Brian Dingerdissen - Director of Investor Relations Nick DeBenedictis - Chairman, President & CEO David Smeltzer - CFO.

Jeremy Roane - Hilliard Lyons.

Good day, and welcome to the Aqua America Incorporated Q4 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen, Director of Investor Relations. Please go ahead, Sir..

Thank you. Good morning, everyone. Thank you for joining us for Aqua America's fourth quarter and full-year 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 Nick 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?.

Thank you, Brian, and thanks, everyone, for being on. Greetings from Philadelphia where our most recent snow squall just flew through and I'll apologize personally for our famous Pennsylvania groundhog’s bad prediction on February 2, but good news is coming tonight.

The world renowned Philadelphia Flower Show opens, which is the traditional start of spring here in Philadelphia. So fortunately for the past 23 years, it's always been a little brighter for me at Aqua weather-wise and numbers-wise, and 2014 was no different. So happy to report our update this morning.

We ended the quarter and year-end on a strong note.

We finalized our portfolio rationalization program with assigned public-private partnership with Fort Wayne, which allowed us to profitably sell our water system and settle all the various litigation, while expanding our waste water system, assuming a portion of Fort Wayne’s wastewater flows and providing for growth into the future in Allen County.

That’d be the equivalent of 10,000 dwelling units which compensates for the sale of the water system to the Fort Wayne. We also closed three water system acquisitions in December; two in Ohio, one in North Carolina, bringing to 16 for 2014 where we had predicted we do 15 to 20.

And customer growth at 12,000 - little over 12,000 or 1.3%, which is in the high end of our last two, three years.

Today's financial update reinforces the consistent and solid results our investors have been used to as the result of our executing on our proven business model over two decades of investing capital in infrastructure, while keeping customer rates reasonable through industry-leading operating efficiency and using those savings to help put more capital in without having to raise rates.

Spreading our overhead over a growing customer base through our growth through acquisition program, the value of acquisitions not only is for capital infusion, but also the fact that they help pay the bills for your existing customers and keep rates modified.

We continue to maintain one of the strongest financial positions in the utility industry S&P A+ for Pennsylvania. In this year, we hit a new landmark. We lowered our embedded cost of debt on over $1.6 billion to 4.85%.

And with today's filing of our 10-K, this is the business time of the year when all the proxy material has to be reviewed and I have to – let you know it's a pleasure leading a company with clean books and a clean company.

We have little goodwill on the books, have never had a reportable SOX control issue and that's attributed to our CFO, Dave Smeltzer and our CAO, Bob Rubin who are with us this morning.

Our environment compliance remains one of the company's highest priorities and we have them - I think we're down to 3% spending on our capital that has to be spent on environmental compliance. And now we're beginning investing in a growing and complimentary non-regulated business line, which I'll talk about little later.

In the theme of consistency, I'm pleased to report our 15th straight year of record earnings in Aqua with net income at $2.33 or up $12 million or 5.4%. EPS for ‘14 is $1.31 versus $1.25. And for the quarter, net income due to the Fort Wayne sale was $0.38 versus $0.32.

But I think equally important, and probably a better indicator of ongoing business, now that our successful portfolio rationalization program which was all sold at a profit by the way, there were no losses taken is basically completed. Our income from continuing ops for ‘14 was $2.14, up $11 million or 5.4%.

Income from continuing per share was $1.20 versus $1.15. And for the fourth quarter, we were at $49 million, up 5.8%, and EPS was $0.28 versus $0.26, up 7%. So pretty healthy numbers.

Operating revenues were up 2.4% over last year despite some adverse weather influences, and also recognizing that this slowed revenue growth is actually a testament to the solid performance and operating efficiencies of our regulated utilities, now that we've been able to continually invest over $300 million a year without any significant need for major base rate cases by using the state adopted water - wastewater infrastructure surcharges, tax policies, and of course efficiency.

Our net income results remained strong due to the Pennsylvania tax repair program.

Even though the Pennsylvania program has no direct effect on revenue levels, actually it diminishes the revenue growth in ‘14, but due to the continued success of this program which was outlined in our 2012 state rate order, we've now gone over three years since the Pennsylvania rate filing or the water disc.

And during this period, we've invested over $575 million on water quality infrastructure without having to raise rates. So this treatment required in the order has been a steadying influence on customer rates and Aqua’s earnings in addition, even though it hasn’t increased our revenues.

With the cost efficiencies we are finding in both our capital and operating expenses in Pennsylvania, I honestly believe we may be able to continue to stay out of rates through ‘15, obviously absent anything unusual or unexpected. Now, although we only get 3% of our total revenues, I don't want to overstate this.

Our non-regulated revenues grew 40% last year, up to the $24 million mark. More importantly, net income from these businesses grew 75%, not a very healthy level, but up to $1.6 million. And of course, they generated free cash.

In late ’14, we acquired two new non-regulated businesses to supplement our other water and wastewater services business in the Aqua Resources subsidiary, which we run separately.

And these new business lines include the cleaning and repair, sanitary, wastewater lines, installation and testing of devices that prevent contamination of portable water that's called cross connection control or backflow and specific training we give now to water utility operator.

Given the magnitude of where water and wastewater infrastructure spending is going over the next 20 years, depending on which estimate you want to believe $0.5 billion to $1 billion in the U.S.

alone, we believe there are sound growth opportunities in these key service business lines and we're hoping to expand these business lines and expect to grow the revenues with these two new late year acquisitions over $30 million in ‘15.

Regarding our Marcellus, which is our other non-regulated investment, we remain confident in the long-term prospects, but don't really expect ‘15 to see anything more than the same depressed levels we saw in ‘14. Last year this operation lost $0.02 a share and we see it being about the same in ’14.

And that will be in any kind of numbers we talk about at the end regarding first call. As usual, cost controls remain a very important part, an integral part of our business model. Our industry-leading efficiency ratio, the regulated only adjusted for purchased water was 34.7% for ’14.

And not only were O&M expenses held in check, but the combined results of our depreciation and amortization and other taxes interest and the O&M, actually resulted in a $0.6 million - $600,000 decrease in cost between ‘13 and ’14. We're very proud of that.

And our industry-leading EBITDA, as a percent of revenue, grew to 56% for ‘14, again an industry-leading ratio and that's where we get the financial wherewithal to conduct our healthy CapEx program, which is a multiple of depreciation. CapEx spending for the year was at our target coming in at 3.29%. I think, we said 3.25% was our target.

For the next three years, we expect to spend approximately $1 billion in capital. And once again, cash generation achieved through our growth in EBITDA complimented by low borrowing costs I mentioned earlier, the 4.85% weighted costs, and on new placements we’re actually getting much better than even that.

Once again, our cash generation exceeded our capital spent for the year, and we expect it to do again in ‘15. This reinforces our earlier statement and consistent statement that we don't see any need for new equity in our five-year plan. And we actually brought back 560,000 shares during the year to avoid dilution from our management equity programs.

We have 125,000 shares remaining from the former buybacks still available, and in late December, our Board authorized an additional 1 million share buyback. And just as we planned in ‘14, we expect the new plan will offset any natural share dilution and be accretive to earnings.

I'm very pleased with the pick-up in our growth through acquisition program, which is showing increased activity in all our states. I mentioned earlier, we completed 16 acquisitions of regulated water and wastewater systems, and that includes organic - about half is organic half is new.

The organic really perked up in two states; North Carolina and in Texas. More importantly, we have a solid backlog of acquisition opportunities that we expect will lead to greater customer growth in ‘15. Recently we've done a comprehensive study of our water and wastewater utilities residing those that are in the states we already serve, the 8 states.

And the analysis suggest that number of appropriate acquisition opportunities, worthy of our view, and it's a point of refocusing our effort on certain ones versus just chasing every operation in the state. So I think, honestly, we remain more bullish than ever. I mean, I've been talking about this for over two decades.

And for two decades, we've been churning out over 300 acquisitions, but I do remain bullish regarding the ability to continue to grow through acquisition and facilitate long-term earnings growth at Aqua. In ’14, we received $12.3 million in rate increases, key cases were New Jersey earlier in the year.

North Carolina mid-year and Ohio later in the year, it was September. And given the solid returns in our regulated operations across the board and the lack of rate activity possibly needed in our largest state, we don't expect ‘15 to be anything more than similar to ‘14 levels.

On the regulatory front, we're pleased that our state regulators continue to recognize the benefit of new mechanisms to streamline the recovery of key capital cost and facilitate the acquisition of municipal water and wastewater systems.

Just recently, the New Jersey Water Infrastructure Protection Act was signed into law, and that intends to facilitate the acquisition of municipal water and wastewater systems. Similar legislation was enacted in Illinois. In 2014 a new disc was approved in New Jersey and in Pennsylvania.

Wastewater rate have always had the water mechanism and North Carolina approved a new disc mechanism for the North Carolina subsidiary. It was done as part of a rate case. We filed for and are in a process of supporting the request for a disc mechanism in Virginia, which again was done through the regulatory mechanism.

And the Illinois legislation is working. We signed a deal in Illinois as letter of intent and agreement to acquire municipal system made possible by this new Illinois process of valuation. And hopefully that deal will close in ‘15 and we're looking at some other possible transactions in Illinois.

For shareholder value, our third quarter - we raised a dividend for the 24th time in 23 years. Dividend went up 8.6%. The CAGR over the last ten years of dividend growth has been 8%, and we delivered 15.9% in shareholder value compared to 13.7% for the S&P 500. Something timely is my contract, which ends on June 30.

We've talked about this in a number of recent earnings calls. The Board and I are actively working with an outside consultant on the succession process and project to ensure timely and appropriate transition. The project is on track. We fully expect to name a new CEO before I retire.

Having said that, I plan to retire as CEO, I still will stand for reelection to the Board in May. And if elected, plan to continue to service Aqua’s Chairman. And our thinking is this plan would allow for a smooth transition in responsibilities and leadership for Aqua’s next CEO. I remain excited about the future.

I believe ’15, a base of 5% growth rate is attainable, even though we're going to remain out of rates in our largest subsidiary, ad therefore remain comfortable with the present first call consensus of 1.27%, although quarterly first call estimate sometimes needs some fine-tuning.

Two questions that have come up on a lot of calls, I thought I’d hit them upfront; one is the weather. In that sense, all of that you on the East Coast know all too well what it’s been like. Although we had seen fewer breaks this year, it's been a colder winter, less snow but colder winter, for at least for the greater Philadelphia and Ohio and so on.

But the extreme cold has caused a lot of in-house breaks and so on, we call them, no water calls, that means your pipe is frozen. And that's expense on our part to serve customers and help them out, even though it's on their side as the service line.

So I think that you always look for a silver-lining, still less breaks than last year, and let's take our biggest subsidiary of the 260 main breaks we've had so far in ‘15, none have been on any new ductile iron pipe that we've been installing over the last 20 years under our disc and infrastructure program. So let's hope for hot weather.

And then the other question that comes up quite often is pension cost. Like everybody with - that's a 100-year old company, they have pensions, we had a mortality table extension which meant more liability, discount rate drop of maybe 75 basis points, which means the liability of APBO goes up. The good news is, we're still 80% funded.

The fact that we froze the pension on one of our plans and limited anybody new getting into the defined benefit plan as early as 2003, are effect on earnings and cash or anything else is minimum, and would not affect the guidance that I gave you earlier. We can absorb the pension without as much problems as some companies.

That covers it pretty much everything. I'll open it up for questions..

[Operator Instructions] We'll go first to Spencer Joyce with Hilliard Lyons..

Good morning, and thank you, for taking our questions. This is Jeremy Roane for Spencer Joyce.

First question is, with Aqua Resources, what would the revenue in that segment look like in 2014? And also my second question is, was the Marcellus pipeline cash flow positive in 2014?.

The Aqua Resources, which we actually booked separately because the Aqua Infrastructure, which is the pipeline, it comes in through a JV line on the sheet. That's the difference. You asked about revenues. Revenues in ‘14 were $24 million.

We're anticipating revenue growth of 20% plus, so we're looking at $30 million in revenues, with hopefully maintaining or improving the margins that we saw this year.

Regarding the cash, although we did lose $0.02 net income in ‘14 with the Aqua Infrastructure Group, the pipeline, because of fewer sales in ‘13, the cash was still positive, and I'm going to say it was about $2 million positive - $1.2 million..

Aqua’s piece..

Yes, okay, Aqua’s piece. Yes, it was - I'm sorry, it's $2.4 million for the whole JV, $1.2 million for us, cash..

Thank you very much..

[Operator Instructions] And at this time I'd like to turn the conference back over to Mr. DeBenedictis for any additional or closing remarks..

Okay, I just thank everyone, and hopefully we'll be out of this winter soon. Thank you..

Ladies and gentlemen, that does conclude today's conference. We appreciate everyone’s participation today..