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.

Michael E. Gaugler - Brean Capital LLC, Research Division.

Good day, and welcome to today's Aqua America Incorporated Q3 2014 Earnings Call. Today's conference is being recorded. At this time, it's my pleasure to turn the conference over to your host for today's call, Brian Dingerdissen, Director of Investor Relations. Please go ahead..

Thank you, Jason. Good morning, everyone. Thank you for joining us for Aqua America's Third Quarter 2014 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, or by calling 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 David 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 up the call for questions.

Nick?.

Thanks, Brian. Good morning everyone. I'm pleased to report another solid quarter with revenues up 4%; earnings from continuing operations up 9%, $0.38 versus $0.35; and expenses kept in check with a growth rate of about 1%.

We had a slow start in Q1 due to the abnormally bitter winter weather, but Aqua is now on its way to our 15th consecutive year of record earnings.

Effective with our third quarter dividend payment on September 1, we raised our dividend 8.6% to $0.66 annually, and that was the 24th increase in 23 years, representing an 8% CAGR growth over the past 10 years. Some areas I'd like to highlight to complement our press release. We're very pleased with the revenue growth of 4%.

Breaking it down for you, 2% was from the 7 non-Pennsylvania states, where the traditional model is in effect. Capital investment, rate relief, acquisitions, and they were all positive factors during the quarter for those 7 states.

We did see a 1% of our revenue growth come from Pennsylvania mainly due to a rebound in consumption over the depressed '13 summer. Although it wasn't a great summer, it was better than '13. And we did see some new growth in revenues from water and wastewater acquisitions we've done over the past year in Pennsylvania.

And then the other 1% came from our profitable unregulated businesses. Our expanding unregulated business sector has grown from about 2% of revenues in '13, and we expect it to grow to about 3% of revenues in '14. Still small, but it's growing so rapidly, it's -- it does represent some of our revenue growth each year.

Now our revenues, our 4% revenue growth increase was despite another quarter, we were able and positively to avoid any rate increases, therefore, revenue growth in our largest state, Pennsylvania. I really feel great about this.

We've invested $0.5 billion on water quality improvements and infrastructure since our last rate relief in Pennsylvania, which was mid-2012, and we have not had to raise rates. Thanks to the benefit of the tax repair treatment policy in our 2012 Pennsylvania PUC rate order.

And it's just been a steadying influence on how we run our business, but also on our earnings despite not increasing revenues. Our industry-leading cost efficiency record for our regulated businesses and, of course, adjusted for purchase water remains less than 35% and is intact as industry leading standard.

Although we had an unexpected outlier in Q1 due to the cold winter, where we had a pretty dramatic increase in O&M for that quarter, we've had 2 straight normalized quarters. Third quarter was a little bit more than 1% increase. And we expect to end the year with an O&M expense increase, including that bad first quarter at -- in the 2% to 2.5% range.

So still well under control. CapEx spending is on target to hit our goal of 3.25% this year, and we've invested 220 to date.

Once again, the cash generation achieved through our growth in revenues, tight expense controls and our low borrowing costs made possible by our recently reaffirmed A+ S&P rating, has allowed us to grow to over $50 million in excess -- $50 million of cash in excess of our capital spend for the 9 months.

So this definitely reinforces our earlier statements of no need for new equity in our 5-year plan, and we actually bought back 500,000 shares during the quarter to minimize dilution. I'm very pleased with the pick up in our growth through acquisition program, which is showing increased activity in all our states.

We completed 13 acquisitions to date this year, and we expect to exceed 1% customer growth in the 15 acquisitions from last year. So we're starting to see finally a turnaround in housing, but more importantly a little bit more aggressive approach from our Corporate Development people on the acquisitions.

There were 2 notable acquisitions I wanted to note and recognize. They were in the release. We bought a Texas water -- wastewater company that had 9 separate systems. It was a mini Aqua in 4 counties in Texas, served about 3,000 people. It was called H2O, and we bought that for $2.8 million. And we've bought Caroline Water from a private investor.

Caroline County, Virginia, and we've invested $3 million in this system. And that serves another 3,000 people. It showed a little pickup in our nonregulated O&M business, which is a piece of the unregulated. We won contracts in Lake Station, a new water plant in Lake County, Indiana.

We won the contract to run the Southwest Delco Municipal wastewater plant and collection system in Pennsylvania. That's a 10,000 customer system. And these -- we also were awarded by Sun Logistics, the operation to run their waste treatment plan for 5 years in New Jersey. Looking ahead, I'm comfortable with first call of $1.19, $1.20.

Most of the analysts are grouped in that area for '14, but would like to note it appears we will finalize the public-private transaction we've mentioned before on Fort Wayne sometime in late November or early December.

We received final approval from the Indiana utility regulatory commission and the negotiations with the Fort Wayne administration and lawyers is being finalized as we speak.

Now we've been carrying Fort Wayne water assets as discontinued ops since Q1, but I did want to remind you that our numbers that we just gave you on being comfortable with first call don't include a positive $0.07 or so to our GAAP earnings in the fourth quarter this year, assuming we closed before the end of the year.

Probably more important on this transaction is that we're investing over $15 million in our continuing operations in Fort Wayne, where we will run the wastewater system for the suburbs at Fort Wayne.

And we also -- that's complemented by a 15-year deal with the city to process us a -- up to 5 million gallons on their wastewater flows, and that will support the -- help support the expansion of the plan that we're doing as we speak. All in all, a solid quarter. And I think we're in position for another positive year in '14.

If we look forward to '15, I'm confident the same positive trends will continue. Everything is in place. The success of the tax repair program I think will allow us to spend record amounts of CapEx in Pennsylvania, that we're anticipating $0.25 billion of spend just in Pennsylvania.

And because of the effectiveness of the tax repair program, we don't expect to see great relief, at least through the first half of '15. Revenue growth will come from growth through acquisitions, rate relief in the other 7 states and further expansion of our unregulated business sector.

And hopefully, an uptick in the Marcellus shale drilling, therefore, water sales -- increased water sales will cut the $0.01 or $0.015 losses we're now experiencing in the joint venture.

So most analysts are grouped in the $1.25, $1.26 area, which I am comfortable with, and I feel like we can achieve by running the company with the same kind of operations as we did in '14. Now also in '15, my actual employment contract is up. I like to briefly discuss where we are on the succession planning project.

We did give you indications of this on the May and August earnings call. My contract as CEO runs through the end of June '15. The board is actively conducting a succession planning project. I plan to stand for reelection for as CEO and Chairman.

And then, when and if -- not if, when, a new CEO is selected, would stay on as Chairman, but would seed the CEO role to the new person, the board has asked me if I would stay on beyond June 30 in case someone is not in place right at the right time. I said, yes, that's no problem. So I think we have a good transition plan in place.

And I think it will give continuity to the way management has run this business and continues to run it as one of the best in the industry.

Any other questions?.

[Operator Instructions] And we'll take our first question from Michael Gaugler with Brean Capital..

Got 2 questions for you, Nick. Kind of first on the joint venture since you kind of -- that was kind of your end commentary. Some new end market developments there. We've got a couple of new pipelines going into construction soon, Constitution pennies, Central Penn should all increase water demand.

And then with oil prices falling, I would think that would drive activity more towards the dry shales like Marcellus.

So just kind of wondering if you're hearing anything or seeing anything positive from customers about future demand given those developments?.

Well, you have -- you've outlined exactly why we're still optimistic on the pipeline. Albeit it's -- it delayed optimism from where we were 3 years ago when we earned $0.01 the first year, and we thought it will go to $0.03, then $0.06, then $0.10 by '15.

We're not -- none of what I mentioned earlier in projections assumes anything, but continuing to lose maybe $0.01 and have a slight drag on our -- now why is that? The pipeline works and it is absolutely replacing truck traffic, and when somebody drills, they use the pipeline.

The problem is the wells are so prolific that they're drilling fewer wells because the pipeline capacity is utilized by the existing wells. You can't drill another one until there is space. EGI's big proposal to take gas to Jersey and to Philadelphia is moving ahead.

They have the contracts with the LDCs, and it's going to happen, but you're looking at '17. There's 2 other pipelines, however, that are completing this month, which we think will take some of the relief off the pressure of the Marcellus.

Marcellus actually sells less than the Henry Hub because you can't get that out, so they have to sell it to a select group of customers where there are pipelines and this new national pipelines, where the gas will actually flow the other way basically. I think we'll help at least levelize the pricing and, therefore, more drilling in the Marcellus.

So it's -- as you know, how I feel, it's Pennsylvania's future. We are now the second largest producer of gas and we -- you need water to do the drilling. And although the legislature is talking about taxing these drillers more, and I assume they'll replace the tax they already pay, nobody is talking about like New York.

We're not going to allow drillings. So I think there's a solid future. I just -- we just feel like our forecast, we don't act like there's going to be any kicks. So it's all upside, if you're right and the things are turning.

Is that helpful?.

It is. And then just one other question. Any update you can provide on when you're thinking about in terms of timing in the next PA rate case, would be helpful..

Well, the numbers are coming in so positively, and we're able to be so efficient in the way we're planning the CapEx. And with interest rates, we just renegotiated and came down again on some new debt. We're now under 5% for all our debt with an 18-year life and our last deal was 1.92%.

Our carrying costs are very low, and that's allowing us to continue to earn our fair keep. So we now think the earliest would be sometime through the first half of 2015. So we don't see anything happening in '14 and nothing through the first half of '15.

Now that could change in a minute when interest rates that's going up or if sales drop, but if sales come up and we continue to do acquisitions, they are profitable, and we keep stretching that out, even though we're putting records amount of capital in.

It does hurt the traditional analysis of revenue is because remember, the earnings are coming in through the tax line, not the revenue line..

[Operator Instructions] And it appears at this time, that we have no further questions. I'd like to turn the call back over to Nick Benedictis for any additional or closing remarks..

I just thank you very much for your attention, and appreciate your time. Thank you..

This does conclude today's conference. We thank you for your participation..