Brian Dingerdissen - IR Chris Franklin - Chairman & CEO Dave Smeltzer - CFO Dan Schuller - EVP, Strategy and Corporate Development, Deputy CFO.

Jonathan Reeder - Wells Fargo Richard Verdi - Atwater Thornton.

Good day, and welcome to the Aqua America Q1 2018 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Dingerdissen, Vice President of Investor Relations. Please go ahead, sir. .

Thank you, Christina. Good morning, everyone, and thank you for joining us for Aqua America's first quarter 2018 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.

The slides that we will be referencing can also 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 risks, 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. A reconciliation of these non-GAAP to GAAP financial measures is posted in the Investor Relations section of the Company's website.

Presenting today are Chris Franklin, Aqua America's Chairman and Chief Executive Officer; Dave Smeltzer, the Company's Chief Financial Officer; and Dan Schuller, Executive Vice President of Strategy and Corporate Development and Deputy Chief Financial Officer. After the presentation, we will open the call for questions.

At this time, I'd like to pass it over to Chris Franklin..

Thanks, Brian. Thank you all for joining us this morning. Let's run down the plan for this morning's call. First, I guess as they say the big story, Dave Smeltzer, our CFO will be retiring after 32 years at Aqua, so I'll give you a brief rundown on the successful plan and the transitions that we plan. Then I'll give you some highlights for the quarter.

Dave will run down for the financial results for the quarter and Dan will bring you to speed on the rate activity and acquisitions. We'll wrap up by reviewing our guidance and then will take some questions.

So, last week, we announce the planned retirement of our long-time friend and executive leadership team member, Dave Smeltzer, who has been our Executive Vice President and Chief Financial Officer now for many years. Dave will help lead us through the Pennsylvania rate case and then retire in October of this year.

It's interesting because Dave started in 1986 and he rose to Controller, Pennsylvania and then Vice President of Rate and Regulatory for Aqua America, finally a CFO and then Executive Vice President in 2012. So Dave started doing rate cases and his last duty will be financing the Pennsylvania rate case as CFO.

So over the last 32 years, he has really helped shape the Aqua that we all know today. He helped propel our regional Pennsylvania water utility into the one of the largest regulated utilities in the country.

And throughout his career, he has been committed to only growing our customer base, but investing in infrastructure and working with regulators to make sure that we get the fair recovery of those investments.

And as you all know, Dave's pragmatic approach to corporate finance has helped us to successfully navigate the Company's growth from a small company to one that's got now market cap of in the range of 6 billion.

He has accomplished his work and developed a really strong team around him, and that team is really going to help us with the transition over the next year here or six months and really make it seamless. During his decades of service, Dave's leadership is really made an indelible mark on the Company's.

So Aqua's largest and most impactful acquisitions were under Dave's leadership and the Aqua family is grateful for his unwavering commitment to the Company. And we wish him the best as he enters the new chapter of his life.

Dave will be on the call on the next call of course, and then we will work closely with Dan and the Dan will fully take over the call when November comes around.

Now Dave's strong legacy will be carried on by Dan Schuller and I think you'll know Dan this point, Dan served as Executive Vice President of Strategy and Corporate Development since 2015, and we name Dan just recently now the Deputy CFO, while he works with Dave and in the coming month toward Dave's retire in October.

By way of background, Dan's got his doctorate in engineering from Purdue University and he's worked in consulting, banking and now most recently as utility executive here at Aqua. Before he joined us at Aqua, Dan has spent eight years at J.P.

Morgan in the Infrastructure Investment Group and he has been highly effective at leading our growth strategy here in the last three years, purely where the Company has done more municipal acquisitions in those three years and the previous eight combined.

Depth of knowledge in finance, understanding of the business, and really his general management capabilities will serve both Dan and the Company well in his new role, so we are very excited about Dan taking over this fall. Now taking over for Dan will be Matt Rose. Matt Rose comes from Goldman Sachs.

He was the Managing Director in Investment Banking Division and Matt was at Goldman for 11 years and had led coverage responsibility for over 25 utility clients of well-known in the utility space, and Matt is going to be a great addition to the team. We look forward to having Matt join us in the coming weeks.

And finally, we also named a new Senior Vice President and Chief Human Resources Officer, Christina Kelly.

Christina most recently worked as Vice President of HR at AmerisourceBergen and she brings with her a great amount of experience of 14 years, leading human resource departments of organizations and executing on business strategies for corporate organization, so very excited about all these new players joining the Company.

And the combination of strong new players on our management team along with those have been with the Company for many years, continues to make our workplace really dynamic, fresh and with these fresh ideas from our new executives are grounded with the deep knowledge of the business from our longer-term executives, it really makes for a very, very strong management team.

It's a great environment and we're looking forward to seeing all these new executives join the team. So with that background, let's talk a little about the quarter. We posted what I'll call solid growth in revenue and earnings per share both up about 3.5% from the first quarter of last year. We close three acquisitions, one of them in Pennsylvania.

It was a water acquisition and then a water and the wastewater system in Ohio. Overall, combining these new acquisitions and organic growth, we added about 2,259 customers during the first quarter and we're still targeting between 2% and 3% total customer growth for the year. Now, Dave, you want to take us through the quarterly financials..

Sure. Thanks, Chris, and thanks for the kind words. Much appreciated, I have to admit I do look forward to working with Dan closely over the next several months, as we plan our transition. I'm really pleased to be able to pass the torch to a guy like Dan experienced, leadership, and one of the smartest guys as I know.

So and that's not in the script, so yes, it's real. But today, I'll review the financial results for the quarter and discuss some of the driving factors that impacted our performance. So to start off right off with the numbers, we reported revenues of a 194.3 million for the quarter, up 3.5% compared to the $187 million in the first quarter 2017.

Our O&M expenses were 73.9 million for the first quarter of '18 compared to 67.9 million in the same period of '17. I'll provide some color on that in a moment.

We reported net income of 50.8 million compared to 49.1 million in the first quarter of '17 and earnings per share followed that at the $0.29 per share, up from the $0.28 per share last year a 3.6% increase. Let's take a look at operating revenue. Look at the different components of the 3.5% revenue increase.

First, if we dissect the rates and surcharge category, we will find infrastructure surcharges such as disk and other rate increases contributed 5.1 million, and they were offset by a 2.5 million revenue reserve related to savings from the Tax Cuts and Jobs Act, which is expected to be return to utility customers as directed by each of the local Public Utilities Commissions.

Higher consumption was also a big driver in the increase in operating revenues at 2.7 million. And these items, along with customer growth a decline in market-based revenue and other items brought the total revenue for the quarter to about $194 million.

Looking at operating and maintenance expenses, O&M expenses were 73.9 million for the first quarter of '18 compared to 67.9 million in the first quarter of 17. As we said last quarter, we had an unusually low O&M expense in 2017 due to several one-time events including a milder winter, and so we expected O&M to be higher this quarter.

The increase included a number of things. First, employee costs. These included pension costs, overtime related to a very severe winter weather and salary increases. Second, maintenance and regulatory adjustments at nearly $2 million.

And third, lower production costs of about $1.1 million and reduced market base expenses of about $1.7 million were offsetting the increase in O&M. On a normalized basis, the O&M expense growth would have been about one-third of the reported increase and more in line with our recent trends. So looking at earnings per share.

We started with the $0.28, we reported this time last year and increases in rates, consumption and market based activities, coupled with growth in other items increased our earnings per share by about $0.05. The increased expenses and reduced tax repair benefit decreased EPS by $0.04.

So as a result, we reported earnings of $0.29 per share for the quarter, up $0.01 from last year. So next we will discuss our rate activity and as Chris mentioned, the Pennsylvania rate case was my first assignment in 1986 and now we want my last assignments will be the oversight of that case as that moves forward into the ends of the year.

So with that, I'll turn it over to Dan to discuss our rate activity and acquisition activity.

Dan?.

Great. Thanks Dave and congratulations again on your announced retirement. Let me say that many times..

Yes, right..

So good morning everyone. Thus far in 2018, we completed rate cases or surcharges, seven of our eight states resulting in $23.6 million in additional annualized revenue. We also have rate cases or surcharges pending in Indiana, North Carolina, Ohio and Virginia where we're requesting an additional $8.6 million in revenue.

Other rate activity includes reduction in revenue on an annualized basis of $7.1 million, the income tax savings expected to refund to customers due to the Tax Cuts and Jobs Act. Lastly, as Dave mentioned, we plan to file for rate release in Pennsylvania this year.

As you may recall, we've not raised rates in Pennsylvania since the conclusion of our 2011 rate case. We expect to file a full rate case in Pennsylvania during the third quarter with rates effective mid-2019. Additional rate information can be found in the Appendix of the presentation.

As Chris mentioned earlier, we are excited about the strong pipeline of acquisitions that we expect to close this year. You can see those six systems listed here, totaling approximately 16,000 new customers.

We're close to announcing a few additional municipal transactions of over 10,000 total connections, so we anticipate having more to share on that soon. Finally, in the first quarter we added three smaller systems, two in Ohio and one in Pennsylvania. With that, I will turn the mic back over to Chris..

Hey, thanks, Dan. So we noted in the last page of press release, we expect our full year earnings per diluted share to be in the range of $1.37 to $1.42. We expect to invest nearly $0.50 billion in infrastructure in '18 and this is a record amount we are near to that last year, but we'll top, but even this year.

And we'll spend right around of a $1.4 billion of CapEx over the next three years through 2020. I think it's important always a note for you that this CapEx doesn't include any investment that we would make in acquisitions either the purchase up or the repairs that we follow on. And finally, we expect rate base to grow in the range of 7%.

Now, year-over-year, we are expecting total customer growth to be in the 2% to 3% range, and by the end of this year will crossover big mark a 1 million customers. And so with that, before we end the call, I'll open it up for questions any questions you might have at this point..

[Operator Instructions] We will take our first question from Jonathan Reeder with Wells Fargo..

Just one quick question, Chris, wanted to get your updated thoughts on kind of strategic M&A or large M&A in light of activity both, inside the water space as well as outside the water utility space, but within the electrical gas space? And where I guess the water utility multiples are trading out in everything how you are doing the strategic M&A and other large potential transactions?.

It is interesting time to be in the utility business. The activity we are watching in Connecticut and in California, we haven't seen before, right, at least to this extent, where proxies are flying and statements are being made. So, it's a very interesting time to observe some of the activity.

You know our history we've always been disciplined buyers and that that continues. And I think when we consider what's happening, let's start in California and as we watch what Cal Water is offering for San Jose. There has to be considerable synergy involved.

We know those two headquarters are 1.5 mile apart, and so I think Cal Water can offer a number of it probably would be difficult for others to touch, just given the local synergies that can be applied.

And I think as you think about Connecticut, a very similar dynamic exist where ever source is locally there bought Aquarian, and not considering Connecticut water again, relatively close quarters there in the same state and probably could apply synergies that most others couldn't.

But when you look at the multiples begin offered, they certainly are you'd say aggressive, and I think as again if you look at the broader you utility market, Jonathan as you've mentioned that you see some high multiples being paid, more recent deal in the Midwest in that category.

So listen a lot happening, I don't want to say that we are watching closely and considering options because we are. But I think we will remain as we always have been disciplined buyers..

I appreciate that and particularly this specific color.

The only follow-up I would have is, do you think as a result of this you would see any other water IOUs willing to come to the negotiating table or not necessarily I mean the ones that have been mentioned in the recent deals?.

It's a good question. The field is certainly getting smaller, and so you look at the possibilities of those that might consider an exit it becomes a very small field. And as you know, Jonathan from your participation and a lot of the meetings that we all go to, it's a small group. We all know each other pretty well.

So I think it may cause everyone to kind of think about options, but that's about all I can say about that..

Okay. Yes, clearly there's some in your backyard so to speak that what sort of make sense.

And then the other thing that I wanted to touch on, real briefly Pennsylvania rate case, I guess what is the high level concerns if any that you have going into there?.

Let me kick it off and then I’ll kick it over to Dave and Dan, if they have other comments. But we have a new set of commissioners since we last filed. We have some new staff people, and so that they've got familiarized themselves with our issues. I will say and Pennsylvania has a very excellent reputation as we all know from the regulatory standpoint.

I wouldn't expect anything less than professionalism that we've always experienced here in Pennsylvania. I do believe and we have regular contact with both staff and commissioners. I do believe that they wholly understand the tax repair that we applied and have used to keep to stay out of rates, continue to spend capital over the last seven years.

So -- but there will be clearly some good questions asked on both sides about the path forward. I don't have -- well, I’ll call it acute issues, Jonathan about the case, just the normal -- the normal concerns that any CEO, management team would have, as you enter into a major case. But I believe all of our capital has been spent extremely prudently.

We continue to have a tight rein on expenses. So I would expect this to be a normal rate case.

And Dave, you're the expert, so what do you think?.

No, I think Chris just spot on. The interest income on the case will be some of the newer issues, we'll deal with. So we have a new test year format for example, right. We -- when I started in ’86 we were just fresh with the new future test year, and now we're moving to what's called a fully projected future test year.

So instead of looking 12 months out at the time of the rate increase, you're actually looking 24 months out. And so that gives you an opportunity to be more current with your costs and probably stay out longer than was -- that was available in the past, so good things. Certainly, it’ll be our first case post-repair adoption.

So that will no doubt be an issue. We don't see any concerns about it, but it will be an important component of the rate case and that we could be adjusting for example how we deal with the remaining catch up deduction that's been amortized so far component each year.

And the last kind of unique thing, I'll just add, we have over 20 acquisitions that we've done over the years that will be for the first time incorporate into a Pennsylvania rate case.

So we're going to do some new things in that regard, we're going to create some rate divisions and group our customers in various divisions around the state into zones according to their rate and try to keep like rates together and go from 20 sum zones today to hopefully five or six post rate case.

So there's some of the things we're talking about, but again, I do agree with Chris, the fundamentals are straightforward, we have rate base we have expenses we have a good feel for how these things are negotiated and litigated in Pennsylvania and very confident with where we are going with the case..

[Operator Instructions] And will take our next question from Richard Verdi with Atwater Thornton. .

I just have one question and possibly a follow-up. So last week Rick Fox was on panel at a conference we both attended, and I'm not sure if he is in the room I did jump on the call just a few minutes late.

But he gave really interesting remarks regarding safety culture at Aqua and basically the Aqua pursue to employee in short, I'm sure employee safety moving forward.

And there was some discussion on that panel from American Water regarding the technology they are using things to make certain employees are safe, but because of the path the panel took we were really unable to learn the technologies Aqua is using for safety.

So I was hoping maybe Chris or if Rick is there, if either of you could just give us some color on what technologies Aqua is using for safety their? And then how Aqua also ensures employee safety for workers, the Company contracts with rather than directly employees?.

First, Rick Fox has been a great champion for safety across our company and our employees are very, very engaged in safety. And I think last year, I don't know if Rick reported this at the conference or not.

But last year, we posted the safest year on record at Aqua America, so something that not only the management but the entire company is very, very proud of and we think about it's really tactics training and technology that you would apply to make the Company safer place, and much of that is based on employee knowledge of the risks and then determining what those mitigating factors are and then putting them in place.

I don't know that I can articulate on a phone every technology that we use, but suffice to say we've been applying things like GPS to look at speeds, right.

We liked our vehicles to drive at what I would call at least below the speed limit, and so we look at the top 10 speeders in our company vehicles on a monthly basis, and we not only report them but then we discuss it with the employees.

That alone Rich has going to have a big effect on the number of car accidents that you have because when you think about the mileage that we drive in any given year, Aqua America company vehicles drive 17 million miles a year.

And so when we just extrapolate that on a per vehicle think about your own vehicle driving 12,000 to 15,000 miles a year that’s a long time without an accident. So we've made improvements like that we’ve applied safety training across the entire company and we've had more safety training hours last year than ever before.

By the way we ask everybody in the company including Dan and Dave, who’re sitting here with me to take the same training, Rick Fox, the executive team. So we try to create and we continue as -- it's a continuous effort. We try to create a safety culture and I think we've been very successful in doing that.

But Rich for more detail, I'd be happy to connect you and Rick and make sure that Rick gives you the more detail on specific technologies that you might be interested in..

That’s great. I appreciate that. Thank you, Chris. And since, maybe I should connect with Rick. I still want to try to ask this, if you don't mind. I'm just kind of curious, because the technologies, it would be for the regulators and consumer advocates would be very receptive to technologies that would ensure employee safety.

But, sometimes they can get pushback on things that you don't think they would get pushback on.

When Aqua's employing the technologies for the safety and what have you, has there been pushback from regulators or consumer advocates or they have been pretty supportive of what you guys are implementing there?.

Well, they've been very supportive. Safety is something that I can't recall, Dave. I don’t if you can ever getting any pushback on. I would say when you think about safety, Rich, cyber security, physical security. These are things that commissions are typically very engaged with us on and not only supportive, but encouraging us to make the spend.

As we put things like tablets all of our vehicles now we have iPads or Tablets, so that people have knowledge of for example where utility lines are on the -- when they come to a scene. They have information at their fingertips about what's happening in a well house or in a system.

I think that's a very powerful when you think about implication of the safety. So I’d be happy to connect you with Rick and let him give you a lot more detail on the safety functionality and technology that we used, but I’ll leave with no pushback from the commissions on safety..

And it appears there are no further questions at this time. I would like to turn the conference back to Chris Franklin for any additional or closing remarks..

No closing remarks, but Dave’s phone line is open for all those who want to congratulate him. I thank you for joining us today and as always, if there's up follow-up questions, we're happy to answer them. Have a great day..

This concludes today’s call. Thank you for your participation. You may now disconnect..