merger integration and she's held senior roles at Anexinet, The Pew Charitable Trust, and at Exelon.

We also had Whitney Kellett join us in mid-April as our CIO, Chief Information Officer, and she reports directly to Susan and is responsible for the Company's technology systems and platforms. Whitney comes to us with great experience more than 20 years of IT and strategic integration experience and she was most recently a Vice President at the Atlas Energy Group, which is an $8 billion energy management company.

Both Susan and Whitney will play key roles in continuing to develop our technology programs and to integrate what we hope is a large influx of new customers over time into our Company. I'm really excited to have both of them as members of our team. I wanted to take a minute to just talk about our market-based business a little bit. You already know this is a very small part of our business and we have talked about it is less than 4% of our revenue, but we are making some changes in this area that will impact our financial results and Dave will touch on them again in a few moments. But we mentioned during the Analyst Day back in January that we were in the process of evaluating our market-based activities and really resulting from that evaluation we have decided to exit several of those and we're in the process of exiting some of them right now.

I will say that the one primary market-based activity that we'll continue to operate is the insurance product that protects service lines between our water mains and the customers' homes. You may recall that we received a royalty on these contracts and the work is really done by a company called Home Serve which we have a partnership with. We will also keep a very limited number of O&M contracts that will continue to contribute to earnings. The full year of our impact of our divestiture's could reduce revenue by as much as $30.5 million, but would correspondingly increase net income just slightly.

So really no meaningful impact on our earnings-per-share. We're actively evaluating other market-based opportunities as we have discussed with you before, but we don't see this segment of the Company ever becoming more than say 15% to 20% of Aqua America as we continue to place our primary focus on the regulated piece of our business. Now, let's talk about the quarter for a couple minutes. The first quarter saw strong financial performance as we continued to pursue our three-prong growth strategy.

We have talked about this before. The first prong is really around municipal acquisitions, second around strategic M&A, and the third prong really around the growth in our market-based activities as we move through the phase of the refinement and clean-up of what we have.

Now, we'll continue to focus on opportunities that really leverage our core capabilities to provide long-term growth. I have also mentioned these three core capabilities to you before. These three are among many, but we tend to focus on these as we think about our growth and I will just mention it's our ability to make capital investments in infrastructure, our ability to then get regulatory relief and recovery of those investments, really our whole regulatory effort, and then third our ability to operate utilities at what I'll call optimal levels or with excellence.

We are off to a good start with customer growth this year with acquisitions. Thus far we have added 5,250 customers, customer connections I should say. Half a percent in customer growth just from acquisitions so we're very pleased with that first quarter. Our quarterly revenues are up, increasing 1.2% to $192.6 million in the first quarter of 2016, from $190.3 million in the same quarter of last year. I just mentioned that through our refinement of market-based businesses we do expect to see a decline in revenue associated with our work there, but also a decline in the associated operating expenses as well. With that said earnings-per-share were up 7.4% to $0.29 compared to the $0.27 we reported in the first quarter of last year.

The June 1st quarterly cash dividend of $0.1708 per share was announced on April 15th and we have now paid consecutive quarters quarterly dividends for now 71 years. We have increased the dividend 25 times in the last 24 years. Now if you look at growth, thus far in 2016, we have closed nine deals, seven water and two wastewater. This represents as I said about a percent and a half of growth just from acquisitions. We expect to see 2016 year-over-year customer growth in the range of about 1.5% to 2%, which includes any organic growth that we would experience.

We're shifting our focus to acquiring larger systems that have over 2,500 connections. That's not to say that you might see a small one here or there as a tuck-in, but our focus is on more of these mid-sized opportunities. These deals as you know take time to come to fruition, but with the favorable legislation in Pennsylvania and several of the other states we're really excited about the opportunities in this area. We hope to see at least one of our municipal deals close this year so stay tuned. And with that, let me turn the call over to Dave who will talk about our financials this quarter. Dave?

Thanks, Chris, and good morning, everyone. Today I'll review the first quarter financial results and some of the driving factors that affected the Company's performance and I will also provide a look at our rate activity for the year so far. First quarter 2016 our annual revenues increased 1.2% to $192.6 million, up from the $190.3 million in the same period last year.

I'll show the water fall chart on these amounts in a moment but the bottom line is when you look at Q1 2015 versus Q1 2016 much of the increase in revenues from rates, surcharges and regulated growth was offset by reduced revenue from the market-based activities and lower consumption. O&M expenses were up about a half a percent to $73.5 million for the quarter compared to $73.2 million in Q1 of 2015. Again, I'll touch on this in the water fall chart, but new regulated acquisitions and employee-related costs were mostly offset by lower expenses tied to the market-based activities, decreased production cost and other factors.

Other factors driving the Company's results included approximately $73 million in capital spending which had two-fold impact on our results. It generated $1.1 million increase in AFDC compared to the first quarter of 2015 and additionally through the tax deductions recognized in the qualifying infrastructure improvement projects in Aqua Pennsylvania the Company was able to reduce its effective take rate year-over-year. So in the end net income was $51.7 million for the quarter, up 6.6% compared to the $48.5 million the same period last year.

Earnings-per-share at $0.29 were up 7.4% over the $0.27 reported in Q1 2015. As a result I'm sure you have noticed that our Q1 results beat the consensus estimates and while we're still comfortable with the full year projections and the guidance we provided that extra penny from Q1 may well result in a weaker Q2 than presently expected in order for us to hit those estimates as we have suggested. Looking at operating revenue water fall, look at the different components of the 1.2% revenue increase, as you see in the left side rate surcharges and customer growth in our regulated operations increased revenues by approximately $7.3 million and then the decline in consumption and also reduced market-based revenues offset that increase by about $5.1 million.

On O&M expenses you see the water fall there operating and maintenance expenses were $73.5 million for the first quarter compared to the $73.2 million last year. As mentioned in the release regulated acquisitions and employee expenses were up for a combined $4.3 million reduced market-based activities expenses, lower production cost and other factors offset the increase by $3.9 million for a total increase of approximately $300,000 year-over-year O&M expenses for Q1. So earnings-per-share starting with the $0.27 we reported in the first quarter of 2015 we had incremental tax repair benefits, rates and surcharges increased AFDC and regulated growth which increased our earnings per share for the quarter by nearly $0.025. Expense increase and other factors offset that but only by about $0.005.

Rate activity. Thus far in 2016 we completed rate cases or surcharges in five states with $4.5 million in additional revenue and that additional revenue includes about $1.1 million of revenues that were initially recognized under interim rates in 2015. We also have rate cases pending in New Jersey, Indiana and Virginia requesting an additional $5.1 million in revenue. The additional rate information can be found in the appendix of this presentation.

With that, I would like to turn it back to Chris who will recap our 2016 guidance. Chris?

Hey. Thanks, Dave. Let's just take you through the chart here. Our guidance is really unchanged through the first quarter of 2016 so we still expect full year earnings-per-share to be between $1.30 and $1.35. As Dave mentioned, there might be some adjustment, or I should say some movement of a penny between the first we were over consensus by a penny, and the second. So I will just point that out. But year-over-year customer growth will still be on track, 1.5% to 2% and we expect to invest more than $350 million in capital this year in 2016. And we remain on track to spend just over $1 billion through 2018. Ongoing rate-base growth will be, again, between 6% and 7% and same system O&M we don't expect to exceed 2%. It will be between 1% and 2% for the full year of 2016. Before we end the call I would like to open it up for any questions that you might have.

(Operator Instructions). And we'll go first to Richard Verdi, with Ladenburg. Please go ahead.

Hi. Good morning, guys. Nice quarter. Thanks for taking my call here. Chris, I just wanted to clarify something first. The $30.5 million revenue decline, you mean year-over-year, right?

Correct.

Okay.

It's really the divestiture of the Company. There's some smaller companies that will reduce that revenue.

Okay. And how should we think about that in terms of timing for the model?

Yes. I would think that we'll have the first one done, our transportation company, should close in the next let's call it 30 days. And that is about a $5 million reduction in revenue. And then the others would come, I would say, between the third and the fourth quarter probably results impacting 2017.

Okay. Great. Thank you for that. And then another one. Looking at the press release today through April it stated that the Company had added about 5,250 connections I think it said. And so with that being based on four months and eight months left in the year two sets of four months, can we expect another 10,500 additional customer connections by year-end? And, if so, would it be heavily weighted towards any certain quarter? I'm just hoping you can give me some sense about acquisitions here for the rest of 2016.

Yes. You know, Rich, we're hopeful, but it's very difficult as you know to predict closing of these kind of opportunities, especially when you talk about municipal which have moving parts to them. So I'm just going to have a very difficult time locking into a certain time period. But yes, we're very hopeful that we have that kind of achievement in customer growth. It's just difficult to give you timing.

Okay. Sure. I got it. Thank you, Chris. Another question we have is actually for Dave. Dave, at the Analyst Day you had indicated Aqua would not be going back into Pennsylvania in 2016 and maybe (inaudible) will be filed in 2017 filed by a rate case in 2018 and so with that only three and a half months having passed since then I'm assuming that outlook is unchanged. So I guess, is this assumption correct and what do you you see net up or pushing it out further?

Well, you're right you're right, Rich. The assumption is still as it was last year. That this could be in 2017 or 2018 and rates in 2018 or 2019. And really those factors are based on a lot of things which is in fact why we have actually started this year to prepare what that rate case will look like because we know there are a lot of moving parts. The repair tax complicates it a bit. There's a new test year in Pennsylvania that's very favorable and more projection oriented than future test year oriented.

So we have a lot of things going on there but overall yes, we still believe that the time frame is reasonably consistent and I think any changes to that time frame would likely be based more on how our expenses flow over the next 18 months and our abilities to install all the capital that we anticipate during that period as well.

Thank you, Dave. That's great color. And then just one more question and I'll jump out. I guess it was about a month ago say very end of March, maybe early April I had a conversation with one of the more prominent leaders at (inaudible) and he was telling me the consumer advocates are looking to meaningfully push-back on DSIC and mirroring surcharge mechanisms in other states because basically the group is thinking DSIC is being abused where it's just one filing after the next. So given DSIC was pretty much the pioneer behind this and Aqua employees (inaudible) frequently, I'm wondering if you guys have seen this yet and how the Company would deal with it if it does play it out.

We're pretty active in the deregulatory circles and conferences. We've not seen that, frankly. I'll say this. We have actually seen expansion of the DSIC. Certainly the gas guys are now using it to replace their mains, and very successfully so. And I think in large part the results speak for themselves. Let's focus on our customers first. The DSIC has really allowed us to replace mains at a pace that is much more aligned with the life of that pipe. Think about it. 20 years ago when Nick first arrived at Aqua we were on a, call it an 800 year-plus replacement cycle for our water mains. And we have reduced that cycle down to a very reasonable level, let's call it under a hundred years, in that period of time. And that's really what we need do in this country is invest in the infrastructure. And we have done it if you look at it at still very reasonable rates. Now, I understand it is a quarterly adjustment in some cases depending on how the mechanism is put to use, but in large part we found regulators to be very supportive of the DSIC in each of the states where we are. So that's new news to me. I don't know. Dave do you have any other information on that?

Yes. Sure. I'll just give you some thoughts that we have. We were part of the writing of the first DSIC rules in Pennsylvania 1996 and subsequent states as well. As you may remember there are a number of safeguards in the DSIC rules to protect customers so there is not abuse and it's fair for all parties. So for example, you can't file a DSIC when you're over earning you're authorized rate of return. That's watched very closely in Pennsylvanian and likely some other states as well. It's typically related to capital in excess of depreciation.

We're not spending the depreciation dollars on capital and then getting returned. It's really capital far above that. The projects are clear, many of them are approved in advance by state Public Utility Commissions. And in the end these are projects that are obviously critical to the country, critical to our Company and result in improved water quality, less main breaks and better service for our customers so we're really convinced that it's still the win/win that we felt it was in 1996 when we started there process in Pennsylvania.

That's excellent color. Thank you very much, guys. I appreciate the time and, again, nice quarter. I appreciate it.

Thanks, Rich.

(Operator Instructions). And it appears we have no further questions at this time.

All right. Well, thank you all for joining us today. We appreciate your time and always available for follow-up if needed. Thank you.

Thank you. This does conclude today's conference. You may now disconnect and have a wonderful day.