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Aqua America Inc (NYSE:WTR)
Q2 2018 Earnings Conference Call
Aug. 2, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Brian Dingerdissen -- Vice President, Chief of Staff and Investor Relations

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 three, 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'll recall, we 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.

Chris Franklin -- Chairman, Chief Executive Officer and President

Hey, thanks, Brian, and welcome, everybody. Thanks for joining us. Today we have got several important topics on the agenda. As we discussed last quarter, we have some key organizational changes taking effect; Brian alluded to this moment ago. This will likely be Dave Smeltzer's last earnings call. He has 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 is currently -- Dan is currently our Executive Vice President of Strategy and Corporate Development and he has 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 closed a good number of acquisitions and made fairly substantial investments in infrastructure in Pennsylvania throughout that time. And I will 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 use for the first time, and 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 in many cases, and we've talked about this in many forums before that, 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 could really be helpful with. And over the last few months, we've closed two 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 bit more detail in few moments. And then, lastly on the agenda, as we typically do, I'll review the guidance and take any of the questions you might have.

So we turn to the next slide, and look at some corporate highlights for the quarter and year-to-date. I have to begin again with just a couple more thoughts on the municipal acquisition strategy. The plan that we laid out nearly three years ago now has been bearing significant fruit with the two recently closed municipal acquisitions; Limerick in Pennsylvania and Manteno in Illinois, and an additional six 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 would say, again, 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 this 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 plans 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 lastly, couple of 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 five years we've had nice growth in dividend, comes to a 7.6% CAGR and we remain committed to rewarding our shareholders in this way. The new quarterly dividend will be nearly $0.22 per share, a 7% increase from prior dividend amount and 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 of 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 it. Dave?

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

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 in 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 non-recurring 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 peel, 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 that it would be advantageous to us to increase the facility and be more in line with our peer companies.

So with that, we'll 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 is 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 non-recurring items, like I mentioned, and so let's move on to side 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 non-regulated division -- one of our non-regulated 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 2018 compared to $69.6 million last year. Taking out non-recurring items, the increase in O&M expense would have 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 non-recurring items, the increase would have been in line with our historical run rate.

So next let's look at EPS on slide 13. In 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 non-recurring 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 have 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 three years, I am really amazed by his work ethic, his ability to grasp all aspects of our business and his ability to lead his fellow employees. He is really the whole package. And while I am 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?

Dan Schuller -- Executive Vice President, Deputy CFO

Dave, thanks for that introduction and certainly for your kind remarks. I appreciate all the support that you have provided to me during my time at Aqua and I thoroughly enjoyed getting to know you better during these past three years. Your legacy at Aqua is truly impressive. You helped create the Aqua that we know today and have provided us with strong foundation on which to build. Thanks for that Dave.

With that let's discuss our rate activity thus far this year. So far in 2018, we completed rate cases or surcharge filings in seven of our eight states, resulting in $20 million in additional annualized revenue. We also have rate cases or surcharges pending in Indiana, North Carolina, Ohio and Virginia. We're requesting 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 the rate case in Pennsylvania since 2011. Thus, this is our first Pennsylvania rate case in seven years, which is considerably longer than the usual cycle of filing every two to three years. If you follow Pennsylvania PUC activities closely, you may have seen that we intend to file no later than August 17 [ph]. In the timeline 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 have 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 [ph] have invested more than $2 billion capital for fleet 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 us to include our projected investments and expenses for the first full year after rates take effect. And of course, tax related matters will be important components for the rate 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.

Chris Franklin -- Chairman, Chief Executive Officer and President

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 in preparing him to be our next CFO. And I got to say, it's through 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 is needed for testimony or additional work on the case beyond October, Dave has agreed to generously stay with us into early November. But in an 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 formerly 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 has 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 reasons, but I know and I'm certain to help build on the strong track record that Dan and his team have established over the last three years.

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

Matt Rhodes -- Executive Vice President, Strategy and Corporate Development

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 have been impressed by the work completed to build the platform for growth. The results we are reporting today related to acquisitions are a reflection of the efforts of Dan and fellow Aqua leaders including our State President who is 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 two 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 two acquisitions and the three 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 a 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 reflect 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 six systems we signed purchase agreements. Since then, two of these have now closed, Manteno and Limerick, as we just discussed. You can see that we now have a revised list of six agreements with municipalities. This includes two new deals, one being System H in Illinois and the recently announced signed asset 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 account that we have 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 slide 18 and 19, we have deals totaling over 27,000 new customer connections with municipalities and over $200 million in purchase price.

Moving onto slide 20, let's provide an update on our legislative initiatives. I think one of the things I didn't fully comprehend on this when I joined Aqua was just how much work has been completed on the regulatory and legislative front. From the DSIC mechanism that Dave was instrumental in starting in Pennsylvania over 20 years ago to the more recent fair market value legislation risk 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 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.

Chris Franklin -- Chairman, Chief Executive Officer and President

Thanks, Matt. Nice job. Glad to have you on the call.

Matt Rhodes -- Executive Vice President, Strategy and Corporate Development

Thank you.

Chris Franklin -- Chairman, Chief Executive Officer and President

Lastly for today's call, we'll review the guidance, 2018 guidance and I would 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 2018. Again, this is a record amount for us and approximately $1.4 billion in CapEx over the next three years, that's through 2020. It's important to note that this CapEx doesn't include any investment in additional systems that will be acquired. So the full CapEx would be likely higher when we look back in 2021 and through these years. Rate base is expected to grow at approximately a 7% clip over the period, and as Dan mentioned, we'll be filing the Pennsylvania rate case later this month.

Year-over-year, we'll grow our customer growth between 2% and 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 into 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, just to make a couple of final points here. One is that the company, the base company continues to perform in with excellence. We don't really 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 team led by Rick.

Second point I'll make is that for last three years, Dan Schuller has 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 has 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 succession 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

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

Ryan Connors -- Boenning & Scattergood -- Analyst

Great. Thanks for taking my question. Actually, the first one I had was just little bit more of a housekeeping item. The JV line was a nice tailwind and I assume that was the pipeline JV, pretty major jump sequentially and 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?

Chris Franklin -- Chairman, Chief Executive Officer and President

Yes, good question, Ryan. I'm going let Dan field it, but I think the first one is, yes, good news and that we've taken -- we've written it down couple of years ago, 2015, as you know and we're pleased with the contract. We have a multi-year contract in place now. But in terms of its growth, I will let Dan and Matt field that.

Dan Schuller -- Executive Vice President, Deputy CFO

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, and 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. It's hard to have visibility too far out in these situations. I mean, we have some visibility to what they're going to request in terms of water delivery, but there is only so many months of that that we really can see. But our understanding from how things are shaping up in the basin is, still we should have a good year this year and another good year coming up.

Ryan Connors -- Boenning & Scattergood -- Analyst

Great, that's helpful. Next I 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 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?

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

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. 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, yes, 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 will do little bit less repairs. But as we look forward into the future test year, in fact the Fully Projected Future Test Year, we have projected the level of repairs which will take place during that year and there is 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 tendency of those rates, we will be in a position to deliver a fairly constant rate reduction in income taxes. And so that's unlikely to be an issue that provides a significant benefit for the shareholders or any detriment in the context of that three-year period between rate cases.

Ryan Connors -- Boenning & Scattergood -- Analyst

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

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

Yes, there is a chance the rate changes once the new rates go into effect, but that change will be a fairly constant item then for the three-year duration of the rates.

Ryan Connors -- Boenning & Scattergood -- Analyst

I see. 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?

Dan Schuller -- Executive Vice President, Deputy CFO

You are correct, Ryan, that Limerick has not been included in the current case, the case we are about to file. In terms of others, so for example, others that haven't closed yet obviously would not make this case either.

Ryan Connors -- Boenning & Scattergood -- Analyst

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

Chris Franklin -- Chairman, Chief Executive Officer and President

That's right.

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

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

Dan Schuller -- Executive Vice President, Deputy CFO

Yes, that's sort of the many [ph] 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 will be included in the 20, the later case down the road.

Ryan Connors -- Boenning & Scattergood -- Analyst

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?

Dan Schuller -- Executive Vice President, Deputy CFO

It's hard to give much of an update there. Obviously, you know it's been a (inaudible) and we'd expect some proceedings starting in September related to that.

Ryan Connors -- Boenning & Scattergood -- Analyst

Okay. Okay, well, thanks for all your time this morning. Best of luck, Dave.

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

Thanks, Ryan.

Chris Franklin -- Chairman, Chief Executive Officer and President

Thanks, Ryan. Take care.

Operator

(Operator Instructions) At this time, we have no further questions, I'll turn it back to Mr. Franklin for closing comments.

Chris Franklin -- Chairman, Chief Executive Officer and President

Well, thank you again for joining us today. And again, congratulations to Dave and obviously we'll always be prepared to answer your questions you might have that you think of after the call. So enjoy the rest of your day. Thank you.

Operator

Ladies and gentlemen, that concludes this morning's presentation. You may disconnect your phone lines and thank you for joining us today.

Duration: 31 minutes

Call participants:

Brian Dingerdissen -- Vice President, Chief of Staff and Investor Relations

Chris Franklin -- Chairman, Chief Executive Officer and President

Dave Smeltzer -- Executive Vice President & Chief Financial Officer

Dan Schuller -- Executive Vice President, Deputy CFO

Matt Rhodes -- Executive Vice President, Strategy and Corporate Development

Ryan Connors -- Boenning & Scattergood -- Analyst

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