Essential Utilities Inc (WTRG) 2018 Q1 法說會逐字稿

Good day, and welcome to the Aqua America's Q1 2018 Earnings Call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Brian Dingerdissen, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Christina.

Good morning, everyone, and thank you for joining us for Aqua America's First Quarter 2018 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.

The slides that we will be referencing can also 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 risk 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 are Chris Franklin, Aqua America's Chairman and Chief Executive Officer; Dave Smeltzer, the Company's Chief Financial Officer; and Dan Schuller, the Executive Vice President of Strategy and Corporate Development and Deputy Chief Financial Officer.

After the presentation, we will open the call up for questions.

At this time, I'd like to pass it over to Chris Franklin.

All right.

Thanks, Brain, and thank you all for joining us this morning.

Let's run down the plan for this morning's call.

First, I guess, as they say, the big story.

Dave Smeltzer, our CFO, will be retiring after 32 years at Aqua.

And so I'll give you a brief rundown on the successor plan and the transitions that we plan.

Then I'll give you some highlights for the quarter.

Dave will run down the financial results for the quarter and Dan will bring you up to speed on the rate activity and acquisitions.

We'll wrap up by reviewing our guidance, and then we'll take some questions.

So last week, we announced the planned retirement of our longtime friend and executive leadership team member, Dave Smeltzer, who's been our Executive Vice President and Chief Financial Officer now for many years.

Dave will help lead us through the Pennsylvania rate case and then retire in October of this year.

It's interesting because Dave started in 1986, and he rose to Controller of Pennsylvania, and then Vice President of Rates -- President of Rates and Regulatory for Aqua America, finally, the CFO, and then Executive Vice President in 2012.

So Dave started doing rate cases and his last duty will be finishing the Pennsylvania rate case as CFO.

So over the last 32 years, he's really helped shape the Aqua that we all know today.

He helped propel our regional Pennsylvania water utility into the one that -- one of the largest regulatory utilities in the country.

And throughout his career, Dave's been committed to not only growing our customer base but investing in infrastructure and then working with regulators to make sure that we get fair recovery of those investments.

And as you all know, Dave's pragmatic approach to corporate finance has helped us successfully navigate the company's growth from a small company to one that's got now a market cap of in the range of $16 billion -- I'm sorry, $6 billion.

He has accomplished his work and developed a really strong team around him, and that team is really going to help us with the transition over the next year here or 6 months, and really make it seamless.

During his decades of service, Dave's leadership has really made an indelible mark on the company.

So Aqua's largest and most impactful acquisitions were under Dave's leadership, and the Aqua family is grateful for his unwavering commitment to the company.

And we wish him the best as he enters a new chapter of his life.

Dave will be on the call -- on the next call, of course, and then we'll work closely with Dan.

And then Dan will fully take over the call when November comes around.

Now Dave's strong legacy will be carried on by Dan Schuller, and I think you all know Dan at this point.

Dan served as the Executive Vice President of Strategy and Corporate Development since 2015, and we named Dan just recently now, the deputy CFO, while he works with Dave in the coming months toward Dave's retirement in October.

By way of background, Dan's got his doctorate in engineering from Purdue University and has worked in consulting, banking and now most recently, as a utility executive here at Aqua.

Before he joined us at Aqua, Dan spent 8 years at JP Morgan in the infrastructure investment group and he's been highly effective at leading our growth strategy here the last 3 years, a period where the company has done more municipal acquisitions in those 3 years than the previous 8 years combined.

Depth of knowledge in finance, understanding the business and really, his general management capabilities will serve both Dan and the company well in his new role.

We are very excited about Dan taking over this fall.

Now taking over for Dan will be Matt Rhodes.

Matthew Rhodes comes from Goldman Sachs.

He was the Managing Director in investment bank -- in the Investment Banking Division and Matt was at Goldman for 11 years and had lead coverage for -- lead coverage responsibility for over 25 utility clients.

So well-known in the utility space, and Matt's going to be a great addition to the team.

We look forward to having Matt join us in the coming weeks.

And finally, we also named a new Senior Vice President and Chief Human Resources Officer, Christina Kelly.

Christina most recently worked as Vice President of HR at AmerisourceBergen, and she brings with her a great amount of experience, 14 years, leading Human Resource departments in organizations and executing on business strategies for corporate organizations.

So very excited about all these new players joining the company.

And the combination of strong new players on our management team, along with those who've been with the company for many years, continues to make our workplace really dynamic, fresh and with these fresh ideas from our new executives are grounded with deep knowledge of the business from our longer-term executives, really makes for a very, very strong management team.

Such a great environment, and we're looking forward to seeing all these new executives join the team.

So with that background, let's talk a little bit about the quarter.

We pushed what I call solid growth in revenue and earnings per share, both up about 3.5% from the first quarter of last year.

We closed 3 acquisitions, one of them in Pennsylvania, that was a water acquisition, and then a water and a wastewater system in Ohio.

Overall, combining these new acquisitions and organic growth, we added about 2,259 customers during the first quarter, and we're still targeting between 2% and 3% total customer growth for the year.

Now Dave, you want to take us through the quarterly financials?

Sure.

Thanks, Chris.

Thanks for the kind words.

Much appreciated.

I have to admit, I do look forward to working with Dan closely over the next several months as we plan our transition.

I'm really pleased to be able to pass the torch to a guy like Dan, experienced leadership and one of the smartest guys I know.

So -- and that's not in the script.

So it's real.

But today, I'll review the financial results for the quarter and discuss some of the driving factors that impacted our performance.

So let's start right off with the numbers.

We reported revenues of $194.3 million for the quarter, up 3.5% compared to the $187 million in the first quarter of 2017.

Our O&M expenses were $73.9 million for the first quarter of '18 compared to $67.9 million in the same period of '17.

I'll provide some color on that in a moment.

Now we reported net income of $50.8 million compared to $49.1 million in the first quarter of '17, and earnings per share followed that at $0.29 per share, up from the $0.28 per share last year, a 3.6% increase.

Let's take a look at operating revenue.

Look at the different components of the 3.5% revenue increase.

First, if we dissect the rates and surcharge category, we'll find infrastructure surcharges such as DISC and other rate increases contributed $5.1 million, and they were offset by a $2.5 million revenue reserve related to savings from the Tax Cuts and Jobs Act, which is expected to be returned to utility customers as directed by each of the local public utility commissions.

Higher consumption was also a big driver in the increase in operating revenues at $2.7 million.

And these items, along with customer growth, a decline in market-based revenue and other items brought the total revenue for the quarter to about $194 million.

Looking at operating and maintenance expenses.

O&M expenses were $73.9 million for the first quarter of '18 compared to $67.9 million in the first quarter of '17.

As we said last quarter, we had an unusually low O&M expense in 2017 due to several onetime events, including a milder winter, and so we expected O&M to be higher this quarter.

The increase included a number of things.

First, employee costs.

These include pension cost, overtime related to a very severe winter weather, and salary increases.

Second, maintenance and regulatory adjustments at nearly $2 million.

And third, a lower production cost of about $1.1 million and reduced market-based expenses of about $1.7 million were offsetting the increase in O&M.

On a normalized basis, the O&M expense growth would have been about 1/3 of the reported increase and more in line with our recent trends.

So looking at earnings per share.

We started with the $0.28 we reported this time last year, and increases in rates, consumption and market-based activities, coupled with growth in other items increased our earnings per share by about $0.05.

The increased expenses and reduced tax repair benefit decreased EPS by $0.04.

So as a result, we reported earnings of $0.29 per share for the quarter, up $0.01 from last year.

So next, we'll discuss our rate activity.

And as Chris mentioned, the Pennsylvania rate case was my first assignment in 1986, and now will be one of my last assignments, will be the oversight of that case as that moves forward into the end of the year.

So with that, I'll turn it over to Dan to discuss our rate activity and acquisition activity.

Dan?

Great.

Thanks, Dave, and congratulations, again, on your announced retirement.

So good morning, everyone.

Thus far, in 2018, we completed rate cases or surcharges in 7 of our 8 states, resulting in $23.6 million in additional annualized revenue.

We also have rate cases or surcharges pending in Indiana, North Carolina, Ohio and Virginia, where we're requesting an additional $8.6 million in revenue.

Other rate activity includes a reduction in revenue on an annualized basis of $7.1 million, the income tax savings expected to be refunded to customers due to the Tax Cuts and Jobs Act.

Lastly, as Dave mentioned, we plan to file for rate relief in Pennsylvania this year.

As you may recall, we've not raised rates in Pennsylvania since the conclusion of our 2011 rate case.

We expect to file a full rate case in Pennsylvania during the third quarter with rates effective mid-2019.

Additional rate information can be found in the appendix of the presentation.

As Chris mentioned earlier, we're excited about the strong pipeline of acquisitions that we expect to close this year, and you can see those 6 systems listed here, totaling approximately 16,000 new customers.

We're close to announcing a few additional municipal transactions with over 10,000 total connections, so anticipate having more to share on that soon.

Finally, in the first quarter, we added 3 smaller systems, 2 in Ohio and 1 in Pennsylvania.

With that, I'll turn the mic back over to Chris.

Thanks, Dan.

So as we noted in last night's press release, we expect our full year earnings per diluted share to be in the range of $1.37 to $1.42.

We expect to invest nearly $0.5 billion in infrastructure in '18, and this is a record amount.

We were near to that last year, but we'll top it even again this year, and we'll spend right around $1.4 billion of CapEx over the next 3 years, that's through 2020.

I think it's important always to note before you that this CapEx doesn't include any investment that we would make in acquisitions, either the purchase of or the repairs that would follow on.

And finally, we expect rate base to grow in the range of 7%.

Now year-over-year, we are expecting total customer growth to be in the 2% to 3% range.

And by the end of this year, we'll cross over a big mark, 1 million customers.

And so with that, before we end the call, I'll open it up for questions.

Any questions you might have at this point.

(Operator Instructions) We'll take our first question from Jonathan Reeder with Wells Fargo.

Just one quick question, Chris.

Wanted to get your updated thoughts on kind of strategic M&A or large M&A in light of activity, both inside the water space as well as outside the water utility space, but within the electric and gas space.

And where, I guess, the water utility multiples are trading now and everything?

How you're viewing strategic M&A and other large potential transactions?

Yes.

Thanks for the question, Jonathan.

It is an interesting time to be in the utility business.

The activity we're watching in Connecticut and in California, we haven't seen before, right, at least to this extent, where proxies are flying and statements are being made.

So it's a very interesting time to observe some of the activity.

You know our history.

We've always been disciplined buyers, and that continues.

And I think when we consider what's happening, let's start in California, and as we watch what CalWater is offering for San Jose, there has to be considerable synergy involved, and we know those 2 headquarters are 1.5 miles apart.

And so I think CalWater can offer a number that probably would be difficult for others to touch just given the local synergies that can be applied.

And I think as you think about Connecticut, a very similar dynamic exists where Eversource is locally there, bought Aquarion, and not considering Connecticut water again, on relatively close quarters.

They are in the same state and probably could apply synergies that most others couldn't.

But when you look at the multiples being offered, they certainly are, you could say, aggressive.

And I think, again, as you look at the broader utility market, Jonathan, as you mentioned, I think you'll see some high multiples being paid, more recent deal in the Midwest in that category.

So listen, a lot happening.

I don't want to say that we aren't watching closely and considering options because we are, but I think we will remain as we always have been, disciplined buyers.

I appreciate that and, in particular, the specific color.

The only follow-up I'd have is do you think as a result of this, you would see any other water IOUs willing to come to the negotiating table, and not necessarily any of the ones that have been mentioned in the recent deals?

Yes.

It's a good question.

The field is certainly getting smaller.

And so as you look at the possibilities of those that might consider an exit, it becomes a very small field.

And as you know, Jonathan, from your participation in a lot of the meetings that we all go to, it's just a small group.

We all know each other pretty well.

So I think it may cause everyone to kind of think about options, but that's about all I can say about that.

Okay.

Yes, clearly, there are some in your backyard, so to speak, that would sort of make sense.

And then the other thing that I wanted to touch on real briefly, Pennsylvania rate case, I guess, what are the high-level concerns, if any, that you have going into there?

Let me kick it off, and then I'll kick it over to Dave and Dan to have other comments.

But we have a new set of commissioners since we last filed.

We have some new staff people, and so they've got to familiarize themselves with our issues.

I will say -- and Pennsylvania has a very excellent reputation, as we all know, from the regulatory standpoint.

I wouldn't expect anything less than professionalism that we've always experienced here in Pennsylvania.

I do believe -- and we have regular contact with both staff and commissioners.

I do believe that they wholly understand the tax repair that we applied and have used to keep -- to stay out of rates, continue to spend capital over the last 7 years.

So -- but there will be clearly some good questions asked on both sides about the path forward.

I don't have what I'll call acute issues, Jonathan, about the case, just the normal concerns that any CEO management team would have as you enter into a major case.

But I believe all of our capital has been spent extremely prudently.

We continue to have a tight rein on expenses.

And so I would expect this to be a normal rate case.

And Dave, you're the expert.

What do you think?

No, I think Chris is spot on.

The interesting component of the case will be some of the newer issues we'll deal with.

So we have a new test year format, for example, right?

We -- when I started in '86, we were just fresh with the new future test year and now, we're moving to what's called a fully projected future test year.

So instead of looking 12 months out at the time of the rate increase, you're actually looking 24 months out.

And so that gives you an opportunity to be more current with your costs and probably stay out longer than was available in the past.

So good things.

Certainly, the -- our first case post-repair adoption, so that will, no doubt, be an issue.

We don't see any concerns about it, but it will be an important component of the rate case and we could be adjusting, for example, how we deal with the remaining catch-up deduction that's been amortized, so far, component each year.

And the last kind of unique thing I'll just add.

We have over 20 acquisitions that we've done over the years that will be, for the first time, incorporated into a Pennsylvania rate case.

So we're going to do some new things in that regard.

We're going to create some rate divisions and group our customers in various divisions around the state into zones according to their rate and try to keep like rates together and go from 20-some zones today to hopefully, 5 or 6 post rate case.

So there's some of the things we're talking about.

But again, I do agree with Chris.

The fundamentals are straightforward.

We have rate base, we have expenses, we have a good feel for how these things are negotiated and litigated in Pennsylvania and very confident with where we're going with the case.

(Operator Instructions) And we'll take our next question from Richard Verdi with Atwater Thornton.

First, I just wanted to congratulate Dave on a well-deserved retirement, and I wish you all the best, Dave.

And I got to say that I'm sincerely going to miss you and all the laughs you gave me on the road in the past.

Those were -- that was comedy that cannot be matched.

And so I wish you all the best, Dave.

Congrats, and thank you for that.

Thanks, Rich.

I appreciate it.

I just have one question and possibly, a follow-up.

So last week, Rick Fox is on a panel at a conference we both attended, and I'm not sure if he's in the room.

I did jump on the call just a few minutes late, but he gave really interesting remarks regarding safety culture at Aqua and basically, the Aqua pursuit to employee -- ensure employee safety moving forward.

And there was some discussion on that panel from American Water regarding the technology they're using to make certain employees are safe, but because of the path the panel took, we were really unable to learn the technologies Aqua is using for safety.

So I was hoping maybe Chris or if Rick is there, if either of you could just give us some color on what technologies Aqua is using for safety there?

And then how Aqua also ensures employee safety for workers the company contracts with rather than directly employs?

Sure, Rich.

First, Rick Fox has been a great champion for safety across our company and our employees are very, very engaged in safety at the end.

I think last year -- I don't know if Rick reported this at the conference or not, but last year, we posted the safest year on record at Aqua America.

So something that not only management but the entire company is very, very proud of.

And when we think about, it's really tactics, training, and technology that you'd apply to make the company a safer place, and much of that is based on employee knowledge of the risks, and then determining what those mitigating factors are, and then putting them in place.

I don't know that I can articulate on the phone every technology that we use, but suffice it to say we've been applying things like GPS to look at speeds, right?

We like our vehicles to drive at what I would call, at least, below the speed limit.

And so we look at the top 10 speeders in our company vehicles on a monthly basis, and we don't want to report them, but then we discuss it with the employees.

That alone, Rich, can have a big effect on the number of car accidents that you have.

Because when you think about the mileage that we drive in any given year, Aqua America company vehicles drive 17 million miles a year.

And so when you just extrapolate that on a per vehicle, think about your own vehicle driving 12,000, 15,000 miles a year, that's a long time without an accident.

So we've made improvements like that.

We've applied safety training across the entire company, and we've had more safety training hours last year than ever before.

And by the way, we asked everybody in the company, including Dan and Dave who are sitting here with me, to take the same training.

Rick Fox, of the executive team.

So we've tried to create, and we continue.

It's a continuous effort to try to create a safety culture.

And I think we've been very successful in doing that.

But Rich, for more detail, I'd be happy to connect you and Rick and make sure that Rick gives you the detail -- more detail on specific technologies that you might be interested in.

That's great.

I appreciate that.

And since -- maybe I should connect with Rick.

I still want to try to ask this, if you don't mind.

I'm just kind of curious because the technologies, it would be thought that regulators and consumer advocates would be very receptive to technologies that would ensure employee safety, but sometimes they can give pushback on things that you don't think they would give pushback on.

When Aqua is employing the technologies for the safety and what have you, has there been pushback from regulators or consumer advocates, or have they been pretty supportive of what you guys are implementing there?

Well, I'll tell you, they've been very supportive.

Safety is something that I can't recall, Dave, I don't know if you can, ever getting any pushback on.

I would say, when you think about safety, Rich, cybersecurity, physical security, these are things that commissions are typically very engaged with us on and not only supportive but encouraging us to make the spend.

We put things like tablets.

All of our vehicles now have iPads or tablets, so that people have knowledge of, for example, where utility lines are on the -- when they come to a scene.

They have information at their fingertips about what's happening at a well house or in a system.

I think that's very powerful when you think about implication of the safety.

So -- but I'd be happy to connect you with Rick and let him give you a lot more detail on the safety functionality and technology that we use.

But I'll leave it with -- no pushback from the commissions on safety.

It appears there are no further questions at this time.

I'd like to turn the conference back to Chris Franklin for any additional or closing remarks.

No closing remarks, but Dave's phone line is open for all those who want to congratulate him.

I thank you for joining us today, and as always, if there's follow-up questions, we're happy to answer them.

Have a great day.

And this concludes today's call.

Thank you for your participation.

You may now disconnect.