Brian Dingerdissen - Director, IR Nick DeBenedictis - Chairman & President David Smeltzer - CFO.

Jonathan Reeder - Wells Fargo Securities.

Welcome to the Aqua America, Inc. Q1 2015 Earnings Conference Call. [Operator Instructions]. 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, Dana. Good morning, everyone. Thank you for joining us for Aqua America's first quarter 2015 earnings conference call. If you did not receive a copy of the press release conference call you can find it by visiting the investor relation 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 welcome everyone to Aqua's first quarter earnings report.

As primarily a mid-Atlantic, Midwest utility we experienced a brutal winter period encompassing the quarter that I'll report on today, but before getting to the numbers, I want to acknowledge the efforts of our dedicated and experienced employees who got our customers through this cold winter almost unscathed.

As you know Aqua's reliability goal is 100% and we think is kept intact even after this winter. We had more main breaks than forecasted, more than last year which we thought was high, a lot of elevated maintenance to service customers with frozen pipes, a lot of extra overtime. And lower consumption in the quarter based on the fact of the weather.

But I have to remind you that 2013/14 winter was no cake walk either so the comparisons were somewhat offsetting.

I would like to note that although we had over 400 main breaks during this three-month period, had we not been rehabilitating over 25% of our pipe over the past 20 years, and that's about thousands of miles of old pipe, over the past two decades, we probably would have experienced probably in the range of 800 pipe breaks.

So everything is relative and we saw return to normal pipe breaks very quickly in April and that shows how the system is resilient and the repairs we're doing really are paying off. We just did get our April revenues and it was a little bit weathered than normal but looking ahead, May and June are much higher use months than April.

So the second quarter results will probably be contingent on dryer weather or how much dryer weather we get over the next two months, May and June and the good news is unlike California, our reservoirs are completely full 100% and we have more water supply than normal at this time of year.

Now to the numbers, pleased to report another strong quarter increased earnings despite the tough winter weather. The quarterly earnings of $0.27 compare favorably to the 24 in the first quarter of last year.

Net income was up more than 13% and the key contributors to the year-over-year positive results were growth in our customer base from regulated acquisitions, the awarded rate cases, benefits from the tax repair.

I should say continuing benefits from the tax repair in Pennsylvania, growth in our non-regulated business and our continued disciplined approach to managing expenses because of these I believe we're well on our way to achieving our 16th straight year of earnings growth.

Revenues for the quarter were 190.3, up 7.7 million or 4.2% over the same quarter in '14 mainly from this growth was mainly from regulated and non-regulated acquisitions, rates and surcharges and customer growth.

As has been a consistent theme during the 23 years I've had the pleasure to head this company, control of operating costs continued to be a very important aspect of the Aqua culture. Operating and maintenance expenses were up just 2.1% enabling us to continue to maintain our industry-leading adjusted O& M to revenue of 34.4%.

Absent to rapid growth in both revenues and therefore expenses in our non-regulated operations, if you take those expenses out, O&M expenses for the regulated group were down actually over a million dollars and a lot of that's thanks to a reduction in pension expense as pension expenses were actually down year-over-year, and that's due to the structural changes we made over the years in our retirement plan.

So you can expect that trend to continue. This is the opposite trend you're hearing from most or being experienced by the majority of utilities. Additionally, thanks to our S&P plus rating interest expense was 3.3% lower for the quarter-over-quarter compared to the first three months of '14 even with $51 million more debt outstanding.

Core of what we do is one of Aqua's key strategies over the past two decades remains in investing the capital needed to rebuild the infrastructure which supports the communities we serve.

During the first quarter of '15, we invested $70 million in infrastructure which is almost as much as in Aqua invested in the entire first three years I was CEO, a fact to it I think is pretty remarkable. We're on track to invest over 325 again this year and a 1 billion over the next three as we continue to grow rate base at a 6% to 7% pace.

We don't talk about it a lot, but it's important that I recognize the hard work and experience of Aqua's experienced workforce that goes into efficiently rehabilitating our essential infrastructure. Effectively spending over 2.5 times depreciation year-end, year-out really can't be taken for granted.

Regarding our rates area, we continue to experience the benefit of tax repair program in Pennsylvania for our customers and shareholders. As of quarter end we have invested almost $700 million in infrastructure improvements in PA since our 2012 rate case and we have not had any need to raise rates, surcharge or a base rate case.

As discussed in the past, this flow-through treatment was required by our PAPUC order in 2012 and has been a consistent component of our earnings ever since. I'm hopeful at this time that Aqua PA will not be in for rates until 2016 at the earliest. Of course absent anything unusual or unexpected.

So far in 2015 and all the other states we've received a total of nine rate awards or infrastructure surcharges.

Together these awards are projected to provide $3.8 million in annualized revenues and recently our rate requests in these states have actually been lower that be they had been on a percentage basis and almost exclusively for capital investment.

As in all these state our operating efficiency is now keeping -- is now improving, keeping our ROEs up and also requiring less in the way of rates except for our capital recovery. Acquisitions are still at the forefront as we've often discussed. It's a main contributor to our long-term growth.

And our April 30th announcement on the completion of the North Maine Utilities award by the City of Glenview which services 44,000 people in Illinois, it represents the largest municipal transaction that Aqua has completed in 16 years since our event [ph] sale and purchase.

This deal was the result of the hard work of our Illinois management team and is the first in what I believe were several large opportunities that our regulated corporate development team in each of our states is currently working on.

In addition to North Maine, yesterday we closed on Mount Jewett, a municipal acquisition in Pennsylvania serving 1500 people. And additionally we have already closed two other smaller acquisitions in '15, one in King William County, Virginia and the other in Egg Harbor Township, New Jersey.

Our acquisition pipeline is quite promising right now, and I believe 2015 with this start announced today will actually experience the most customer growth we've seen since 2007 before they turned out. Non-regulated, usually don't take a lot of time at these meetings talking about these calls but this was a pretty remarkable quarter.

So I would like to take a little time. We're starting to see excellent revenue growth and more importantly profits from our non-regulated operations. We’ve forecasted in our projections for non-reg this year to contribute about a penny-and-a-half, a positive swing to the company's overall EPS growth in '15.

Revenues expected to increase to over $30 million, still well below 5% of our total revenues, but growing because it was only $23 million in '14 and $16 million in '13. So you can see pretty rapid growth in the revenue section. But we're still holding our net income margins in the 6 to 7 range which is the most important.

We're growing for profits, not just for revenues. As discussed previously, we view our water and waste water non-regulated opportunities as complimentary services to our existing utility business. And we're not planning to stray far from what we know best, water and waste water.

But we believe the company has great ability to expand our operations to play a more significant role in future earnings growth. Regarding the JV which we've talked about for a couple years now, that's the water pipeline for drillers in the Marcellus region, it continues to unfortunately to underperform our original forecast.

And we expect it will again lose a $0.01 to $0.02 a share in '15, a little less than last year but management still is a strong believer in the long-term potential of this business opportunity and the energy future of Pennsylvania.

Now let me note something we've talked about in prior calls witch is the current succession planning program being conducted by the Board.

The Board had planned to announce my successor as CEO by this time, but unfortunately we will not be doing that today but let me reassure you that the Board continues to diligently work on choosing the right CEO for our shareholders, our customers, our employees, and our communities.

I still plan to retire during 2015 with my official contract running to July 1 and I've informed the Board that I will stay on for months at a time if needed to ensure that we pick the best candidate and provide for a smooth transition.

I expect to be re-elected for the next year as Chairman of the Board at our Annual Meeting which is this Friday, and therefore will continue supporting the new CEO over that year especially in the areas of strategic direction and Aqua's public policy and regulatory initiatives.

The Board has undertaken an extensive search using a professional firm that's included inside and outside candidates. I personally am very impressed with the talent throughout the utility industry that's expressed interest in working for Aqua's shareholders.

We're in the stage of vetting a small number of very capable candidates but not yet available to announce a final decision this week at our annual meeting My commitment to ensure a smooth transition remains intact and my primary focus over the next 12 months will be to ensure that this great company does not miss a beat during this important time period.

In closing and as I’ve mentioned before despite a rough start to the beginning of the year from the weather perspective including now today to wet spring, we still have full reservoirs at sharp contrast to California and I remain very confident we’re well on our way to making 2015 the 16th consecutive year of increased earnings from operations.

I'm also comfortable with Analyst first call expectations for the full year that went up over the past couple of month to 127 despite a relatively soft start to Q2. Some of you may need to look at your quarterly estimates where for example Q2 looks a bit high for some of you especially after the April range.

But at this time I would like to open the call for questions..

[Operator Instructions]. We will go to Jonathan Reeder with Wells Fargo Securities..

So if I heard you correct, there won't be an announcement either at the Annual Meeting coming up?.

No, I don't believe there will be..

Okay.

And is it this Friday or next Friday, I'm sorry I don't have the calendar in front much me?.

It's this Friday, two days from now..

Okay. I mean how should we be thinking I guess the process, it's still a short list.

Does that mean just terms haven't been reached with the number one candidate or did something fall through that didn't kind of reach their hopeful deadline?.

I think you just have assume but we’re still doing a thorough job and this is a very confidential type thing, people that have applied to look at the job, have their career at stake. So I don’t really want to get into any speculation..

Okay. And then I guess just in terms of the actual business, it seems like things are really running well. The M&A landscape you seem quite optimistic that, there is potentially large future deals in the process too.

I mean should we be thinking as large as the North Maine or is it the size of the other deal that you announced this quarter as well?.

I think the North Maine at 50,000, 44,000 people being sailing was 50. That's the upper end of the range that we are targeting. So in essence, the deductive reasoning would say that if we got one or two of those, that's great a year. But we are looking for the larger municipal deals, 5000, 10,000, 15,000 000 customers or people.

We think that's our niche. We're not looking at Philadelphia. We're not looking at big cities. There are some in our public space if we look at that. But we are looking at what I'll call small to mid-sized town U.S.A.

and the eight states we're in and those are probably have more of a decision mode to make because it's less politics, more about the financial and service to their customers.

So we think we have a better chance at convincing them which is very difficult because as you know, things at rest stay at rest and there has never been massive move at privatization but we're starting to see maybe 1%, 2%, 5% of that 85% of municipal sector at least putting out RFPs, asking for inquiries and that's healthy and with us with 1% of the total market, that would be a huge growth factor for us..

Of course.

So I guess is this just increased conversations with the RFPs or do you think you're pretty close to striking some additional deals?.

Well, you know, what happens is you might have to have referendums, there is council votes. Gestation period is much longer than a private deal, even at macro-deal like big electric company deal which would still take as year sometimes or more.

But the municipal deals could take sometimes a year-and-a-half, two years through an election cycle so it's hard to predict..

Okay. And then last question on the non-regulated, revenue projection of $30 million this year, I guess how should we think about that, you know, growing going forward? I know of you said the margins were kind of in the 6% to 7% range.

What's the aspiration for I guess growing off that $30 million base?.

Well, hopefully as you get a little bigger and a little bit, you know, more of an in-depth management team. Don't forget we just started this. You have the chance of consolidating expenses and maybe improving margins. That would be one area. But, at this point, the CAGR has been almost 50% a year when you look at it compounded.

I don't think we're going to continue at that pace, but, you know, we're looking into a couple more deals right within the space so I would anticipate 10% to 20% revenue growth at which point the margins and maybe some margin improvement..

Okay.

10 and 20%, would half of that just be from the organic business growing and then the other half from kind of other deals?.

Right. If you do a deal on top of that, then it would grow faster but I don't want to predict until we have it and the JV on the Marcellus, I think you really have to look at that as a base now. It's finally bottomed I guess you could argue and you know we're starting to see drilling. It's shut down basically for six months.

We're starting to see a little bit of demand coming up which means that just a little uptick in gas prices and oil prices over the past month it's already started to make a little bit of a difference. So to me, that's some upside. As you remember we had predicted as much as $0.05 to $0.10 a share by this time and now it reverses the penny.

So that’s a in my mind, you know a possibility of enhancing our future. We are still generating cash, Jonathan so it's not like it's throwing cash off because of the high depreciation rate but it's just not -- we're just not selling as many gallons as we would like..

[Operator Instructions]. And it appears we have no further questions..

Okay. Thank you very much..

Again that does conclude today's presentation. We will thank you for your participation..