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Edited Transcript of WTR earnings conference call or presentation 23-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Aqua America Inc Earnings Call

BRYN MAWR Feb 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Aqua America Inc earnings conference call or presentation Thursday, February 23, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Dingerdissen

Aqua America Inc - IR Director

* Chris Franklin

Aqua America Inc - CEO

* Dave Smeltzer

Aqua America Inc - CFO

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Conference Call Participants

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* David Cater

Robert W. Baird & Co. - Analyst

* Ryan Connors

Boenning & Scattergood Inc. - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Aqua America Q4 and full-year 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.

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Brian Dingerdissen, Aqua America Inc - IR Director [2]

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Thank you Keith. Good morning everyone and thank you for joining us for Aqua America's 2016 full-year and fourth-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 aquaamerica.com. The slides we will be referencing can be found on our website as well. There also will 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 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 will open the call up for questions.

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

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Chris Franklin, Aqua America Inc - CEO [3]

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Thanks Brian and good morning everyone. For today's brief agenda, we'll start with some recent news on the Company, and then I'll comment on some of our highlights from 2016 and Dave Smeltzer, our CFO is going to cover the financial results for the year and some of our rate activity. Then we will conclude the formal portion of the presentation by reviewing our guidance for this year 2017 and after that we'll take any questions you might have.

Let's jump right in. As we close the books on 2016, which is our 130th year anniversary, I'd like to provide just a little bit of color on the year. I think it was an exciting and a fulfilling year for all of us at the Company and we laid in some important groundwork for our strong future. Probably most importantly, we built our strong Management Team and I believe we're fielding a world-class team at this point. I'm thrilled with how the team as gelled and the talent that they possess.

Secondly, we continue to maintain our high standard of operational excellence, including the handling of some of the industry type challenges like the fallout from Flint, Michigan, which is the national discussion as we've said before and we continuously get questions from our customers and our different constituencies about the lead issue.

We invested nearly $400 million in our infrastructure this year at the Company. This is a record year for us. We provide a higher degree of service continuously for our customers and we continue to bring fair market value legislation in even more states where we do business, Pennsylvania obviously being the big accomplishment in 2016. We talked about that detail on our last call so I am not going get into the details other than to say that our New Garden acquisition is the first one through in Pennsylvania and that's in the midst of getting its examination at the PUC in Pennsylvania now.

We've largely completed the exit of our small non-core, nonstrategic, market based or unregulated businesses as we call them. That's almost done and the last remaining really is profitable but is on the way out now.

On the softer side, we continued the refinement of our corporate culture and worked to ensure that all of our 1,600 dedicated utility professionals are safe in the workplace when they come in every day and that they uphold our high ethical standards and continue to operate the Company as efficiently as possible.

Also last year, we updated our short term and our long-term incentive plans to better reflect our strategy and incent behaviors that will continue to make us the world-class company that we are. Finally, we implemented some new Board governance practices. I've mentioned them before but we put term limits on our Board members, we've put rotation requirements on the committee chairs, and we switched from the traditional meeting fees to retainer fees. So I think we've put good work governance into place in 2016.

Now let's turn to some of the highlights from the 2016 on the next slide here. We increased our customer count by 1.6%. This includes customer growth from acquisitions and organic growth and it falls with within our guidance range that we provided last year. Our annual revenues increased to $819.9 million compared to $814.2 million last year or in 2015, I should say.

Our 2016 earnings per share increased 4.8% over the 2015 adjusted income per share. Again, we'll talk non-GAAP here just for a minute of $1.26 per share. As you'll recall that we wrote down our Marcellus pipeline to the $0.12 write-down in 2015. I would also like to note that 2016 marks the 72nd consecutive year that the Company has paid a quarterly dividend.

Now many of you have seen this next slide, you'll recognize it from our 2017 earnings call just a month ago. And this slide summarizes what we completed as of year-end 2016. We invested more than $22 million in acquiring water and wastewater systems last year. We acquired 13 water and six wastewater systems, including two municipal deals and most of you recall those are the East Cameron and Emlenton, both in Pennsylvania.

As I mentioned a minute ago, we increased in total of 1.6% for the year and I think it's important to note that the majority of the deals still don't reflect the targeted size range that we've discussed; this is that 2,500 to 25,000 customer range. The majority of the deals closed in 2016 and were initiated before we refocused our strategy on larger opportunities. And that work that we began in 2015 and continues today, really focuses on those larger opportunities and I am very confident that this refocused strategy is already working.

I think you'll see it in the next slide here as we talk about our 2017 growth initiatives. As we turn the page, and I mentioned this last month, we already have four municipal systems under contract, under agreement this year and their representative as systems A through D on this chart; again, just because they haven't been announced yet. Combined, they represent $113 million of purchase price, nearly 9,000 customers or 12,000 of what we call equivalent dwelling units.

These deals are expected to close at some point during the year of 2017. In addition, to the four municipal's, we also have a couple of investor-owned utilities under agreement but not yet closed. These couple of deals are also smaller deals from our backlog of small private deals. And we'll of course keep you updated as these systems close and move through the new process.

And with that, I'll hand the call over to Dave, who's going to review the full-year financial results.

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Dave Smeltzer, Aqua America Inc - CFO [4]

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Thanks, Chris. Good morning everyone. Today, I'd like to review the financial results for the full-year and discuss some of the driving factors that impacted the Company's performance. While we're doing that I'll also provide a look at our rate activity from 2016 and for the current year so far.

Turning to the next slide, we've reported annual revenues of $819.9 million, which is up from the $814.2 million last year. In our regulated segment, reported revenues of $800.1 million were up 2.6% compared to the $779.6 million in 2015. Operating and maintenance expenses were down 1.4% to $304.9 million for the year compared to $309.3 million in 2015.

For our regulated segment operations and maintenance increased just less than 1% to $285.3 million compared to $282.9 million last year. We reported net income of $234.2 million or $1.32 per share, compared to $201.8 million or $1.14 per share in 2015. Chris mentioned the adjustment for the Marcellus write-off on an adjusted basis. Earnings per share of $1.32 increased by 4.8% over the 2015 adjusted income per share.

Turning to the next page, let's take a look at the full-year revenue comparison, starting with our revenue for 2015 of $814.2 million. Regulated growth rate surcharges, assumption, and other factors increased revenue by approximately $20.5 million. From there, lower revenues from the Company's sale of certain of it's market-based activities offset the increase by $14.8 million.

The next page we'll look at O&M expenses, starting with our O&M for 2015 of $309.3 million. Increased employee related costs and regulated acquisitions, increased O&M by approximately $10.4 million. From there, lower production costs, expenses related to our sale of our market based activities, and other factors decreased expenses by $14.8 million, getting us to an overall decrease of $4.4 million or 1.4% in O&M expense for the year.

The next page, looking at earnings per share, starting with our EPS for 2015 of $1.14 and adding in the adjustment of $0.12 for the impairment of the JV pipeline, as we mentioned earlier, brings us to the 2015 adjusted income of $1.26. From there tax repair benefits, rates and surcharges, and regulated growth, accounted for an increase of about $0.08.

We also saw some minor earnings from our remaining market-based activities and consumption. And from there, higher expenses and other factors decreased EPS by approximately $0.02 net, resulting in the $1.32 we recorded for the year.

Moving on, let's take a look at our rate activity schedule. Recapping 2016 from a rate perspective, Aqua America's regulated subsidiaries received rate awards and infrastructure surcharges in six of our eight states, with an estimated increase in annualized revenues of approximately $5.6 million; including $1.1 million of revenues recognized under interim rates during 2015.

Thus far in 2017, we completed rate cases or surcharges in three states with $3.7 million in additional revenue. We also have a rate case pending in Ohio, requesting an additional $5.6 million of revenue. Additional rate information can be found in the appendix to this presentation.

And with that I'll turn the call back to Chris, who will discuss our expectations for the future.

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Chris Franklin, Aqua America Inc - CEO [5]

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Great, Dave thanks. So let's take a look at what lies ahead. We continue to be very excited about our opportunities, particularly our growth opportunities and particularly in water and wastewater. Among our top priorities for this year 2017, we plan to continue to grow our rate base from both acquisitions and needed infrastructure improvement. In fact, we'll again spend CapEx at record levels next year.

We'll focus on our operating efficiencies and this is one of our hallmarks and we won't lose sight of operating efficiency. We'll also focus on our safety programs as we want our workplace to be the safest in the industry and we'll continue our tremendous focus on safety programs.

We'll also continue to focus on succession planning; as we know there's a wave of utility retirements coming through in most of the utility industry and we plan to be very prepared for that wave as we build greater diversity in our Company and greater depth of bench. I think we're doing that very, very well already.

Of course we'll continue to work on fair market value legislation, as this helps to fuel the growth in our municipal world and in states where it makes sense, we'll spend a lot of time in 2017 trying to get that legislation through the legislatures. So I'll close by reviewing our 2017 guidance that we provided in January.

On the next slide you'll see our full-year earnings per share guidance to be in the range of $1.34 to $1.39. On a same system basis, we expect O&M to increase only 1% to 2% for the full year and as always, we'll remain very focused on that aspect of the business.

We expect to invest more than $450 million in infrastructure in 2017. Again, this is another record for us. And more than $1.2 billion of CapEx will be spent over the next three years between now and 2019, which will continue to improve and strengthen our existing infrastructure for the customers that are already due within our footprint. Now these investments allow us to provide a high quality of service to our customers throughout that footprint.

When we spend capital, we talk about our capital budget of $1.2 billion over that time but we're also going to improve systems that are new to us; so new acquisitions and the improvements in those systems. That will be over and beyond our $1.2 billion CapEx budget. We don't budget for acquisitions or the improvements that are associated with those acquisitions.

We also expect to grow rate base as a result, approximately 6% to 7%. And regarding one of our most commonly asked questions, our PA rate case, we expect to stay with our original plan, we've been discussing for some time now; and that's to file a distribution system improvement charge in 2017 later this year and we'll follow then with a full rate case in 2018 with an expected resolution in 2019. Finally, year over year we expect our total customer growth to be in the range of 1.5% to 2%.

Now before we end the call, Dave and I would be happy to take any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator instructions)

David Cater, Baird.

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David Cater, Robert W. Baird & Co. - Analyst [2]

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Hello, thank you for taking the question. I was hoping you can provide some color on your 1.6% customer growth. What percentage of that was organic and is that level of organic growth sustainable, do you think?

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Chris Franklin, Aqua America Inc - CEO [3]

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Let's take a look at that piece of organic here to get it right for you. Our organic customer growth was about 6,500. And so the balance or 8,700 were from the 19 acquisitions we did during the year.

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David Cater, Robert W. Baird & Co. - Analyst [4]

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Got it.

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Chris Franklin, Aqua America Inc - CEO [5]

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I'm sorry. It's the other way around. So our acquisitions were 6,500 and organic growth was 8,700.

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David Cater, Robert W. Baird & Co. - Analyst [6]

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And is that level of organic growth something that we can think about going forward, do you think is sustainable?

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Chris Franklin, Aqua America Inc - CEO [7]

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Yes, I don't see why that wouldn't be a sustainable level of organic growth.

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David Cater, Robert W. Baird & Co. - Analyst [8]

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Excellent. Thank you. And lastly I was hoping if you could provide some color on what levers you have to decrease the O&M ratio and what are your long-term goals there, your efficiency targets?

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Chris Franklin, Aqua America Inc - CEO [9]

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Yes, so the challenge with what we called the efficiency ratio is, as you buy municipal systems and as we're in that world now of municipal systems, you have this delayed rate impact. So we will buy it, and typically it's a multiyear phase, where we wait for a rate case. And so as we do that, expenses slightly climb and then of course as we recover in rates, we would get that all back.

So over time, we have a nice, strong O&M to revenue ratio. As you look at it and this is the non-GAAP measurement that we used in the industry. We're at about 33.4% today and so it's very strong.

I think it's still the strongest in the industry, despite our municipal activity. But I would expect as we ramp up municipal activity, that expenses could front run revenues at least for a short period of time until we get rates. So it could impact that ratio slightly.

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David Cater, Robert W. Baird & Co. - Analyst [10]

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Got it. Thank you.

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Operator [11]

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Ryan Connors, Boenning & Scattergood.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [12]

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Good morning, thanks for taking my question. I wanted to actually, Chris, thanks for the reiteration of the timeline there on the Pennsylvania rate activity. But now that we're more into the tactical timeframe of this, I wonder if you could give us any modeling guidance on when you would actually expect the DSIC to begin actually impacting the P&L.

Would that be something you'd expect to see a little bit of that in the back half of this year or should we hold off on expecting any of that until 2018?

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Chris Franklin, Aqua America Inc - CEO [13]

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Yes, I think it's fair to say back half of the year certainly. And I think that's a very fair and I would say more towards Q4 than Q3.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [14]

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Okay. Good, that's good that's helpful. And then I was just curious, Ohio, you just got new rates there; another one in the pipeline, just curious what's the reasoning behind or the dynamics behind such rapid succession there in Ohio?

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Chris Franklin, Aqua America Inc - CEO [15]

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Well we have a couple of different things going on in Ohio, right, we have the regulated, fully regulated, which is the PUCO rates and we go in on a fairly regular cadence for that. And they have a, they don't call it a DSIC out there but a SIC and we then have the locally the regulated system. In Baseline, Ohio, for example, we go to the county and the county regulates.

So we go in for rates there but it's not the same that's going into commission, it's that those cases are reviewed locally and the rates are approved locally. So it's a much more, I'm going to use the word efficient, but in the sense that you're not prosecuting a full rate case the rate case expenses are a lot more efficient than they would be otherwise.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [16]

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Interesting.

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Chris Franklin, Aqua America Inc - CEO [17]

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I would say you have multiple rate divisions there, Ryan if you think about it. One large at PUCO and then two smaller, which are locally negotiated.

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Dave Smeltzer, Aqua America Inc - CFO [18]

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And you know, Ryan, Ohio is our second-biggest state and its obviously some very old towns that we serve where there's significant opportunity for infrastructure rehabilitation.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [19]

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Yes. That's good. I wasn't aware of that. That's good color. And my last one was just on the -- I realize you're mostly out of the market based businesses now but you do still have the service line protection and I noticed that there's new marketing documents that home serve is using an they're much more robust. Really it looks great actually. Might actually get me on board for the first time.

But is that something that you're aware of that they've really beefed up their marketing of that? And have they given you any forecast or expectation on their expectations of how that more aggressive marketing will impact uptake on the service line protection? I mean it's really a multipage brochure now with all these neat graphics and stuff. Is there any expectation that, that will accelerate that?

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Chris Franklin, Aqua America Inc - CEO [20]

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Remember the offerings today are a lot more robust than when we first started, when it was really a service line protection, water service line protection. Now the services are into wastewater, electric, everything else. So the offerings are much more robust.

What they call take-up rates or saturation in my mind, are already significant. So I don't have any projections as to what they think they can attain through their new efforts. But I would say that just looking at what they saturated in the states where they do business with us already, it's very, very strong.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [21]

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Okay. And then I apologize but one more, while we are on the topic, it comes to mind that this is a broad question for anybody in that business but how does the Commission's look at that? If someone subscribes to that, it goes on the water bill, right?

So I would assume they don't look at that then as part of your quote, unquote rates, when they're assessing total household wherewithal to meet the water bill and whatnot. How do the Commissions look at that when someone subscribes?

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Dave Smeltzer, Aqua America Inc - CFO [22]

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Yes, Ryan. It's Dave. Most of the Commissions don't really look at it very much. They recognize it's a nonregulated business and they allow that to go on unattached.

There's an occasional opportunity when the commission does take a look at it and incorporate into a rate case but we've generally only seen that in one state.

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Chris Franklin, Aqua America Inc - CEO [23]

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The fact is that it doesn't take really staff time or overhead from the Company. Since it operates largely independent, it really doesn't impact rates.

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Ryan Connors, Boenning & Scattergood Inc. - Analyst [24]

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Got it. Okay. Well, thanks for your time.

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Operator [25]

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(Operator instructions)

At this time we have no further questions in the queue. I would like to turn the conference over to Mr. Brian Dingerdissen for any additional or closing remarks.

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Chris Franklin, Aqua America Inc - CEO [26]

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Folks, this is Chris. Thanks for joining us today and if you have follow-up questions, we're always available. Thank you so much.

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Operator [27]

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Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation.