Brian Dingerdissen - Chief of Staff Chris Franklin - Chief Executive Officer Rick Fox - Chief Operating Officer of Regulated Operations Dave Smeltzer - Chief Financial Officer.

Jonathan Reeder - Wells Fargo.

Good day and welcome to the Aqua America, Inc. Q4 FY 2015 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, Mr. Dingerdissen..

Thank you, Valerie. Good morning, everyone. Thank you for joining us for Aqua America's Fourth Quarter and Full Year 2015 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 Scott Siegel at (610) 520-6361.

The slides that we will be referencing can be found on our website. There will also be a webcast of this event available on our site.

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 risk 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.

Presenting today is Chris Franklin, Aqua America’s Chief Executive Officer, Rick Fox, Aqua’s Chief Operating Officer of Regulated Operations and Dave Smeltzer, the Company’s Chief Financial Officer. After the presentation, we will open the call up for questions.

At this time, I would like to pass it over to Chris Franklin, Aqua’s President and Chief Executive Officer..

Okay, thanks, Brian and welcome everyone. It was very nice to see many of you in New York last month at our Analyst Day and I appreciate you joining us again this morning.

Before we get into the discussion of our results of what I believe was a very solid year from our Utility operations, I want to first mention that last month was a pretty special month for this company, not many companies in the United States can boast a 130 year duration, this company was born in 1886 and celebrate a very important milestone.

We are very proud of that milestone and the company continues to enjoy a very rich tradition and robust history and frankly, we are very optimistic about the company’s future. And with that said, let’s take a look at what we are going to cover on today’s call.

For today’s call, I’ll start with some news from the first couple of months of 2016, then I’ll comment on the 2015 highlights, then I’ll provide an update and some of the results – on some of the results we saw last year, and then ask Rick Fox, our Chief Operating Officer to join us and talk a little bit about lead in the public drinking water supply, and then Dave Smeltzer will join us and review the company’s financial results.

Finally, I’ll end the formal portion of the discussion by recapping our guidance for 2016, and of course, we then will open it up for questions. I thought I’d start with the very important mention that, just recently, you may have seen that the press release that we’re nearly complete in the filling of our senior management team.

Karen Heisler was our latest appointment. We are very proud to have Karen join us. She is our new Senior Vice President and Chief Human Resources Officer. Karen joined us from her work at UGI where she was most recently, where she was the Vice President of Human Resources and Administration there.

I think Karen brings us a tremendous background in human resources and expertise and will be instrumental in evolving our corporate culture and being a good partner with me. In the coming days, we will also make an announcement regarding the appointment of our new Chief Administrative Officer.

She will join us in March and when that – when it’s – her name becomes public, we will make sure we get it out in a release form. But we are very excited about both of these new executives joining the company. Now looking at some of our highlights from last year, in 2015, we increased our customer count by 1.9%.

This includes additional customer growth through acquisitions, and organic growth, very proud of that accomplishment, one of our better years. Annual revenues were up increasing 4.4% to $814 million in 2015 from $779.9 million in 2014. Adjusted income from continuing operations per share were up 5% to $1.26, compared to the $1.20 we reported in 2014.

This represents income from continuing operations before the impairment, which we initially mentioned at the Analyst Day when we were together last month.

We took this charge in the fourth quarter for the JV pipeline, which delivers water to the natural gas drilling sites in Marcellus Shale region of Pennsylvania and just for context, from the earnings we’ve seen reported so far in the fourth quarter of 2015, we’ve seen about $7.2 billion of impairments taken by the midstream companies and you will recall that we are a 49% owner of this pipeline with a midstream company.

And I think we are all aware of the market conditions that have prompted these impairments at the end of last year. Dave will get into more detail on the financials and the impairment in a few moments. Now with regard do our dividend, in August, we increased our quarterly dividend by 7.9% to an annualized rate of just over $0.71.

This is the 25th dividend increase in 24 years and we are very proud to say it marks the 71st consecutive year of paying quarterly dividends. Now let’s talk a little bit about growth. In 2015, we acquired 16 water and waste water systems, 12 of which were water, 4 were waste water.

I think it’s important to note, two of the – 4 of those 16 were municipal acquisitions and as you know that’s a primary focus of ours. Total acquisitions in 2015 added over 10,600 customers and organic growth added just over 7000 additional customer connections.

Total customer growth as I mentioned was 1.9%, which was at the higher end of our stated guidance of 1.7% to 2%. These acquisitions not only increase customer base, but maybe even it’s important or more importantly provide additional opportunities for us to invest capital.

The much needed infrastructure upgrades we make improve the quality of service for all of our customers. Now with regard to 2016 acquisitions.

So far we closed four deals, three water and one waste water and two Illinois water acquisitions just closed yesterday that will serve nearly 500 customers and they were not in the release because they just closed yesterday.

Expect to see 2016 year-over-year customer growth in the range of 1.5% to 2% again and as you know, we are shifting our focus to acquiring larger systems that serve over 2500 connections apiece.

Before Dave talks about talks about our financial results in 2015, I mentioned that I asked Rick Fox to join us today with Flint Michigan on many people’s minds these days, I thought you might want to hear a little bit from Rick regarding our approach to the lead issue and he will provide you some – I think, assurance that we remain on top of these issues at Aqua America.

Rick?.

Thanks, Chris, and thank you all for joining today. After the announcement about Flint, it seems that stories about Flint and other cities are in the news almost daily. First, as you know, Aqua prides itself on environmental compliance. We strive to be and we believe we are in compliance with federal and state regulations concerning water quality.

Now, concerning lead, it is important to note that there are lead components in all water systems including Aqua’s. Let me explain. Lead piping was the material of choice until the 1930s when most utilities switched to copper.

Additionally, lead-based solder was not phased out until 1986 in cities that contained some lead were not phased out until 2011. The point is, lead exists, both in the pipes owned by the utility and in the pipes solder in fittings in the customers’ home. Concerning the water itself the utility is responsible for controlling the corrosiveness of water.

When corrosion is controlled, it doesn’t matter as much whether or not lead exists in the piping. Utilities including Aqua add corrosion control chemicals to the water to prevent the lead and other metals from leaching into the water. Lead and Copper rule was implemented by the US EPA in 1991 and has been amended several times since.

This rule governs both the corrosion controls employed by the utility and the in-home water testing that is done to confirm the effectiveness of the corrosion control. Aqua follows the protocols set forth by the Lead and Copper rule at all of our 1484 water systems and we comply with all federal and state drinking water regulations.

Now I’d like to talk a little bit about our capital investment plans. In 2015, Aqua invested $364.7 million, compared to $328.6 million in 2014. This year, we expect to invest over $350 million and to invest over $1.1 billion through 2018.

With that, I’d like to introduce Dave Smeltzer, Aqua’s Chief Financial Officer who will take you a little deeper into the 2015 results. .

Thanks, Rick and good morning everyone. So today I’ll review the fourth quarter and full year financial results and some of the driving factors that affected the company’s performance during those periods. I’ll also provide a look at our rate activity last year and through the first couple months of 2016. So first, 2015 financial results.

Our annual revenues increased 4.4% to $814 million, up from the $779.9 million in 2014. And you can see operating and maintenance expenses were up 7.2% to $309 million, compared with $288.6 million in 2014.

And importantly, of that 7.2% increase, about 5.2 percentage points of that were related to acquisitions and therefore about 2% was the same-store increase in O&M expenses.

As we noted in the release that went out last night, and as Chris mentioned a moment ago, due to the negative future outlook of natural gas drilling, because of lower gas prices, changes in the industry and other market conditions, the joint venture that owns and operates our Marcellus pipeline that delivers raw water to those drillers assessed the value of the pipeline.

And as a result of that assessment, the joint venture recognized a non-cash impairment charge, of which $33 million or $21.4 million after-tax was Aqua’s portion of the charge amounting to $0.12 per share. Absent that, non-GAAP adjusted income from continuing operations was $223 million, which is up 4.4%, compared to the $213.9 million in 2014.

GAAP income from continuing operations was almost $202 million. Adjusted income from continuing operations per share increased 5% to $1.26, compared to the $1.20 reported in 2014 and GAAP income from continuing operations per share was $1.14.

Looking at revenue, as we mentioned at our Analyst Day in January, we are keeping our promise to show these waterfall charts in our earnings calls going forward. Customer growth in our regulated operations and growth in our market-based activities accounted for nearly two-thirds of our overall revenue increase.

Rates and surcharges accounted for another 20% and higher use and other factors accounting for the remaining increase in our revenue. Looking at O&M expenses, O&M was up to $309 million for 2015, compared to $288.6 million in 2014, as I mentioned before, an increase of 7.2%.

Acquisitions in both the regulated and market-based business made up 5.2% of that. Growth in our market-based activities accounted for 3.2% of the total increase. Employee-related cost and production cost combined, increased O&M by about 2.6%, but were offset by other factors that provided a year-over-year decrease in expenses of about $2.6 million.

Chris will cover the guidance in more in-depth for 2016, but keep in mind, we do expect 2016 same-system O&M expense increases in the 1% to 2% range for the full year.

Looking at income from continuing operations, we start with the $1.20 we reported in 2014, regulated growth in consumption, tax for payer benefits, rate increases and market-based activities increased our income from continuing operations per share by more than $0.08.

Other factors and expenses increase – other factors and expense increases brought our final adjusted income from continuing operations per share for the year to $1.26 or a 5% increase over what was reported in 2014. Then, of course, the $0.12 impairment charge from our JV pipeline gets us to our net income per share of $1.14.

So taking a quick look at the quarter, Q4 2015 revenues increased 3% to $197 million, up from the $191 million for Q4 2014. O&M expenses were nearly $78 million for the quarter, compared to $74 million in Q4 2014 representing about a 5% increase, a sizable portion of which came from the growth ventures that we noted earlier.

Adjusted income from continuing operations was $49.9 million, up nearly 2% compared to the $49 million for the same period last year. Adjusted income from continuing operations per share was flat at $0.28 for the quarter, all before the JV impairment charge of $0.12.

So, looking at rate activity, recapping 2015, Aqua America’s regulated subsidiaries received the rate awards and infrastructure surcharges in six of our eight states with an estimated increase in annualized revenues of about $8.6 million.

So far in 2016, we completed rate cases or surcharges in five states with $4.3 million in additional revenue including $1.1 million of revenues recognized under interim rates during 2015. We also have a rate case pending in New Jersey requesting an additional $2.5 million in revenue.

And additional rate information can be found in the appendix of this presentation. So with that, I’d like to turn the call back to Chris who will discuss expectations for 2016. .

Thanks, Dave and just before I dive into our guidance slide, I’ll just mention that we continue to spend considerable time and have spent considerable time over the first eight months since I’ve been CEO on the refinement of our strategy.

We continue to pursue our three-prong growth strategies, municipal acquisitions, strategic M&A and market-based activities and we will continue to focus on opportunities to leverage those core capabilities that I have discussed.

Those include the ability to make capital investments prudently, the strong regulatory aspects of being able to get recovery of those investments and then of course, our ability to operate the utilities at a level of excellence to provide really long-term growth for the shareholders.

I remain very confident in our direction and our strategy and I think it will produce continuing strong results. Now I’d like to take a moment with the company’s – and give you company’s guidance for the upcoming year. As we introduced at the Analyst Day last month, we expect full year earnings per share to be between $1.30 and $1.35.

Our year-over-year customer growth in the range of 1.5% to 2% and we expect to invest more than $350 million in capital in 2016 and more than $1.1 billion through 2018. Ongoing rate base growth, we expect to be in the 6% to 7% range and on same-system O&M, we expect only an increase of about 1% to 2% for the full year.

So with that said, I’d like to open the call now to any questions that you might have..

Thank you. [Operator Instructions] And we will move to our first question from Jonathan Reeder of Wells Fargo. Please go ahead..

Hey, good morning gentlemen. Just two clarifying questions.

One, the rate base growth of 6% to 7%, Chris, just remind me, is that just from the existing systems that does not include any potential tuck-ins M&A?.

That’s right, Jonathan. .

Okay. And then, you highlighted the Flint in a situation and obviously it’s been getting a lot of attention from investors.

Can you just discuss if you’ve seen any pick up in municipalities or other system owners coming to the table to consider either public/private partnerships or outright sales of the system to avoid getting headlines like that or avoid those kind of issues on their own systems?.

Yes, it’s a really good question. So, I can’t say that we have had municipal interest that is specifically attributable to the lead in the water situation. Although, it’s hard to know what we have seen though is, considerably more interest by municipal entities in talking to us about opportunities.

And so, particularly in the states where we have the legislation either pending or passed, we see a generally more interest in the municipal sector and talking to us about an exit or how value might be created by doing something together. But I – as far as the lead, I think, long-term, we may see some results from that, but not most immediately. .

Okay, I mean, it’s just kind of the ongoing industry dynamics these needs have kind of been there for a while and that's what's been driving the conversations and you are enabling the legislation?.

Yes, and I think, as it becomes apparent in some systems that considerably more capital would need to be spent, let’s say to be in compliance, I could see some more interest being generated in looking at alternatives, privatization in other words to address capital needs.

But, I just can’t attribute any of the immediate interest from municipals to that particular issue, Jonathan..

Okay, and then, just kind of a housekeeping thing. Are the slides going to be posted on the website, I don't see them out there..

Jonathan, this is Brian. The slides are in the webcast and the PDF should be up. We are having a bit of an issue with our website. But the PDF should be up with the slides shortly..

Okay, great. Thanks so much, guys..

Thanks Jon. .

Thank you. [Operator Instructions] It appears there are no further questions at this time. Mr. Chris Franklin, I’d like to turn the conference back to you for any additional or closing remarks. .

All right, thank you very much. I appreciate all of you joining us today and we obviously will be happy to answer any questions you might have any time today as well. Thanks for joining us..

This concludes today’s call. Thank you for your participation..