Essential Utilities Inc (WTRG) 2018 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Aqua America's Q2 2018 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, David.

Good morning, everyone, and thank you for joining us for Aqua America's second quarter 2018 earnings 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 and a webcast of this event can also be found on our website.

As a reminder, 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.

Moving on to Slide 3, presenting today are Chris Franklin, Aqua America's Chairman and Chief Executive; Dave Smeltzer, the company's Chief Financial Officer; Dan Schuller, Executive Vice President and Deputy Chief Financial Officer; and Matt Rhodes, Executive Vice President of Strategy and Corporate Development.

As you recall, we've announced Matt's hiring in April, and then he started at the company in June.

Thus, this is the first time he is joining us for an earnings call.

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

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

Thanks, Brian, and welcome, everybody.

Thanks for joining us.

Today, we've got several important topics on the agenda.

As we discussed last quarter, we have some key organizational changes taking effect.

Brian alluded to this a moment ago.

This will likely be Dave Smeltzer's last earnings call.

He's been with the company 32 years, and plans to retire in October.

Taking over for Dave will be Dan Schuller, we've announced this previously, who's currently -- Dan's currently our Executive Vice President of Strategy and Corporate Development, and he's been there since 2015.

And I have the pleasure really today, and I'll do it in a few moments, of introducing our new Executive Vice President of Strategy and Corporate Development taking over after Dan, and his name is Matt Rhodes.

And I think many of you know Matt probably already either personally or by reputation.

Also on the agenda today, we have obviously our standard financials, and Dave will take you through those.

But in addition, and I think many of you have been waiting to hear more details about, is the Pennsylvania rate case that we plan to file later this month.

This is the first Pennsylvania rate case since 2011.

And I think you are aware that we've closed a good number of acquisitions, and made fairly substantial investments in infrastructure in Pennsylvania throughout that time.

And I'll say that the investment in Pennsylvania alone has been over $2 billion by the time we filed the case.

And as many of you know also, we've got some new mechanisms involved in this case that we'll used for the first time.

Dan Schuller will discuss those in -- about PA rate case in just a few moments.

Also, we've got a lot of activity to report with regard to our municipal acquisition strategy.

With the passage of fair market value legislation across many of our states, the latest one was North Carolina just last month, the increased number of municipalities who are open to selling is substantial.

And we know that many cases, we've talked about this in many forums before, that a lot of towns and cities are using the proceeds from the sale of their utilities to improve their financial position, and to address some of their most pressing needs.

And these are things like health and human services, safety or pension liabilities, things that the proceeds can really be helpful with.

Now over the last few months, we've closed 2 fair market value acquisitions.

And in addition, we've got several more under agreement and a lot more in the pipeline.

And Matt will take you through this in a little more detail in a few moments.

Then lastly on the agenda, as we typically do, I will review the guidance, and take any of the questions you might have.

So we turn to the next slide, look at some corporate highlights for the quarter and year-to-date.

I have to begin again with just a couple of more thoughts on the municipal acquisition strategy.

The plan that we laid out nearly 3 years ago now has been bearing significant fruit with the 2 recently closed municipal acquisitions, Limerick in Pennsylvania and Manteno in Illinois, and an additional 6 signed asset purchase agreements with municipalities, we expect to welcome a total of more than 27,000 new customers from municipal acquisitions when all these deals close.

Now for 2018, specifically, we're on track for our customer growth between 2% and 3%.

And that includes organic growth.

And I have to say, in my more than 25 years at the company, I've never seen this level of activity in the municipal sector.

And we're very pleased to be part of the solution for many of these local towns and cities and their elected officials.

While growth opportunities are exciting, we also reported solid financial results for the quarter, with revenue up 4.2%, earnings per share growth over just at 8.8% over last year's second quarter.

And in conjunction with the strong financial performance, we also continue to make some substantial infrastructure investments this year.

Another record year so far in the first half, we've already invested more than $216 million in new pipe, plants and other infrastructure.

And we remain on track to spend more than $0.5 billion in water and wastewater infrastructure by the end of the year.

And then lastly, a couple weeks ago, the board gathered to increase the dividend by 7%.

And if you look on the next slide here, you can see that over the last 5 years, we've had nice growth in the dividend, comes to a 7.6% CAGR.

And we remain committed to rewarding our shareholders in this way.

The newly quarterly dividend will be nearly $0.22 per share, a 7% increase from prior dividend amount.

On an annualized basis, this amounts to more than just over $0.87 per share.

And I'll remind you that we've been paying consecutive quarterly dividends now for 73 years, and this was our 28th increase in the dividend in 27 years.

Our ability to make these steady and increasing dividend payments to our shareholders is really a testament, I think, to our strong record of operational excellence and growth.

And now, I'd like to pass the call over to Dave, who will give us an update on the company's financial results.

And as you can see from our results, Dave picked a great quarter to go out on a high note.

Our performance this quarter is pretty strong in all aspects of our business really, and I'll let Dave walk you through.

Dave?

Thanks, Chris.

Yes, it was a solid quarter, and happy to talk about it.

We reported revenues of almost $212 million for the quarter, up about 4.2% compared to last year's second quarter.

O&M expenses were $73.5 million for the second quarter compared to about $69.6 million the same period last year.

When we get to the waterfall slide, I'll discuss what drove this and explain why the increase is more in line with our typical rate when considering some one-time nonrecurring items.

We reported net income of $66.6 million compared to $61 million in the second quarter last year, an increase of over 9%.

Earnings per share were $0.37, up from $0.34 last year, an increase of 8.8%.

And lastly, as you may notice when you review our Q, which will come out tomorrow, we also increased our credit facility.

Our combined facilities now allow us to borrow up to $635 million.

And we don't see this as a big deal, but we figured some of you might flag it and wonder why we went in this direction.

And essentially, we compared our credit line to our peer companies and other companies, and we consulted with credit agencies in the normal process of talking to them anyway.

And through those items, we really determined it will be advantageous to us to increase the facility and be more in line with our peer companies.

So with that, we move on to the next slide and look at the year-to-date results.

For the year-to-date, we see a similar story here with strong growth on both the top and bottom lines.

Revenue was up 3.8%, EPS up 6.5% for the first half.

We've seen an increase in O&M, which I'll go into in a later slide, breaking down some of the drivers there, which were in large part nonrecurring items, like I mentioned.

And so let's move on to Slide 11 for more details on revenue.

So looking at different components of the 4.2% increase in revenue, we see the rate activity was the biggest contributor at $6.2 million of the increase.

And as a reminder, the bulk of our revenue requests are for the recovery of necessary infrastructure improvements.

Our O&M has been fairly steady for a long period of time.

Regulated growth from both acquisitions and organic growth added $1.3 million to revenue.

Other items were primarily driven by higher wastewater revenues in our nonregulated division -- one of our nonregulated divisions, offset by lower revenues from market-based activities.

And finally, consumption was down ever so slightly, although less than the typical 0.5% to 1% we've seen historically.

So next, we'll look at the O&M waterfall.

Operations and maintenance expenses were $73.5 million for the second quarter of '18 compared to $69.6 million last year.

Taking out nonrecurring items, the increase in O&M expense would've been in line with our historical level of 2% to 3%.

So looking at the primary drivers, employee-related costs increased O&M by $1.6 million.

Other items increased O&M by $2.1 million, and they include about half of which was a favorable one-time item booked last year in O&M that, therefore, shows an increase this year without such a booking, and the other half includes several one-time costs that occurred this year.

So bottom line, O&M looks to be a bit more than usual.

But if you remove the nonrecurring items, the increase would have been in line with our historical run rate.

So next let's look at EPS on Slide 13.

And walking through EPS waterfall from left to right, you can see that the increased rates, a pickup from the tax act and regulated growth, drove the increase.

Other items, including the nonrecurring items and expense growth were the negative drivers.

All in, this led to a growth in EPS for the quarter from $0.34 to $0.37, an increase of nearly 9%.

So that completes our review of the financials for the quarter.

With that, I'm going to turn it over to Dan, who I've had the pleasure of working with closely for the last several months to complete this transition as Aqua's new CFO.

And I have to say, in getting to know Dan over the past 3 years, I'm really amazed by his work ethic, his ability to grasp all aspects of our business and his ability to lead his fellow employees.

He's really the whole package.

And while I'm excited as I transition to my next phase, I'm incredibly confident in Dan's ability to drive Aqua to bigger and better things in his new role.

And with that, I'll turn it over to Dan, as we move to Slide 14, to talk about rate activity.

Dan?

Dave, thanks for that introduction, and certainly for your kind remarks.

I appreciate all this support that you've provided to me during my time at Aqua, and I've really enjoyed getting to know you better during these past 3 years.

Your legacy at Aqua is truly impressive.

You helped create the Aqua that we know today, and it provided us with strong foundation on which to grow.

So thanks for that, Dave.

Let's discuss our rate activity thus far this year.

So far, in 2018, we completed rate cases or surcharge filings in 7 of our 8 states, resulting in $20 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 $8.8 million in revenue.

For further detail on rate activity, please refer to the slides in the appendix.

Next let's turn to slide 15 to discuss our upcoming Pennsylvania rate case.

As you know, we've not filed a rate case in Pennsylvania since 2011.

Thus, this is our first Pennsylvania rate case in 7 years, which is considerably longer than the usual cycle of filing every 2 to 3 years.

If you follow Pennsylvania's PUC activities closely, you may have seen that we intend to file no later than August 17.

Given the time line for rate case proceeding, new rates are expected to be effective in the spring of 2019.

If you turn to Slide 16, you will see the rate case summary slide that we've shown previously.

This slide outlines several of the key items for this rate case.

In the time since we last filed in Pennsylvania, we've completed more than 20 water and wastewater acquisitions, and we will invest in more than $2 billion of capital to replace and expand our infrastructure.

This is also our first rate case since the Fully Projected Future Test Year came into effect.

This mechanism will reduce regulatory lag by allowing it to include our projected investments and expenses for the first full year after rates take effect.

And of course, tax-related matters will be an important component for this case.

So we will file later this month, we'll work through the proceedings through the balance of this year and into 2019, and we expect new rates to be effective in the spring.

With that, I'll hand the call back over to Chris.

Thanks, Dan.

And before I introduce formally Matt Rhodes, I want to, again, recognize the contributions of my friend and colleague for over 25 years, Dave Smeltzer.

One of the legacies that Dave will leave at Aqua when he retires is the experienced team that he hired and invested in for so many years.

Dave, as Dan mentioned, has also spent a good deal of time with Dan and preparing him to be our next CFO.

And I've got to say, to Dave's work, that my confidence in our financial strength and stability has never been stronger.

And while we expect that this will be Dave's last earnings call, Dave has committed to see the Pennsylvania rate case through.

So in the outside chance that Dave's needed for testimony or additional work on the case beyond October, Dave has agreed to generously stay with us into early November.

But in anticipation that this is Dave's last call, I want to publicly thank him for his good work, his contributions over the years, and wish he and [Debbie] well in their retirement together.

So now I get to introduce the newest member of our executive team, Matt Rhodes.

And Matt will fill the position of Executive Vice President, Strategy and Corporate Development, which was formally led by Dan Schuller.

Matt comes to us, as many of you know, from Goldman Sachs, where he covered utility companies for a decade.

He has deep knowledge of the utility sector.

And yes, I think many of you know Matt already.

And since he's joined us in mid-June, he's really hit the ground running, and has already become deeply involved in all aspects of our growth program at the company.

I have to say I'm excited about Matt being on board for a number of reasons, but I know and I'm certain that he'll build on the strong track record that Dan and his team have established over the last 3 years.

With that, Matt, I'll turn it over to you for an update on our municipal acquisition strategy.

Thank you very much, Chris.

Much appreciated.

I have to say, in my short time here, I've enjoyed getting to know the team at Aqua.

And I've been impressed by the work completed to build the platform for growth.

There's also a reporting today related to acquisitions, a reflection of the efforts of Dan and fellow Aqua leaders, including our state presidents, who strategically focused on opportunities across our operations, where we can be a solution to municipalities and privately owned water systems.

If you've been following our releases over the past month or so, you know that we've closed 2 sizable municipal acquisitions, as outlined here on Slide 18.

One is in Illinois, and one is in Pennsylvania.

And they both totaled over 9,000 customers and about $100 million in purchase price.

When we add these 2 acquisitions to the 3 small private deals announced earlier this year and our organic growth through June, you can see that our customer growth so far in 2018 is 1.4%.

We remain on track for 2% to 3% customer growth for the year, which I will discuss in more detail on the next slide.

In addition to the deals already closed, we have a very strong pipeline of municipal acquisitions that are currently under agreement.

This reflects the opportunities we continue to see in the municipal market and the hard work that our state leadership teams are doing.

In May's earnings deck, we provided a schedule of 6 systems with signed purchase agreements.

Since then, 2 of these are now closed, Manteno and Limerick, as we just discussed.

You can see that we now have a revised list of 6 agreements with municipalities.

This includes 2 new deals, one being System H in Illinois and the recently announced signed as a purchase agreement with Cheltenham Township in Pennsylvania to acquire their wastewater system, which we expect to close in 2019.

This will actually be the largest single municipal system by customer count that we've acquired since 1999.

While not all of these acquisitions will close in 2018, we are on track to achieve our goal of between 2% and 3% customer growth for the year.

Also, I think it's important to note that between flat in '18 and '19, we have deals totaling over 27,000 new customer connections with municipalities and over $200 million in purchase price.

Moving on to Slide 20, let's provide an update on our legislative initiatives.

I think one of the things I didn't fully comprehend when I joined Aqua was just how much work has been completed on the regulatory and legislative front.

From the DISC mechanism that Dave was instrumental in starting in Pennsylvania over 20 years ago, to the more recent fair market value legislation, or FMV, these items are great tools to allow utilities to provide solutions, to solve infrastructure issues across the country.

In the short time I have been here at Aqua, a major event already occurred related to FMV legislation.

FMV legislation became effective in North Carolina in July, representing the sixth Aqua state to allow us to pay and recover on fair value.

Since the FMV legislation, such similar FMV legislation has also passed the House of Representatives in Ohio, and will soon be considered in the Senate.

With fair market value legislation continuing to be implemented across our key states, we believe this will be a significant catalyst for future municipal growth.

With that, I want to thank you for the opportunity to present today, and I look forward to interacting with you all in the near future.

Thanks, Matt.

Nice job.

Glad to have you on the call.

Thank you.

Lastly, for today's call, we'll review the guidance, 2018 guidance.

And as I say we remain confident in that guidance.

We expect full year earnings per diluted share to be between $1.37 and $1.42.

We expect to invest approximately $500 million in capital -- in infrastructure in '18.

Again, this is a record amount for us, and approximately $1.4 billion in CapEx over the next 3 years, that's through 2020.

It's important to note that this CapEx doesn't include any investment in additional systems that would be acquired.

So the full CapEx would be likely higher when we look back in 2021 and to these years.

Rate base is expected to grow at approximately a 7% clip over the period.

And as Dan mentioned, we'll be filing a Pennsylvania rate case later this month.

Year-over-year, we'll grow customer growth between 2% to 3%.

And I want to point out, we're just about 3,000 customers away from hitting a key milestone of 1 million customer mark.

And we should hit that before the year is out.

And just a point of reference, when I came to the company in 1992, the company had just over 240,000 customers.

So we've seen tremendous growth over the period.

And just before we open it up for questions, to make a couple of final points here.

One is that the company, the base company continue to perform with excellence.

We not only talk about operations, but under Rick Fox's leadership, we continue to achieve high marks, even record achievements in safety and environmental compliance.

And we're doing all of that while we continue to invest in infrastructure at record levels, and we continue to review and do due diligence and integrate acquisitions.

So it's a tremendous job done by our operating teams, led by Rick.

Second point I'll make is that for the last 3 years, Dan Schuller's really done a complete revamp of our acquisition program and built a great foundation for Matt to continue with.

And so Dan has just done a fantastic job, and as he transitions, we're thrilled with the results he's put on the board.

And finally, while Dave will most certainly be missed in the coming months when he leaves in October, it gives me, and all of us on the management team, great confidence to know that Dan will be our next CFO upon Dave's retirement.

I think in your dealings, you'll find Dan to be not only knowledgeable and accessible, but unquestionably honest.

And this transition has been just a really good example of the strong success and planning we do at the company, which is really for the long-term benefit and the building of shareholder value.

So with that, I'll conclude and offer up the time for any questions you might have.

(Operator Instructions) And our first question will come from Mr. Ryan Connors with Boenning and Scattergood.

Actually, the first one I have was just a little more of a housekeeping item.

The JV line was a nice tailwind.

And I assume that was the pipeline JV, a pretty major jump sequentially in year-over-year.

So is that something we should expect to continue rising as the oil and gas markets recover?

Or do we level out there?

Any outlook on that?

Yes, good question, Ryan.

I'm going to let Dan field this.

But I think the first one is, yes, good news, and that we've taken, we've written it down, a couple of years ago, in 2015, as you know.

And -- but we're pleased with the contract.

We have a multiyear contract in place now.

But in terms of its growth, let Dan and Matt field that.

Yes.

Thanks, Ryan.

So we've had very nice success in terms of water sales this year.

Actually, thus far, this year, we've sold more water than we sold in any full year previously.

So it's positive from a volume perspective.

As Chris mentioned, we've got one long-term contract in place.

We've got another contract in place for a second driller.

I'd say we would expect to see the types of volumes we've had thus far this year, kind of strong volumes continuing through the balance of the year, and then through 2019 at this point.

Target visibility is too far out though in these situations.

I mean, we have some visibility to what they're going to request in terms of water delivery, but there's only so many months of that, that we really can see.

But our understanding from how things are shaping up in the basin is we should have a good year this year and another good year coming up.

Great.

That's helpful.

Next, I'd echo the sentiments on Dave.

Best of luck, and thanks for all your help over the years.

And the last thing I want to do to you, Dave, on your last call is make you dive back into repair tax.

But can you just -- we've got a PA rate case now.

Obviously, the long stay out was a function in some ways of repair tax.

Can you just walk us through -- maybe not even the granular details.

But just logically, what happens to the tax rate, both in Pennsylvania, but, maybe more importantly, on a consolidated basis once this rate case is in effect?

Yes.

Well, as you know, and as we've talked previously, the repair change, when made, was a permanent change to the way the company treats its repairs, right?

So nothing changes in terms of the way we treat repairs, and in terms of the tax deduction that's afforded from those repairs.

From a leveling standpoint, the amount could change a little bit over the years.

There'll be years when we'll do more repairs.

There will be years when we'll do a little bit less repair.

But as we look forward into the future test year and, in fact, the Fully Projected Future Test Year, we have project the level of repairs, which will take place during that year.

And there's an appropriate reduction in our income taxes incorporated into the PA rate case request for that.

And so when we do that, we look forward to make sure that during the pendency of those rates, we'll be in a position to deliver a fairly constant rate reduction in income tax -- income taxes.

So that's unlikely to be an issue that provides a significant benefit for the shareholders or any detriment in the context of that 3-year period between rate cases.

Okay.

So we shouldn't expect the tax rate to jump once the rate -- or new rates go into effect?

Yes.

There's a chance the rate changes once the new rates go into effect.

But that change will be a fairly constant item then for the 3-year duration of the rates.

I see.

Okay, okay.

And then we -- okay, I got it.

And my last one was on regarding the rate case in Pennsylvania, our read of the Limerick settlement is that the Limerick will not be included in that PA rate case.

So can you just affirm we have that right?

And also, are there any other recent deals that will not be included in that rate case due to similar stay-out agreements?

You are correct, Ryan, that Limerick is not being included in the current case, the case that we're about to file.

In terms of others, so for example, others that haven't closed yet, obviously, would not be -- would not make this case either.

Okay.

So there's no -- so all the other deals that have closed will go in?

That's right.

Okay.

I think we have 20 or 20-some deals that are, for the first time, being incorporated into a Pennsylvania rate case.

Yes.

But sort of the main deals that we've talked about here recently, you're correct.

Limerick does not make this case.

And then going forward, we'll -- they obviously don't make this case.

They're included in the 20 -- the later cases, down the road.

Got it.

Okay.

That's good news.

And then you mentioned the deals that haven't closed.

Any update on New Garden that you can give us?

Hard to give much of an update there.

Obviously, you know it's been [fielded] to the Commonwealth Court, and we'd expect some proceedings starting in September related to that.

(Operator Instructions) At this time, we have no further questions.

I'll turn it back to Mr. Franklin for closing comments.

Well, thank you again for joining us today.

And again, congratulations to Dave.

And obviously, we'll always be prepared to answer questions you might have that you think of after the call.

So enjoy the rest of your day.

Thank you.

Ladies and gentlemen, that concludes this morning's presentation.

You may disconnect your phone lines, and thank you for joining us today.