Essential Utilities Inc (WTRG) 2016 Q2 法說會逐字稿

Good day, everyone and welcome to the Aqua America Q2 2016 earnings call. Today's conference is being recorded. At this time I would like to turn the call over to Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Dana. Good morning everyone and thank you for joining us for Aqua America's 2016 second 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 Szczygiel 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 material -- 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. A reconciliation of these non-GAAP to GAAP financial measures is 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 be open the call-up for questions.

At this time I would like to pass it over to Chris Franklin, Aqua America's President and Chief Executive Officer.

Thanks Brian, and thanks everyone for joining us this morning. On today's call we'll talk about some recent news on the Company and then I'll comment on some of the highlights from the quarter including our acquisitions. And Dave Smeltzer, our CFO, will take us through the financial results and rate activity and then we will conclude the formal portion of the presentation of the presentation by reviewing our guidance for 2016 and then answer any questions that you might have.

So let's start with some organization. We spent a lot of the first year putting the organization together and we'll call it tweaks at this point, but I think important enough to mention here. You may have seen some of these in our recent press releases, but Stan Szczygiel was recently promoted to Vice President Finance and Treasurer. This is an important one for us.

Stan has been with the Company for 10 years now and Stan and I have worked very closely over the last 10 years. He was the Regional Controller of the southern division when I was the Regional President in the southern division so we worked together a long time. Stan then went on to be director of planning, Vice President of Finance and now added treasury to his responsibilities.

He's got a vast resume of significant responsibilities including executive roles in companies such as Exxon, Foster Management Companies and Novacare. Not to say, we are very fortunate at Aqua America to have the bench we have and so when the position opened very quickly Stan was promoted to the job as treasurer and is well qualified and will do a terrific job.

Another new member of our team that I'm very excited about is Chris Crockett. Chris joined in mid-June as our new Chief Environmental Officer. Chris reports up through Bill Ross, our Chief Engineer up in Rick Fox's organization. You will recall Rick addressed the group last time, Rick is our Chief Operating Officer. Chris is going to be responsible for overseeing water quality, environmental compliance and all of our drinking water and wastewater systems in the eight states.

He will also manage Aqua's in-house water and wastewater lab as well as the Company's water quality services and water resources department. He comes to our Company with 20 years of experience most recently as Deputy Commissioner for Planning and Environmental Services at the Philadelphia Water Department. This was a key pick. Chris will do a great job for us as well.

Again, demonstrating the strength of our bench, Shannon Becker, our former President of our Aqua Virginia Company, which is a relatively small part of our system in terms of customer count. Shannon has been appointed to President of our Aqua North Carolina Company, which is our third largest state by customer count. Shannon succeeds Tom Roberts who was with us for 30 years retired.

Tom did a great job as the President of Aqua North Carolina. Now, in his role as President of Aqua North Carolina Shannon will supervise 160 employees and be responsible for overall operations. Now, Shannon was previously the controller in Aqua North Carolina before he was President in Virginia so he is well trained and very familiar with North Carolina and he also will do a terrific job.

And finally again from our bench, John Hildabrant has been named President of our New Jersey Company. John has been with the Company for 11 years and previously served as our operations manager in that same state of New Jersey. Got a great combination of skills. John has been involved with our regulatory filings, our rate cases, growth of the Company and certainly operations. So I really can't say enough about the strength of this Management Team and I fully expect that this team will continue to deliver the operating results that we're all so proud of and that our customers have come to expect.

Now let's take a look at the quarterly results. The Board met yesterday on a regular scheduled Board meeting and increased our dividend by 7.5%. We're very proud to say this is the 26th dividend increase in 25 years and it's our 71st year of paying a consecutive quarterly dividend. We're very proud of that. The second quarter also saw strong performance as we continue to pursue our three-prong growth strategy. We have talked about this on previous calls.

As you might remember municipal acquisitions prong number one, strategic M&A is prong number two, and market-based activities as prong number three. As we think about this growth strategy we will continue to focus on -- and leverage our core capabilities and among those, and we have mentioned these before as well, is our ability to both financially and operationally make significant capital investments in infrastructure.

Two, our ongoing regulatory relations work that brings the Company strong credibility with our regulators. And finally as we think about our core capabilities we think about our ability to operate utilities at optimal levels and, of course, you are very familiar with the efficiency we bring in our O&M.

Now in growth so far this year we have added 5400 new customer connections from acquisitions alone slightly more a half percent. Quarterly revenues were down slightly decreasing just less than 1% to $203.9 million in the second quarter of 2016 from $205.8 million in the same quarter last year. A large portion of this, though, comes from the decreased revenue from our market-based activities. We discussed that extensively in our last call. Now with that said earnings-per-share were up 3.1% to $0.33 compared to $0.32 reported in Q2 of 2015.

Now as we look at our dividend history, as I said the Company takes great pride in rewarding its shareholders with quarterly dividends. For the past 10 years we have more than doubled the dividend and achieved a compounded annual growth rate of 7.6%. Now we're going to continue on this path to achieve the Board's stated payout ratio target of between 60% and 70%. Currently that payout ratio is right around 57%.

Let's look at our growth activity for the year. Looking at the acquisitions completed so far in 2016, we have closed 10 deals, eight of them water, two of them wastewater systems. As we have mentioned, we continue clearing our small deals that have been on our list for several years and you will notice some of these numbers are small, looking to push these out. These are the ripening deals that have been sitting there for many years as we pursued a lot of the smaller tuck-ins.

But I will tell you we remain very confident in our pipeline and the increasing size of the deals that we're reviewing in our internal investment committee. We meet every two weeks to review these deals. And we remain very confident in our ability to grow in the water and wastewater space. We just think there's a lot of opportunity and we're seeing more municipal interest in selling systems than we have in many, many years.

Now to-date this growth represents more than a half percent in growth this year from acquisitions and we have also seen an uptick of approximately a half percent in organic growth through the second quarter. So at this point we expect 2016 year-over-year customer growth to be in the range of our current guidance of 1.5% to 2% and this includes organic growth.

So with that I'll hand the call over to Dave take a look at the numbers.

Thanks, Chris. Good morning, everyone. Today I will review the second quarter financial results and some of the key driving factors that impacted the Company's performance. And I will also provide a look at our rate activity for the year thus far.

The second quarter our revenues decreased nearly 1% to $203.9 million, down from $205.8 million in the same period of 2015. In a moment I will show you the waterfall chart, but when we look at the Q2 2015 versus Q2 2016 much of the decrease was related to market based activities along with lower consumption due to the unfavorable weather conditions and that was mostly in Pennsylvania. There was also some unfavorable weather in New Jersey and North Carolina.

Operations and maintenance expenses were down about 7.2% to $74 million for the quarter compared to $79.7 million in Q2 of 2015. Again, I'll touch on this in the waterfall chart but lower production expenses, lower expenses associated with our market-based businesses and several one time events led to the decrease in O&M expenses. As mentioned in the release, same utility systems O&M would have been up about 1.3% year-over-year for the second quarter.

Net income was $59.6 million, up 3.9% compared to the $57.4 million in the same time frame of 2015. And earnings-per-share at $0.33, as Chris mentioned, was an increase of 3.1% compared to the $0.32 reported in Q2 of 2015. Year-to-date, as of June 30 revenues were virtually flat at $396 million.

You can view the year-to-date waterfall charts in the appendix, but lower consumption and decreased market-based revenues offset the increased revenues from the regulated business to cause that flat revenue. Operating and maintenance expenses were down 3.5% to $147 million for the quarter compared to $153 million in the same time frame last year.

Again, several non-recurring items, lower production and lower market-based expenses offset the increase in employee-related and regulated acquisition expenses. Net income was $111.4 million, which is up 5.1% compared to the $106 million in the same time frame of 2015. Earnings-per-share was $0.63, an increase of 5% compared to the $0.60 reported in 2015 and the year-to-date waterfall chart on EPS in the appendix will give you more color on this as well.

Let's take a look at quarterly revenue comparisons starting with our revenue for Q2 2015. Regulated growth increased revenues by 1.5%, rates and surcharges along with other factors accounted for an additional increase of about 1%. From there revenues related to our market-based activities decreased about $3 million or 1.5% of total revenue. Then a decrease in consumption associated with the unfavorable weather we saw in this quarter lowered revenues by an additional 2% resulting in an overall decrease of 0.9% to $203.9 million.

Looking at O&M expense and starting with our O&M for the second quarter of 2015 of $79.7 million, expenses tied to regulated acquisitions and slightly higher employee-related costs increased O&M by 1.9%. From there lower production costs and expenses related to market-based activities decreased expenses by about $3.1 million. Additionally, there were several non-recurring events that contributed to the decreased O&M for the quarter versus 2015. Again, looking at same system utilities O&M would have increased by about 1.3% well within our guided range of 1% to 2% for 2016.

Looking at the next waterfall of earnings-per-share and starting with our EPS for Q2 2015 we saw lowered expenses, regulated growth and rates and surcharges account for an increase of more than $0.3 per share. From there market-based activities, lower consumption and other factors decreased the EPS by approximately $0.2 resulting in the $0.33 we reported in Q2 2016.

Onto rate activity. so far in 2016 we have completed rate cases or surcharges in five states with approximately $5 million in additional revenue dollars including $1.1 million of revenues recognized under interim rates during 2015. We also have rate cases pending in New Jersey, Indiana and Ohio requesting an additional $10.5 million of revenue. Additional rate information can also be found in the appendix of this presentation.

And with that I'll turn the call back to Chris who will recap our 2016 guidance. Chris.

Okay, Dave. Thanks. So as we look at the recap of our guidance our earnings customer growth, CapEx, and expense guidance is really unchanged for the second quarter of the year. We expect full year earnings-per-share to be between $1.30 and $1.35 dollars and as you heard Dave talk about weather, some ups and downs, flooding in Texas and some better weather elsewhere we get more and more comfortable with the center of that range.

Now, year-over-year, as we have said a couple of times, we expect to land customer growth in the targeted range of 1.5% to 2%. We expect to invest about $350 million in infrastructure in 2016 and more than $1.1billion of CapEx through 2018. We expect our ongoing rate-base growth of approximately 6% to 7% and on a same system O&M basis we expect O&M, as Dave just said, to increase between 1% to 2% for the full year. So all-in-all good solid quarter and we expect a good solid year.

Now before we end the call I would like to open it up and answer any questions that you might have.

Thank you. (Operator Instructions). We'll go first to Angie Storozynski with Macquarie.

Thank you very much. So thank you for your remarks today about especially growth opportunities within the water and wastewater segments. So in light of that can you talk us through this possibility of maybe venturing into non-water sectors and why would you attempt to actually diversify away from water if you see so much organic growth potential within the water sector? Thank you.

Yes. It's a good question and as we think about growth opportunities, let's just talk for a moment about water because we've worked with legislators in multiple states now and we have seen the passing of legislation that really provides us an opportunity to get access to a municipal market that often was not available given the prices that we could get into rate base.

Now, with the new legislation and the ability to pay fair market value we see even greater opportunity and I know our pier companies are seeing the same thing. And the activity in the municipal market is certainly on an uptick. So I want to leave you with our confidence.

Having said that, we also, we have been talking about this on a lot of our calls, have said that the skill sets and the core competencies that we have here would work in a lot of areas. We think that the regulated market is where we excel and certainly a regulated market where we could invest capital at a high rate, which is what we do very well here.

And then certainly our regulatory relations we work very hard on to be a very credible company that gives top level service and is mindful of customer pricing and everything else. And we believe that transcends, it's just water and wastewater, in the regulated market. And finally, as we think about how we run our Company with O&M, we just think, Angie, that those, among other core competencies, have multiple application.

And believe me if see an opportunity that matches those and would enhance our utility strength in the market, we would look at it. Having said that, we're going to be very, very prudent in how we approach it. We have a long history of being very prudent in how we think about M&A.

Okay. But on the back of it, I mean just looking at your market valuation wouldn't you say that your PE multiple is to a large extent reflective of a scarcity value of a water utility as an investment? I mean they're very really few sizable public water utilities you can invest in. There are a number of international funds looking for exposure to water. Wouldn't you agree that if you were to dilute your water focus that that multiple could erode?

Well, we think the multiple is largely due to the management team. I'm kidding of course. No. I think you make a very, very strong point and I think as you look across the general utility sector, of course water is not the only utility that is seeing an increase in valuation and so traditionally as you point out water has traded at a premium to other utilities.

Whether that's scarcity we think that would agree that that's part of it. Whether it's the safety particularly in this market, that's a component. And in fact the companies are all well run. So you make a very good point, but I'm not sure that the premium is solely based on scarcity.

Okay. And I'm sorry. I keep asking the same question but again in light of the water driven growth options, are you basically trying to grow faster or become larger quickly, behind, and that's the strategy, behind the potential M&A outside of water? Or is it basically that you feel that the growth in the water sector is actually less visible than we might think and thus the need to maybe get some support somewhere else as far as the growth is concerned?

That's a great question, too. Here's I think how we think about it. The United States right now has a vast need for investment in infrastructure and we have been a leader in that in the areas where we operate. We have been investing, as you know, significant amounts of capital in infrastructure in water and wastewater.

And when you think about it, you have heard the numbers that EPA has put out there the need for an additional trillion dollars of investment in just this space. And if you broaden that to the broader utility market, the needs I'm very familiar with transmission from my board membership up at ITC, the need for investment in transmission, the need for investment in gas pipes.

So it's across the general utility industry. Huge need for infrastructure. So to the extent that we could capitalize on our skill sets and be a larger player in making sure that that investment is made in a great area of need in the United States, we think our skill sets are broadly applicable and specifically applicable in those infrastructure needs.

Okay. Thank you.

And we'll take our next question from Ryan Connors with Boenning & Scattergood.

Great. Good morning. Thanks for taking my question. A couple of housekeeping items and I had a bigger picture question if I could. First just on the housekeeping, Dave, you mentioned a few times, quote non-recurring unquote, events as part of your lower O&M expenses. Can you just elaborate for us on more specifically what some of those things were?

Yes. We had a couple of charges, kind of one time charges and one time bring backs this year and last year. See if I can get my hands-on them all. So for the quarter, yes, so for the quarter last year we had a couple of charges. One was the leadership transition charge that we talked about on the call. We reserved some old old Aqua Pennsylvania water rights that appeared would not be able to be put to use. So they were two big one time charges last year totaling about $3.5 million that obviously did not recur again this year.

Okay. So truly non-operating stuff?

Yes. Kind of unique one-off items in last year's numbers that caused part of that difference.

Got it. Okay. And the other one was just can you give us a progression on the tax rate. Obviously we have jumped -- we have been now in the single digits for a while? Can you just kind of give us an outlook of how we should think about modeling that going forward?

Yes. I would expect it will be fairly consistent until the next Pennsylvania rate case. And in that Pennsylvania rate case I would see somewhat of a change, not more than a few percentage point, but certainly more than what we have seen recently. So I would say fairly steady until we get to that point.

Okay. That's actually a good segway into my next question which was any update on Pennsylvania in terms of where we stand relative to go into the [deseg] and ultimately to generate rate case. I know you made some comments at the Analyst Day that were helpful in that regard. So any update there?

Yes. I would say no. You know, we're sticking with the guidance that we provided at the Analyst Day that we would like to think of a [disc] sometime in 2017 or 2018 and then a rate increase sometime in 2018 or 2019 and that's still where we see it right now.

Okay. So a rate increase in 2018 or 2019 would imply filing either in late 2017 or early 2018. Is that the right way to read that?

Yes. That's right.

Okay. Okay. And then, yes, my bigger picture question was, I mean Chris you commented on the Pennsylvania Act 12 legislation and the PUC did have some news on that front with their preliminary implementation order a couple weeks ago. I wondered if you had a chance to look at that and if you had any, if that gave you any more granularity on the opportunity there and whether there were aspects of that that you liked or didn't like or any incremental feedback on that legislation with the latest developments?

Yes. I guess frankly I have not seen that particular piece from the commission so I can't comment directly on that. But I guess from what we know and what we are aware of from the legislation and our discussions at the commission level we we remain very confident that this will be a great tool for continued growth and maybe expanding growth.

Okay. Great. That's all I had. Thanks, guys.

Okay.

(Operator Instructions). We'll go next to Jonathan Reeder with Wells Fargo.

Hey. Good morning, gentlemen. Most of my questions have been answered, but I didn't know if there was any more color you could give on the M&A progress, particularly on the targeted muni effort that's being made. Is there some deals in the second half that you expect to announce, deal the size?

The deal pipeline I will tell you is strong, but as you probably are aware, as we think about the discussion with municipals, Jonathan, it's a long lead time and there's a vote and in many occasions we're seeing the need for referendum. So I don't see in the coming two quarters a major, that's why we have given the guidance.

You have seen the guidance, but we have some, I'll call it sizable, opportunities in our pipeline and we have a relatively high level of confidence about some of those. So I guess I will leave you with we see activity, we see greater size, and we feel like the pipeline is strong for next year.

Okay. So look to 2017 to really see kind of the, I guess the efforts coming to fruition?

That's -- I think that's fair to say.

Okay. Sounds fair. Thanks, guys.

And it appears we have no further questions in the queue at this time.

All right. Thank you very much. Appreciate your time.

Again, that does conclude today's presentation. We thank you for your participation.