Good day, and welcome to the Aqua America's Third Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir..

Thank you, Kathy. Good morning, everyone, and thank you for joining us for Aqua America's third quarter 2019 earnings 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 we will be referencing and the webcast of this event can also be found 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 included at the end of the presentation and also posted in the Investor Relations section of the website. After the presentation, we will open the call up for questions. Before handing the call over to Chris, I would like to formally introduce a new addition to the IR team at Aqua.

Renee Marquis, who has been with the company for five years in various financial roles has recently been promoted to Director of Investor Relations, she has hit the ground running and you will start to see her on the road at various investor event. At this time, I'd like to turn the call over to Chris Franklin..

Hey, thanks, Brian. And thank you everyone for joining. I'll add my warm welcome to Renee as well. She, as Brian said, has really hit the ground running and I'm happy to have her on our team. I will start today's call with a couple of highlights from the quarter followed by a brief update on the Peoples transaction.

Then Dan is going to discuss the financial results, as well as our rate activity. Matt Rhodes, you've heard from before, our Executive Vice President of Strategy and Corporate Development to give you an overview of our recent progress on municipal growth.

And finally, I'll conclude the call with a review of our guidance for 2019 and then open the call for questions. So the third quarter was certainly unexciting one.

In summary, we continue to deploy a large amount of capital, we've reached a significant milestone with the Peoples acquisition and we saw the Peoples rate case going to effect and we also announced the largest municipal acquisition in our 133 year company history. So quite a quarter. Let me give you a little bit more details.

We remain on track for record capital spending of about $550 million this year and in the first three quarters of the year, we've already invested over $400 million in infrastructure renewal, which as you know, consistently delivers value to our customers, communities and the shareholders.

Investing infrastructure is at the core of our mission to deliver safe and reliable service. And it also helps to drive our earnings growth. On the financial front, our non-GAAP earnings per share increased by over 9% compared to the same period last year. And on the growth front, our municipal acquisition strategy continues to deliver results.

In September, we announced a signed purchase agreement with DELCORA, which many of you know, is a large municipal wastewater authority in Southeastern Pennsylvania, and Matt's going to give you more details on that in the coming slides.

And finally, we received the much-anticipated decision from the Pennsylvania administrative law judge and the recommendation was in favor of the Peoples transaction, which I'll talk a little bit more on the next slide here. Slide eight provides an overview of the transaction timeline related to the regulatory process for Peoples.

As reported on the last earnings call, we received the Kentucky approval in March and West Virginia back in April, and then more recently here on October 28, we received a proposed decision of the ALJ recommending that the Public Utility Commission here in Pennsylvania to issue all approvals necessary for the company to carry out the acquisition of Peoples.

In terms of next steps, the parties who don't agree with the settlement agreement can file exceptions, disagreeing with the ALJ recommendation and the PUC will consider those arguments, a formal vote will take place by all five PUC commissioners at a public meeting likely in December or January based on our projected timeline.

Not to say that we are pleased with the ALJ recommendation and respect the process and the procedure, which now allows a full review by the Public Utility Commission. And as such, we now anticipate the closing of the Peoples transaction or acquisition in late 2019 or early 2020.

And with that, let me turn the call over to Dan to discuss our financials for the third quarter.

Dan?.

Thanks, Chris. Good morning, everyone. Let's begin with the third quarter financial highlights. We are again reporting non-GAAP numbers this quarter that adjust for the impact of the Peoples transaction and integration. We reported revenues of $243.6 million in the third quarter of 2019, 7.7% compared to $26.1 million in the third quarter of 2018.

Operations and maintenance expenses were $82 million in the third quarter compared to $68.6 million in last year's third quarter. Moving on to GAAP net income, which includes items related to Peoples transaction. We reported $88.5 million compared to $78.2 million in the third quarter of 2018.

GAAP earnings per share, including Peoples related expenses and incremental shares were $0.38 in the third quarter compared to $0.44 in 2018. When adjusted for Peoples related charges, income was up 9.4% from $78.2 million to $85.6 million.

And as you can see on the bottom row of the table, adjusted income per share was up 9.1% to $0.48 per share from $0.44 per share in the third quarter of 2018. This non-GAAP measure removes Peoples related items, including the equity raise to complete the transaction. Now let's move on to the revenue waterfall on slide 11.

Breaking down the 7.7% revenue increase, you'll see that rates and surcharges was the main driver at over $15 million with Pennsylvania being the primary contributor. Growth added an additional almost $2 million, this was driven primarily by acquisitions in Pennsylvania and Illinois and organic growth in Pennsylvania, North Carolina and Texas.

Volume was up by $429,000 driven by wastewater and other items increased revenue by $216,000. Next, we will discuss the O&M waterfall on slide 12. Operations and maintenance expenses were $82 million for the third quarter compared to $68.6 million in the third quarter of 2018.

The main contributors were the 2018 non-recurring items and cost from the Peoples transaction and integration, which increased O&M by $5.8 million and $2.5 million, respectively. Of that $5.8 million, $3.9 million was the favorable reduction to a regulatory liability that we mentioned on last year's third quarter call.

Walking through the other drivers. Other items increased by approximately $2.4 million, employee-related costs increased by less than $2.1 million, growth, both from acquisitions and organic growth added $684,000 of expense.

Excluding the non-recurring items and transaction related expenses O&M growth would have been in line with our historical expectations. Next, let's review the drivers of EPS on slide 13. In walking through the EPS waterfall from left to right, you can see that rates and surcharges increased EPS materially with an incremental $0.064.

Growth, volume and other also contributed. Expenses were higher, which reduced EPS by $0.046. This brings the adjusted income per share for the third quarter to $0.48, up over 9% from last year's Q3 EPS.

GAAP EPS included two additional items from the Peoples transaction, $0.074 to adjust for the dilutive effect of the equity offering, as well as $0.024 per transaction and financing expenses. This brought GAAP EPS to $0.38 for the third quarter. Moving on to rate activity on slide 14.

In 2019, so far, we've completed rate cases and surcharges in Illinois, New Jersey, North Carolina, Ohio and Pennsylvania totaling annualized revenue of $59.8 million. We saw the impact of these increases when we discussed the revenue waterfall a few minutes ago.

In the coming months, we expect to file water or wastewater rate cases in North Carolina, New Jersey and Indiana. On slide 15, I'd like to give you a brief update on the Peoples Pennsylvania rate case, given its importance. You recall that Peoples filed a Pennsylvania rate case in January requesting $94.9 million in additional annualized revenue.

This case was the first consolidated case for the Peoples and Equitable divisions and supports the largest infrastructure rehabilitation program in the company's history.

A settlement agreement was filed in this case in July and following a commission order new rates went into effect on October 29, totaling approximately $59.5 million in additional annualized revenue. As mentioned previously, Peoples has not elected repair tax in Pennsylvania yet and we're evaluating how to implement it.

This takes a fair amount of work as there are several factors, including defining the unit a property, identifying, how much of the capital is repair eligible and conducting repair study to determine the catch-up deduction.

As you you'd expect, this is something we anticipate implementing in 2020 once we own the company, given the success that we've had with this mechanism for our Pennsylvania water customers where we were able to invest over $2 billion in infrastructure without raising rates from 2012 until May of 2019.We'll be prepared to speak about the potential impact of repair during our upcoming Analyst Day.

And with that, I'll hand it over to Executive Vice President, Strategy and Corporate Development, Matt Rhodes..

Thank you, Dan. As Chris previously mentioned, in September we announced a signed asset purchase agreement with the Delaware County Regional Water Quality Control Authority, known as DELCORA. This is highlighted on slide 17. The purchase price of the transaction is $276.5 million.

This municipal wastewater authority is located in Southeastern Pennsylvania, service 42 municipalities and approximately 500,000 people and marks the largest municipal acquisition in our company's history. It is also the largest ever municipal deal in the State of Pennsylvania.

Aqua estimates that DELCORA provides wastewater service to approximately 165,000 retail customer equivalents. DELCORA system includes over 180 miles of pipe and has a customer base consisting of retail, commercial and industrial customers, as well as large wholesale agreements with municipal authorities.

Post-acquisition, there are approximately 50 million gallon per day wastewater treatment plant in the Western portion of their service territory, will be the largest wastewater treatment plant that we own and operate.

The Eastern service territory currently conveys wastewater to the Philadelphia Water Department or PWD through a contract that is set to expire in 2028. Given this, DELCORA is responsible for a portion of PWD's Philadelphia EPA mandated cost to separate its combined storm and sewer.

It's afforded to stay with PWD over the long term, its total expected cost related to the Philadelphia EPA mandated costs, its own EPA mandated cost related to combined storm and sanitary sewer in the city of Chester and other work for its wastewater plant and pipeline rehabilitation are expected to be $1.2 billion through 2042.

This is expected to increase DELCORA customer rate substantially over the long term. To mitigate this DELCORA plans to build the infrastructure to divert the wastewater flows from PWD, which also requires the expansion of DELCORA's existing plant to approximately 100 million gallons per day.

Aqua is uniquely positioned to make these investments, given its extensive expertise in large and complex projects. Total DELCORA CapEx under Aqua ownership through 2028 is estimated to be approximately $700 million with the majority to be spent in 2026 to 2028.

DELCORA intends to use all net proceeds from the sale to establish a rate stabilization plan which will help to offset customer rate increases in the future due to the large capital cost that DELCORA faces. So, we feel that the combination with DELCORA is a win-win for both parties involved.

We expect the transaction to close in late 2020, we plan to fund the DELCORA acquisition with a combination of debt and equity. And as we have discussed on previous calls, this could include an at-the-market equity program. In addition, Aqua already operates in many of the same communities as DELCORA.

As you can see on slide 18, there are significant overlap in the footprint between Aqua's water service territory and DELCORA's wastewater service territory. Aqua is deeply entrenched in the local communities where DELCORA operates and is well positioned to effectively serve its customers and these communities as a whole. Moving to the next slide.

As we've noted in the last several calls, we continue to see a strong - strong municipal deal flow, especially in our seven states with fair market value laws. This slide details our 10 signed agreements, including nine with municipals for approximately 188,000 customer connections.

This includes the DELCORA acquisition, assuming it serves 165,000 retail customer equivalents, which I mentioned earlier. Just recently, on October 24, the Schuylkill and Cheltenham acquisitions were also approved by the Pennsylvania Public Utility Commission and these deals are expected to close before year end.

The two Illinois, transaction shown in the table are also expected to close this year. Although some of the transactions are expected to close in 2020, we still expect a total new customers added in 2019 along with organic growth to be within our targeted customer growth range of 2% to 3%.

Also as noted in the last call, it is important to note that for every $100 million in rate base from acquisitions that are added through municipals. We expect approximately $5 million in additional earnings to be generated from this increased rate base, excluding any pursuit costs.

In addition to our signed acquisitions in recent quarters, we have also highlighted some of the opportunities we're pursuing that are still in the earlier stages. And slide 20 demonstrates we are actively pursuing acquisition opportunities in several of our existing states totaling approximately 275,000 customers.

We are also seeing more and more larger opportunities many over 25,000 connections. Now I'd like to pass the call back to Chris..

Thanks, Matt. Let's conclude with a quick review of our '19 guidance and then we'll open it up for questions. We are reaffirming our stand-alone 2019 guidance for Aqua along with an updated timeframe with the expected closing of the Peoples transaction, we expect Aqua stand-alone adjusted income to be $1.45 to $1.50 per share.

This excludes the impact of the Peoples transaction, including the associated equity offering. We are on track to spend approximately $550 million on replacing and improving pipe and plants and other infrastructure.

This will be another record year of infrastructure spending across the Aqua platform, and through 2021 we expect to invest approximately $1.4 billion and this will help drive our rate base growth of about 7%.

As mentioned earlier, we have 10 signed acquisition agreements and together with organic growth, our customer count will increase by 2% to 3% this year.

And finally, we've passed most of the important milestones in the regulatory process and in our integration planning for the Peoples acquisition and expect to close in late 2019 or early 2020, after the PAPUC carefully considers the acquisition case.

Given the new closing expectations for Peoples, we are going to delay the Investor Day that was planned for December, we now plan to hold that Investor Day when we announced our full year earnings in New York on February 27. At that event, it's our intention to provide longer-term guidance.

And as I said in previous calls, we'll provide that longer-term guidance only after we finish the Aqua rate case, which is now complete. The Peoples rate case again not complete, close the Peoples transaction we've discussed that late '19 early ' 20 and do the analysis of the repair tax that Dan discussed in his comments today.

So with that, I'd like to open the call for questions at this point..

Thank you. [Operator Instruction] Our first question comes from Durgesh Chopra of Evercore..

Hi. Good morning, team. Good. Thank you for taking my question. Good quarter here. So I'm clear on the drivers.

Can you just talk about the rate case settlement at Peoples Gas, how does that compare to what you might have had in your models when you were kind of looking at the deals, and you sort of you first full year of accretion of the combined company.

How does it fit? What's the internal projections?.

Yeah. So, Durgesh, simply said that, we're pleased with the rate case outcome and the revenue outcome there is right in the landing zone that we expected in our modeling for the transaction. So very comfortable with that - where that came out.

Yeah, we continue - as we've talked, this is expected to be - this will be an accretive transaction for us in that first full year of ownership. So no change of that and, obviously, we'll give more guidance on that when we have our Analyst Day, now in February..

Okay. Awesome. And then just - maybe just walk us through, and I apologize if you've done this in the previous calls. But just walk us through sort of the gating items on the repairs tax election.

So obviously, you have to make a decision whether it makes economic sense and then go to the regulators for approval, how does that - how does that process work? And just sort of the - kind of the gating items to getting there?.

Yeah. So the primary gating item is this repair study. And the repair study, Durgesh, what that really does is, it has us look back at capital that has been expanded over the past several years to determine how much of that capital would have been repair eligible and that's really the establishment of that catch-up deduction.

And so that's one piece of this, which is a gating item which takes time, obviously. Another item is obviously the decision for kind of determining what the framework is, what that unit a property is, as we discussed, what the threshold are related to that is, and thus, how much of the capital would be repair eligible.

But in terms of the actual kind of, course of events, once we have that repair study completed, we can file with the IRS to allow us to implement the repair tax deduction. So we can go ahead and do that. And then we would then look to the commission in terms of how do we think about and how do we adjudicate that catch-up deduction.

So, that's a separate piece that comes after that. Now you'll recall that for Aqua Pennsylvania We had a process that allowed us to amortize that catch-up deduction over a 10 year period of time.

We'll look for something here to be helpful with that catch-up deduction as well, but the actual implementation of the repair tax comes from that IRS filing that we will do..

Great, and then just on DELCORA, what - how should we think about the timeline for you getting to the closer?.

Yes, so I do get. So we're going to expect to file our PUC applications sometime in early 2020 and then it would take six months to nine months from that point. So we're looking it at late 2020 closing for DELCORA..

And I guess, we've already been work - and we've already been working on the assignment of contracts with a number of contracts associated with DELCORA. So some of those public meetings have already begun to take place and the assignment - the contracts have been going well. So, as Matt said, that leads up to the filing of the PUC..

Okay. Thanks, Chris. A good quarter, guys. Thank you for taking my questions..

Thanks, Durgesh..

Our next question comes from Ryan Connors of Boenning & Scattergood..

Yeah. Thank you. Good morning..

Hi, Ryan..

I wanted to actually continue on the topic of DELCORA for a minute. And it's, first of all, just a housekeeping item.

DELCORA, in my understanding, that's not a at 12 fair market value deals, is that correct?.

Yeah. We would likely file for that under the fair market value legislation..

We would expect it to be..

Yes..

Okay. So then I guess my follow-on to that was, this whole idea of the trust account or the money going into a trust for rate payers to offset future rate increases.

I mean, that's sounds like a much different than the prevailing logic of at 12, which was the selling municipality maximizing their own financial benefit by being able to sell above book value.

So how does that - how do you square those things that were going into a trust and yet it is an at 12 deal and who are the owning municipalities? I'm just curious how that that all played out..

Well, I think DELCORA was most focused on keeping customer rates low. And the reason they really started talking to Aqua is, they're facing a lot of capital cost over the coming years which would on a standalone basis would increase our customer rates pretty substantially over the next several years.

And a lot of their customers are these large - other municipal authorities that they serve. They have large industrial customers, they also serve some retail customers in the city of Chester, but all these customers were facing pretty large increases given the capital plan of DELCORA over the coming years.

And so DELCORA's main objective in doing a deal with Aqua is to keep rates low. And so it made sense for them to take the proceeds that Aqua paid and put those into a trust, which will be used to offset customer rates for as long as possible. And as you know, Ryan.

In some of these transactions - municipal transactions can have implications for what future rates at the municipal be and so DELCORA was looking for a purchase price that optimize - was a fair purchase price, but also helps to mitigate longer term rates after this trust was is exhausted.

So that was really the - a lot of the rationale for the purchase price and the discussions with Aqua. This trust will be administered fully by DELCORA going forward, but its sole purpose will be to offset any future rate increases that Aqua may have for these customers..

Hey, Rayan I'll add outside of Matt said with - when DELCORA first talked to talk to us, they talked about three principles. Right. They wanted rates to remain low, they wanted to be able to address this vast capital need generated by the exit from Philadelphia Water Department and they wanted to take care of their employees’ long term.

And so, admirably and as we've discussed before, to take all the proceeds after they really net proceeds and putting the customer rates, we've not seen before. So this is really using a lot of the tools that have been considered and created over the last several years to have a really nice outcome for customers in the long run.

And for that matter, the combined company..

Yeah. That definitely helps clear it up. My other follow-on regarding DELCORA was just from a scale standpoint. I mean, obviously, the pipeline is solid, as you talked about Matt. But it does seem like it's kind of barbelled. You have this very large DELCORA [Technical Difficulty] a lot of much smaller ones.

I mean, what is - is DELCORA sort of a one-off in that size, are there anything - is there anything approaching that magnitude out there, or should we just really over the next several years more be looking for kind of the standard smaller type transactions..

I think we have to be careful in how we answer that, Ryan, as you would suspect. But I think as we talked about it here, we have some large things that are in the pipeline and some medium and some smaller, but I would not say that we see DELCORA as a one-off.

We think there's other possibilities in that same size range that we could - that we could think about across our footprint..

Okay. Very helpful. Thanks for your time..

[Operator Instructions] Our next question comes from Tim Winter of Gabelli Funds..

Hello, guys. Good morning and thanks for taking my question. I was wondering if you could talk a little bit more about the potential for wastewater opportunities.

It seems like they might be a little bit easier to acquire? And maybe specifically in the areas you already serve water?.

Yeah. I mean that's probably the easiest one to give you a thought, and then going to kick it to Matt. But as we look across our water platform, we have a lot of opportunities. When we think about the Tredyffrin pipeline that we've purchased about a year ago. There are certainly some interest in that area.

As well as in some other areas where we currently serve the water. And that's where we should look first frankly. And so that's a lot of the work we've done, not only here in Pennsylvania, but across the footprint.

And I would say this, generally, and I think we've talked about this before, but the politics are at least slightly easier when it comes to wastewater, because there is not the same affinity that people find with their water source. And so I think you'll see a lot more wastewater in the coming years.

I also would say this, given our new size with the DELCORA acquisition, but even before that I then we have but 130,000 wastewater customers before DELCORA. So we've got now a developing an existing and a developing level of expertise in wastewater that would make us a strong competition in any transaction or potential transaction with wastewater.

Matt you may..

I would just say, as you look at our recent deals that we've done in Pennsylvania and other places. And then if you look at our pipeline, we're starting - we do see a lot of wastewater opportunities in front of us. And as Chris said, there is less affinity for wastewater compared to water.

And also it can be more difficult to operate in some cases, there can be more violations that some of these municipalities have related to their wastewater. And so it makes more sense for them to look to another option and to sell to Aqua. So we're really seeing a pickup in wastewater and I expect that to continue over the coming years..

Now, do you guys have the ability to sort of socialize the rates across water and wastewater, are they uniform rates or something of that nature to offset the need for rate increases in situations like this with DELCORA?.

Well, let's think about it in two ways. Right. One is, if we think about standard tariff where we - where we would have a single rate for wastewater. which we're moving towards. We are - obviously single tariff pricing is a goal.

But secondly then, in Pennsylvania the law allows for some subsidy of wastewater customers by the water customers, but that is solely determined by the Pennsylvania Public Utility Commission and that's the level of that subsidy, if any, would be determined to the normal rate procedure at the commission, but outside of Pennsylvania, Tim.

That ability doesn't exist in other states to my knowledge..

Okay. Thank you, guys..

You bet. Thank you..

At this time we have no further questions in queue. And I would like to return the conference back to today's speakers..

Well, as always, we're available for follow-up. But thank you for joining the call today and look forward to seeing you soon..

Thank you, ladies and gentlemen. You may now disconnect..