Brian Dingerdissen - Director of Investor Relations Nicholas DeBenedictis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Disclosure Committee, Chairman of Consumers Water Company, Chairman of Pennsylvania Suburban Water Company, Chief Executive Officer of Consumers Water Company and Chief Executive Officer of Pennsylvania Suburban Water Company David P.

Smeltzer - Chief Financial Officer, Executive Vice President and Member of Disclosure Committee.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division Spencer E. Joyce - Hilliard Lyons, Research Division.

Good day, and welcome to the Aqua America Incorporated Q2 2014 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen, Director of Investor Relations. Please go ahead, sir..

Thank you. Good morning, everyone. Thank you for joining us for Aqua America's second quarter 2014 earnings conference call. If you did do not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com or call Alex Whitelam at (610) 645-1196.

There will also be a webcast of this event available on our site. Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America; along with Dave Smeltzer, the company's Chief Financial Officer.

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 risks and uncertainties. During the course of this call, reference may be made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the company's website.

At this time, I would like to turn the call over to Nick for his formal remarks. After which, we will open the call up for questions.

Nick?.

Glenview, Illinois, which we talked about the last call; Mount Jewett, Pennsylvania; and Sussex Borough, New Jersey. Now Sussex still needs a vote a referendum, but all 3 still are going through the regulatory approval process, probably won't be effective in these transactions until '15.

So don't count at '15's growth, which we're now projecting to be greater than 2%. We really believe that the massive investment requirements now being recognized that are facing our nation's government-run water-wastewater systems is really driving municipalities to show interest in the public-private solutions to address this really growing problem.

That's why we see a future in the municipal market. We've also been expanding our heretofore fairly small nonregulated water-wastewater services business. Although approximately 2% of our revenues, our Aqua Resources unit should hit $20 million in revenues in '14. And that's going to be up over 30% from '13.

And net income, which is usually in the 6% to 7% after-tax range, should be up a similar amount. We recently were the successful bidder on a $6 million wastewater infrastructure rehabilitation company, Tri-State Grouting, in Delaware.

It serves the mid-Atlantic states, and we see actual potential in this company, and also more importantly, for this whole business line.

So you can see that despite revenues being severely hampered by the weather, management has been very busy to ensure our best-in-class operational performance while investing in numerous opportunities to ensure our future growth.

Meanwhile, the company, Aqua, remains a hallmark of consistency for our investors as the company proceeds this year on a path through our 15th straight year of increasing earnings and our 23rd straight year of increasing dividends. Thank you, and I'll take any questions..

[Operator Instructions] And we'll take our first question from Gerry Sweeney with Boenning..

I wanted to talk about, I guess, the Aqua Resources side of business and the Tri-State Grouting. But when you look at that business as a whole, I'm curious as to what's the strategy going forward? I mean, what do you want to grow that into? I'm not sure if that pipeline business falls under that category, and you have to create -- Tri-State Grouting.

And then maybe possibly -- I'm not sure if the O&M contracts fall under there.

But what do you want that to grow into? And what's the vision for that business line?.

Sure. The vision is to see it as a complementary function to the acquisition of municipal water and wastewater systems, chiefly wastewater.

As we started looking at wastewater systems, although there's less affinity to keeping the wastewater than the water for most municipalities, all of them are recognizing the need to cut back I&I to prevent -- I&I, being infiltration inflow -- to prevent fines and also excess cost. So we did a little televising.

We do a lot of service work for pumps and lift stations, and so on, with Aqua Resources. Now that's probably the most profitable and fastest-growing part of the line. But it's limited by geography, I mean, people -- higher people who they know, and they are reliable because these are not -- these are like "we need this fixed this year"-type contracts.

And we found this company, which was very, very successful but was capital and resource constrained. And the owners were willing to take a buyout -- a payout, excuse me, based on the fact that they're very confident they can grow the business at least 10% to 15% a year, which of course makes it more profitable too.

So I would argue that at a minimum, 10% to 15% a year growth. We're looking at some other ones, Gerry, so that would expand it revenue-wise more rapidly. But we want to make sure, as we always are, conservative. Walk before we run. We've been around 120 years. We're going to be around for another 120 years.

So we want to make sure what we're doing is successful. The second part of your question, related to the pipeline. The pipeline is a separately run business. We call it Aqua Infrastructure because it was an LLC, and we want to keep it separate from the services-type business.

And although pumping is up a little bit over '12 -- excuse me, over '13, we're still not seeing what we think is the maximum potential. I mean, we built a pipeline that can carry 3 million gallons of water a day, and we're not nowhere close to that.

On the other hand, it's still generating cash because we're depreciating so much in the assets so quickly. And although it is not adding anything to net income, matter of fact, it'll be probably for the whole year, lose about $0.01 versus last year's $0.01 loss too. The cash flow coming in will be a little over $2 million.

Last year, it was a little under $2 million. So it's not hurting us cash-wise, but we just are waiting for gas drilling to return. And at which point, we'll start seeing some good returns on the pipeline. They're -- it's not going away. It works. It's just a matter if you think drilling is ever going to take off again.

Does that answer your question?.

It does. And I know the pipeline's a good asset and good location. It's just when takeaway capacity increases, drilling is going to start up again..

Just a quick item, 50% increase, which is -- would be about half of what the pipeline could cover. Delevered factors are phenomenal..

Got it. Looking at the comment on the, I guess, the potential for municipal acquisitions, and I think you said the P3 opportunities that may be floating out there, can you give us a little bit of idea what type of size those P3 opportunities are? Will they be an Allentown size? Or is it smaller....

No, we're looking at pieces of systems so that we attack the problem they're having, build the relationship and then see where it goes from there. They're in the 5 to 20 range..

[Operator Instructions] And we'll go next to Spencer Joyce with Hilliard Lyons..

All right. Just one quick one for me. Nick, we saw over the weekend the news item out of the Northern Ohio area about some toxic allergy in Lake Erie.

And I guess I was just wondering if you could comment there, what your or Aqua America's exposure may or may not be to that particular situation?.

Sure. We worked with and offered help to the city of Toledo. That was a unique situation.

Algae formations come from different weather patterns, hot weather and lack of winds and dispersion of the algae, but the -- usually they occur -- they don't occur in free-flowing streams normally because you have aeration and dissipation of any kind of organic buildup for the algae to eat. But in a lake, you have all the potential for it.

It would be like the Chesapeake Bay, natural Chesapeake Bay, artificial and natural great lakes, artificial for man-made lakes.

When you do a man-made lake, you build in the perspective flow through, taking water from the bottom versus the top, and so on, to prevent any kind of thing, like an algae buildup, from preventing you from disrupting your water supply system.

But in a shallow area, Chesapeake Bay had waters natural that the western end of Lake Erie, where you have a buildup and you have a couple of big cities and you have shallower and lack of -- the wind actually pushes it into the cove, and that's where the intake unfortunately was for Toledo. We're on Lake Erie also.

We have two water systems, Ashtabula and Lake Mentor. We readjusted our intakes. And I think we're in better shape there but also the much deeper part of the lake. So we have not seen the blue-green algae buildup in those areas. Now when we ever find -- and it's not always blue-green algae, there's all kinds of different algaes.

Most of the problems, Spencer, are taste and odors, not toxic. This particular type of algae, if you break down the cellular unit, releases a toxin, and that was the fear. I don't want to downplay it, but I think once the press hears the word toxin, it becomes a lot more elevated than probably the real health risk is. I don't want demean it.

It definitely shouldn't have been there. It definitely should have been screened out before it got into the water system. But it's not like Ebola, okay, which this is sharing the news with. On the other hand, we didn't have any on the western end of the lake. We looked for it obviously, always look for it.

And it's weather dependent, wind dependent and how shallow the lakes are. You can dissipate it either by mechanical means. Sometimes, you'll see a small reservoir, with an aerator in it. That's really to get rid of the algae. And the second would be, there's chemicals you could apply to it to dissipate it and kill it. That's like copper sulfate.

And sometimes, in an extreme buildup, the regulators will let us use it. But most of the time, they want to do it mechanically. So I hope that was helpful..

Yes, very informative there. And I guess just for this particular incident, you did mention Toledo was able to lean on you guys as a resource, perhaps a little bit. But again, no real direct impact to you all whatsoever..

No, no. The state was involved, and I think they handled the PR pretty good..

[Operator Instructions] We'll go to a follow-up question from Gerry Sweeney with Boenning..

Follow up on -- I want to talk about the tax rate real quick. I know repair tax accounting create -- or influences the tax rate dependent on how much money spent on which project in the state of Pennsylvania, et cetera.

Is there any way you can give us any type of guidance as to where some of that is going to fill out for even Q3 or Q4? I mean, just looking at your CapEx budgets, where you're spending money now should give us an -- give you an idea what those projects are, whether or not they're eligible for the repair tax accounting, the flow-through side.

Can we get any info on that?.

Yes, I'll start, and let Dave fill in exactly on the tax rate. The very positive aspect is we filled up NOLs with the repair tax catch-up mechanism and so on, to the point where we -- and again, this is great for cash. We don't anticipate having to pay any taxes for 2016 at the current levels and that depends on bonus depreciation being not reenacted.

If it's reenacted, we may even go a year further. So the positive aspects from a cash standpoint, which is what's allowing us to do all this capital investment without floating equity and requiring major rate increases to Pennsylvania, has been very, very positive from operating the business.

And the specific tax rates, which really get to the long-term approach, and I thought -- I think because most of the misunderstanding in 2013 as to this wasn't a long-term program, really has proven out. And Dave can give you some numbers..

Sure, Nick. Yes, Gerry, there are a couple of numbers I can give you. When we book income taxes in general, the concept in booking income taxes is not to look on a quarter-to-quarter basis but to look at the year. So by the second quarter, we should have a pretty good look at the year.

And you'll see, as of the second quarter on a year-to-date basis, our effective income tax rate is about 10.2% at Aqua America. So that means that we projected through the year end, and that's what we expect it to be.

So there's only the chance, as we get closer to the year end, an additional couple of projects will close, or perhaps a couple of projects won't get done, and that effective tax rate could be changed slightly from that estimate. But that's where we are year-to-date, and we're there year-to-date because that's where we expect to be by year end.

As we look forward, beyond 2014, we do see a slight uptick over the course of the next 5 to 10 years in that effective tax rate. And by slight I mean, it could move into the teens, for example, over 5 or 10 years. So we don't see anything dramatic happen. We see it being very, very stable, and in particular for the balance of this year..

Okay, that's helpful. And then one other question, Nick. It came up on the last call. There was some talk about maybe succession plan in Aqua America. I'm not sure exactly when your next contract up, and I know you serve at the pleasure of the board, and there was a little bit of some questions around that the last call.

Care to elaborate on that? Or if that's still up in the air or something?.

My contract's up in the mid-2015. The work -- the board is actively working on succession planning, and we have really nothing definitive to report. I'm hoping by the year end, we could be more definitive..

It appears there are no further questions in the queue at this time. I'd like to turn the call over to Mr. DeBenedictis for any additional or closing remarks..

I just want to thank everybody for being on. Thank you..

That does conclude today's conference. Thank you for your participation..