Brian Dingerdissen - IR Chris Franklin - CEO Dave Smeltzer - CFO.

Agnieszka Storozynski - Macquarie Ryan Connors - Boenning & Scattergood Jonathan Reeder - Wells Fargo.

Good day and welcome to the Aqua America Q2 2016 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 sir. .

Thank you, Diana. Good morning, everyone. Thank you for joining us for Aqua America's 2016 second quarter 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. A reconciliation of these non-GAAP to GAAP financial measures is posted in the Investor Relations section of the company's website.

Presenting today is Chris Franklin, Aqua America’s Chief Executive Officer and Dave Smeltzer, the Company’s Chief Financial Officer. After the presentation, we will open the call up for questions. At this time, I'd like to pass it over to Chris Franklin, Aqua America's President and Chief Executive Officer..

Thanks, Brian, and thanks everyone for joining us this morning. On today's call we'll talk about some recent news on the company and I’ll comment on some of the highlights from the quarter, including our acquisitions, and Dave Smeltzer our CFO will take us through the financial results and rate activity.

And then we'll conclude the formal portion of the presentation by reviewing our guidance for 2016, and then answer any questions that you might have. So let’s start with some organizational, we spent a lot of the first year putting the organization together and we'll call it tweaks at this point, but I think important enough to mention here.

You may have seen some of these in our recent press releases, but Stan Szczygiel was recently promoted to Vice President, Finance, and Treasurer. This is an important one for us. Stan has been with the company for 10 years now and Stan and I have worked very closely over the last 10 years.

He was the Regional Controller of the Southern Division, when I was the Regional President for Southern Division. So, we worked here a long time. Stan then went onto be Director of Planning, Vice President of Finance, and now added Treasury to his responsibilities.

He's got a vast resume of significant responsibilities including executive roles in companies such as Exxon, Foster Management Companies and NovaCare.

I've to say we are very fortunate at Aqua America to have the bench we have and so when the position opened, very quickly Stan was promoted to the job as Treasurer and is well qualified and will do a terrific job. Another new member of our team that I'm very excited about is Chris Crockett.

Chris joined in mid-June as our new Chief Environmental Officer. And Chris reports up to Bill Ross, our Chief Engineer up in Rick Fox's organization, you'll recall, Rick addressed the Group last time, Rick is our Chief Operating Officer.

Chris is going to be responsible for overseeing water quality, environmental compliance and all of our drinking water and waste water systems in the eight states. He'll also manage Aqua's in-house water and wastewater lab as well the company's water quality services and water resources department.

He comes to our company with 20 years of experience, most recently as Deputy Commissioner for Planning and Environmental Services at the Philadelphia Water Department. This was a key pick. Chris will do its great job towards us well.

And again demonstrating the strength of our bench, Shannon Becker, our former President of our Aqua Virginia Company, which is a relatively small part of our system in terms of customer count. Shannon has been appointed to President of our Aqua North Carolina Company which is our third largest state by customer count.

Shannon succeeds Tom Roberts who was with us for 30 years, retired. Tom did great job as the President of Aqua North Carolina. Now in his role as President of Aqua North Carolina, Shannon will supervises 160 employees and be responsible for overall operations.

Now Shannon was previously the Controller in Aqua North, Carolina before he was President in Virginia, so he is well trained and very familiar with North Carolina and he will also will do a terrific job. And finally again from our bench John Hildabrant has been named President of our New Jersey Company.

John has been with the Company for 11 years and previously served as our operations manager in that same, he stays in New Jersey. With a great combinations of skills, John has been involved with our regulatory filings or rate cases, growth of the Company and certainly Operations.

So I really can’t say enough about the strength of this management team and I fully expect that this team will continue to deliver the operating results that we’re all so proud of and that our customers have come to expect. Now I’ll take a look at the quarterly results.

The Board meet yesterday on a regular scheduled Board meeting and increased our dividend by 7.5%. We’re very proud to say this is the 26th dividend increase in 25 years and it’s our 71 year of paying the consecutive quarterly dividend, we’re very proud of that.

The second quarter also saw strong performance as we continue to pursue our three-pronged growth strategy. We've talked about this on previous calls, as you might remember municipal acquisitions, prong number on one, strategic M&A is prong number two and market based activities is prong number three.

As we think about this growth strategic we’ll continue to focus on and leverage our core capabilities and among those and we have mentioned these before as well, is our ability to both financially and operationally make significant capital investments in infrastructure.

Two our ongoing regulatory relations, work that brings the company strong credibility with our regulators. And finally as we think about our core capabilities, we think about our ability to operate utilities at optimal levels and off course, you’re very familiar with the efficiency we bring in our O&M.

Now on growth, so far this year we’ve added 5,400 new customer connections, from acquisitions alone, slightly more than a 0.5%. Clearly revenues were down slightly, decreasing just less than 1% to 203.9 million in the second quarter of’16, from 205.8 million in the same quarter last year.

A large portion of this though comes from the decreased revenue from our market based activities and we’ve discussed that extensively in our last call. And with that said earnings per share were up, 3.1% to $0.33, compared to $0.32 reported in Q2 of 2015.

Now look at our dividend history, as we said the Company takes great pride in rewarding its shareholders with quarterly dividends. Over past ten years we’ve more than doubled the dividend and achieved the compounded annual growth rate of 7.6%.

And we’re going to continue on this path to achieve the boards stated payout ratio target of between 60% and 70%, currently that payout ratio is right around 57%. Now let’s look to our growth activity for the year. Looking at the acquisitions completed so far in ’16, we’ve closed 10 deals, eight of them were water, two of them waste water systems.

As we’ve mentioned, we continue clearing our small deals that have been on our list for several years and you’ll notice some of these numbers are small, continue to push these out, these are the ripening deal that have been sitting there for many years as we’ve pursued a lot of the smaller tuck-ins.

But I'll tell you we remain very confident in our pipeline and the increasing size of the deals that we're reviewing in our Internal Investment Committee, we meet every two weeks to review these deals. And we remain very confident in our ability to grow in the water and wastewater space.

We just think there is a lot of opportunity and we're seeing more municipal interest in selling systems than we have in many-many years. Now to date, this growth represents more than 0.5% in growth this year from acquisitions and we've also seen an uptick of approximately 0.5% in organic growth through the second quarter.

So at this point we expect 2016 year-over-year customer growth to be in the range of our current guidance of 1.5% to 2% and this includes organic growth. So, with that I'll hand the call over to Dave to take a look at the numbers..

Thanks, Chris. Good morning everyone. Today I'll review the second quarter financial results and some of the key driving factors that impacted the company's performance; and I'll also provide a look at our rate activity for the year thus far.

In the second quarter our revenues decreased nearly 1% to 203.9 million, down from the 205.8 million in the same period of '15.

In a moment I'll show you the waterfall chart, but when we look at Q2 '15 versus Q2 '16 much of the decrease was related to market based activities along with lower consumption through the unfavorable weather conditions and that was mostly in Pennsylvania. There was also some unfavorable weather in New Jersey and North Carolina.

Operations and maintenance expenses were down about 7.2% to 74 million for the quarter compared to 79.7 million in Q2 of '15. Again I'll touch on this in the waterfall chart, but lower [ph] production expenses, lower expenses associated with our market based businesses and several onetime events led to the decrease in O&M expense.

As mentioned in the release same-utility system O&M would have been up about 1.3% year-over-year for the second quarter. Net income was $59.6 million, up 3.9% compared to the 57.4 million in the same timeframe of 2015. And earnings per share of $0.33 as Chris mentioned was an increase of 3.1% compared to the $0.32 reported in Q2 of '15.

Year-to-date as of June 30th, revenues were virtually flat at $396 million. You can view the year-to-date waterfall charts in the appendix but lower consumption and decreased market based revenues offset the increased revenues from the regulated business, because of that flat revenue.

Operating and maintenance expenses were down 3.5% to $147 million for the quarter compared to 153 million in the same timeframe last year. Again several non-recurring items, lower production and lower market based expenses offset the increase and employee related and regulated acquisition expenses.

Net income was 111.4 million, which is up 5.1% compared to the 106 million in the same timeframe of 2015. Earnings per share was $0.63 an increase of 5% compared to the $0.60 reported in 2015 and the year to date waterfall chart on EPS in the appendix will give you more color on this as well.

Let’s take a look at quarterly revenue comparisons starting with our revenue for Q2 2015. Regulating growth increased revenues by 1.5% rates in surcharges along with other factors accounted for an additional increase about 1%. From there revenues related to our market based activities decreased about $3 million or 1.5% of total revenue.

Then a decrease in consumption associated with the unfavorable weather we saw in this quarter lowered revenues by an additional 2% resulting an overall decrease of 0.9% to $203.9 million.

Looking at O&M expense and starting with our O&M for the second quarter of 2015 of $79.7 million, expenses tied to regulated acquisition and slightly higher employee related cost increased O&M by 1.9%. From there lower production cost and expenses related to market based activities decreased expenses by about $3.1 million.

Additionally, there were several non-recurring events that contributed into the decrease of O&M for the quarter versus 2016. Again looking at same system utilities O&M would have increased by about 1.3% well within our guided range of 1% to 2% for 2016.

Looking at the next waterfall of earning per share and starting with our EPS for Q2 2015, we saw lowered expenses regulated growth and rate and surcharges account for an increase of more than $0.03 per share.

From there market based activities, lower consumption and other factors decreased by approximately $0.02, resulting in the $0.33 we reported in Q2 ’16.

On to rate activity, so for in ’16 we completed rate cases or surcharges in five states with approximately $5 million in additional revenue dollars, including 1.1 million of revenues recognized under interim rates during 2015. We also have rare cases pending in New Jersey, Indiana and Ohio requesting an additional $10.5 million in revenue.

Additional rate information can be found in the appendix of this presentation. And with that I'd like to turn it back to Chris who will recap our 2016 guidance..

Hey, Dave, thanks. So look at the recap of our guidance, our earnings, customer growth CapEx and expense guidance is really unchanged for the second quarter of the year. We expect full year earnings per share to between $1.30 and $1.35.

As you heard Dave talked about whether some ups and down, flooding in Taxes and some better weather else were, we get more and more comfortable with the center of that range. Year-over-year as we said a couple of times, we expect to land customers growth in the targeted range of 1.5% to 2 %.

We expect to invest about $350 million in infrastructure in ’16 and more than 1.1 billion of CapEx through 2018. We expect our ongoing rate base growth of approximately 6% to 7% and on a same system O&M base we expect O&M as Dave just said to increase between 1% to 2% for the full year.

So, all in all good solid quarter and we expect a good solid year. And now before we end the call, I'd like to open it up and answer any questions that you might have..

Thank you. [Operator Instructions] We'll go first to Agnieszka Storozynski with Macquarie..

Thank you for your remarks today, about especially growth opportunities within the water and wastewater segments, so, in light of that, can you talk us through this possibility of maybe venturing into non-water sectors and why would you attempt to actually diversify away from water if you see so much organic growth potential within the water sector?.

As we think about growth opportunities, let's just talk for a moment about water, because we've worked with legislators in multiple states now and we've seen the positive [ph] legislation that really provides us an opportunity to get access a municipal market that often was not available given the prices that we could get into rate base.

Now with the new legislation and the ability to pay fair market value we see even greater opportunity and I know our peer companies are seeing the same thing and the activity in municipal market is certainly on an uptick. So, I want to leave you with our confidence.

Having said that we also and we've been talking about this on a lot of our calls have said that, the skill sets and the core competencies that we have here would work in a lot of areas, we think that the regulated market is where we excel and certainly a regulated market where we could invest capital at high rate, which is what we do very well here and then certainly our regulatory relations, we work very hard on to be a very credible company that does top level service and is mindful of customer pricing and everything else.

And we believe that trends in just water, wastewater in the regulated market. And finally, as we think about how we run our Company with O&M, we just think, Angie, that those among other core competencies have multiple applications.

And believe me if we see an opportunity that matches those, and would enhance our utility strength in the market, we'd look at it. Having said that, we're going to be very-very prudent in how we approach it. We've a long history of being very prudent in how we think about M&A.

But on the back of it, I mean just looking at your market valuation, wouldn’t you say that your key multiple is to a large extent reflective of the scarcity value of the water utility as an investment, I mean there're very -- really few sizeable public water utilities you can invest in, there are a number of international funds looking for exposure to water, wouldn't you agree that if you were to dilute your water focus that that multiple could erode?.

Well we think the multiple is largely due to the management team, I’m kidding off course. I know think that you make a very, very strong point and I think as you look across the general utility sector.

Off course water is not the only utility that seen an increase in valuation and so traditionally as you pointed out water has traded at a premium to other utilities, whether that’s scarcity, we think that that we would agree to that part of it.

Whether it’s the safety, particularly in this market that’s a component and in fact the Companies are all well run. So you make a very good point, but I’m not sure that the premium is solely based on scarcity..

Okay and I’m sorry I just keep asking the same question, but again in light of the water driven growth option, are you basically trying to grow faster or become larger quickly, as behind -- and that’s the strategy behind the potential M&A outside of water, or is it that basically you see all the growth in the water sector is actually less visible than you might think and thus the need to maybe get some support somewhere else as far as the growth is concerned?.

That’s great question too. Here is I think how we think about it. The United States right now has a vast need for investment in infrastructure and we’ve been a leader in that in the areas where we operate. We’ve been investing as you know significant amounts of capital in infrastructure, in water and wastewater.

And when you think about it, you heard the numbers that the EPA has put out there, the need for an additional trillion dollars of investment in just this space.

And if you broaden that to the broader utility market, that is the, I’m very familiar with transmission from my Board membership up at IPC, the need for investment in transmission, the need for investment in gas pipes. So it’s across the general utility industry, huge need for infrastructure.

So to the extent that we could capitalize our skill sets and be a larger player in making sure that that investment is made in a great area of need in United States. We think our skill sets are broadly applicable and specifically applicable in those infrastructure needs. .

And we’ll take our next question from Ryan Connors with Boenning & Scattergood.

Couple on housekeeping items, than I had a bigger picture question if I could.

First just on housekeeping, Dave you mentioned a few times, “non-recurring” events as part of our lower OEM, O&M expense, can you just elaborate for us on more specifically what some of those things were?.

We had a couple of charges, one time charges and one time bring backs this year and last year. I’ll see if I can get my hands on them all.

So for the quarter last year we had a couple of charges, one was the leadership transition charge that we talked about on the call, we reserved some old Aqua Pennsylvania water rides that appeared -- we would not able to [indiscernible] use, so they were two big one time charges last year, totaling about $3.5 million that obviously did not recurs again this year..

Okay, so clearly non-operating stuff?.

Yes, kind of unique one off items in last year's numbers that caused the part of that difference..

And the other one was just can you give us a progression on the tax rate, I mean obviously we've jumped -- we've been now in the single-digits for a while, can you just kind of give us an outlook on how we should think about modeling that going forward?.

I would expect this will be fairly consistent until the next Pennsylvania rate case and in that Pennsylvania rate case, I would see some somewhat a step-change, not more than few percentage points, but certainly more than what we've seen recently. So, I would say fairly steady until we get to that point..

That’s actually a good segway into my next question which was that any update on Pennsylvania in terms of where we stand relative to go into the DSIC and ultimately to general rate case.

I know you made some comments at the Analyst Day that we're helpful in that regards, so any update there?.

I would say no, we're sticking with the guidance that we provided at the Analyst Day. That we'd like to think about a DSIC sometime in '17 or '18 and then a rate increase some time in '18 or '19, that's still where we see it right now..

So, a rate increase in '18 or '19 would imply filing either in late '17 or early '18, is that a right way to read that?.

Yes, that's right..

And then yes, my bigger picture question was, I mean Chris you commented on the Pennsylvania Act 12 legislation and PUC did have some news on their front with their preliminary implementation order couple of weeks ago, I wondered if you had a chance to look at that and if you have any -- if that gave you any more granularity on the opportunity there, and whether there were aspects of that that you liked or didn't like, or any incremental feedback on that legislation with the latest developments?.

I guess frankly I have not seen that particular piece confirmed [ph] and commissioned. So, I can't comment directly on that. But I guess from what we know and what we're aware of from our -- the legislation and our discussions at the commission level, we remain confident that this will be a great tool for continued growth and maybe expanding growth..

[Operator Instructions] We'll go next to Jonathan Reeder with Wells Fargo..

Most of my questions have been answered, but, I mean no, if there's any more color you could give on the M&A progress, particularly on the targeted muni [ph] effort that's being made.

Is there some deals in the second half that you expect to announce deal size?.

The deal pipeline I will tell you is strong, but as you probably are aware, as we think about the discussion with municipals, Jonathan it's a long lead time and there is vote and in many cases we're seeing the need for referendum.

So, I don't see in the coming few quarters a major, that's why we've given the guidance, you've seen the guidance, but we have some, I'll call it sizeable opportunities in our pipeline and we have a relatively high level of confidence about some of those.

So, I guess I’ll leave you with, we see activity, we see activity, we see greater size and we, the like pipeline is strong for next year. .

Okay, so look to 2017 we really see kind of the, I guess the efforts coming to fruition..

I think that fair to say..

Okay, sounds fair. Thanks guys. .

And it appears we have no further questions in the queue at this time..

Thank you very much, appreciate your time. .

Again that does conclude today's presentation. Thank you for your participation..