Q3 2019 Earnings Call
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These statements are predictions based upon our current expectations.
Estimates and assumptions.
Additional information regarding these risks uncertainties and factors as well as a more detailed analysis of our financials and other important information.
Provided in the earnings release in in our Form 10-Q , each has filed with the SEC.
Reconciliations for non-GAAP financial information discussed on this conference call, including adjusted income.
Adjusted earnings per share adjusted return on equity in our adjusted regulated OEM efficiency ratio.
Also.
This slide deck has been posted to our Investor relations page of our website.
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My name is David did a I'd and well be Oh W.
Your company.
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Thank you.
You are now rejoining the main conference was in both our regulated and market based businesses.
In our regulated business, we've added more than 57000 customer connections year to date. This includes 46900 customers through closed acquisitions and 10400 through organic growth in our existing service areas.
We most recently closed on the water assets of Stilton Barra, Pennsylvania, Unlike station, Indiana as well as the wastewater assets of exact exit or township in Pennsylvania, We're excited to welcome our new customers and our new employees. Additionally, in the coming months, we will welcome an additional 26400.
Third customer connections through agreements that are signed and pending.
Moving to our market based businesses were extremely honored to be awarded department of defense contracts for the water and wastewater systems at joint base, San Antonio in Texas, and the United States Military Academy at West Point, New York.
Joint base, San Antonio includes Randolph Air Force base for Sam Houston Camp, Bullis, and Lachlan Air Force base. These installations support over 187000 jobs across the state of Texas.
The United States Military Academy at West point is the oldest continually operated army post in the United States. The campus is home to 4400 could debts and was once home to our own COO Walter Lynch at West point alumnus and Army veterans.
Excuse me the opportunity to expand our military footprint to 16 basis across the country is a testament to American waters industry, leading water research development and operational excellence, it's a privilege to ensure the delivery of safe clean and reliable water and wastewater services for our country's military members.
And their families.
With this continued strong performance in our disciplined approach to our business. We are narrowing our 2019 adjusted EPS guidance to $3.56 to $3 in 64 cents per share from $3.54 to $3.64.
Moving to slide six the foundation for our earnings growth continues to be the capital investment we make in our regulated operations through September 30, we invested around $1.3 billion with about 1.2 billion into our existing regulated infrastructure and around 85 million.
In in regulated acquisition closings.
We expect to invest approximately $1.9 billion total for the full year with projections of more than 260 million for regulated acquisition closings at around $1.7 billion to address the continued and growing need for infrastructure investments across our footprint.
Results for our market based businesses are also strong contributing to both net income growth and cash flow generation given the capital light nature of these businesses. So in summary, we will continue to invest in our infrastructure and we have line of sight to a 31.5% aluminum efficiency ratio.
Thanks, Susan and good morning, everyone. Our regulated businesses had a strong third quarter, making capital investments to ensure a clean safe and reliable water services. We also continue to improve our operating efficiencies to benefit our customers and grow our business through acquisitions.
On slide eight let me touch briefly on the weather as you'll recall, we had an unusually wet weather in the second quarter of 2019, which led to a total quarter over quarter unfavorable impact of five cents.
This quarter has been more typical and once again you can see our geographic diversity helps mitigate weather variability for example, this quarter, New Jersey American water experience at or below average precipitation, which offset Missouri slightly above average precipitation as a result weather had no material impact on our revenues for the third quarter.
Turning to slide nine let's walk through some of the regulatory highlights starting with our two pending rate cases in Virginia and California.
In November 2018, Virginia American water file the general rate case, requesting an overall increase of $5.6 million driven by approximately $98 million in infrastructure upgrades. Since April 2017 interim rates became effective on May one 2019, and we expect the decision in the first quarter of 2020.
California American water file for new rates. This past July the case covers 2021 through 2023 and request an increase in authorized revenue of $46.6 million over three years, beginning with a $26 million increased proposed for January Onest 2021.
The request seeks $197 million for infrastructure improvements for the 2021 to 2022 capital test years, we expect the decision on this case in late 2020 with new rates to take effect by January Onest 2021.
In other activities. Several bills were recently signed into law in Indiana by Governor HOKA First House Bill Fortino, six known as the water infrastructure funding Act establishes the first state appropriation of $20 million per year for water infrastructure investment paired with another Bill Senate Bill four this combined legislation support.
Its regional water planning and the reduction of water loss caused by poor or aging infrastructure. The goal is to promote a consistent approach to providing clean and safe water across all water systems in Indiana.
A third Bill Senate Bill 472, enhances Indiana's version of fair market value legislation.
And in Pennsylvania on October three the Pennsylvania Public Utility Commission approved our proposal to replace customer owned lit service lines in accordance with Act 120.
This act authorizes the cost associated with the replacement of the customer own portion of led service lines to be included in a regulated utilities rate base.
Turning to slide 10, we continue to grow the size of our footprint with 19 acquisitions occurring in eight states totaling 46900, new customer connections earlier this month, Pennsylvania American water completed the acquisition of both the Steelton water and exit or wastewater systems. The steel to water system added approximately 24.
100, new water connections the sale the water system will allow the barrel to eliminate as existing water debt and investing capital projects.
And exit or Pennsylvania, where we've been providing water service for more than 17 years, we welcomed approximately 9000 wastewater customer connections. According to township manager John Granger quote the sale of the wastewater treatment plant and collection system. The Pennsylvania American water is a great benefit to current and future residents of Exeter the plant.
And system, we're becoming an increasing burden on the township as federal and state regulations were becoming too difficult for the township to manage and quote. This is a great example of how communities are better simply because we're there.
This marks Pennsylvania American water's fifth acquisition in the state in 2019.
Indiana American water also close on the Lake station water system earlier, this month, adding about 3300 water connections to the existing Indiana customer base.
As we've shared with you before with a consistent pipeline of opportunities we see in the water and wastewater industry. We're confident in our disciplined growth strategy and our ability to provide solutions across the nation.
Turning to slide 11, we continue to balance making critical investments to ensure reliable service, while limiting the impact to our customers bills in the first nine months, we've invested approximately $1.2 billion on our existing regulated infrastructure.
At the same time, we're making progress towards our long term onem efficiency goal of 31.5% by 2023.
To put this effort into perspective, our adjusted own and expenses are just slightly higher today than they were in 2010.
We're extremely proud of our employees focus and commitment to controlling costs on behalf of our customers.
We launched this new platform by listening to our customers, who told us they wanted to more easily manage their accounts online since the launch we received very positive customer feedback, especially on ease of use. This is just another great example of how our customers are at the center of everything we do.
With that I'll turn the call over to Susan for more detail on our financial performance.
Thank you Walter and good morning, everyone.
Let me start on slide 14, with a summary of results third quarter 2019 consolidated GAAP earnings were one dollar and 33 cents per share compared to one dollar four cents per share in 2018.
2018 results included a six cents gain from the sale of the majority of the contracts in our contract services group and a 22 cents charge from the Keystone impairment.
Excluding these two adjustments in 2018 adjusted earnings per share were up 10.8%, primarily driven by growth in the regulated business.
The market base business results were about flat in the parent results improved one cent per share compared to 2018.
Our 2019 adjusted earnings through September 30 were $2.88 per share or a 10.3% increase over the same period last year, our regulated businesses increased 15 cents per share our market based businesses increased nine cents per share and finally, the parent results improved by three cents per share year over year.
There.
Moving to slide 15, let me walk through the details of the quarterly results by business regulated operations were up 12 cents per share in total we had an 11 cents per share increase from additional authorized revenue and surcharges to support infrastructure investments acquisitions and organic growth.
Depreciation and interest increased one cent per share primarily to support regulated acquisition and investment growth.
The market base business results for the quarter were similar to last year on continued strong performance.
Finally earnings at the parent where one cent per share reflective of the impacts of a lower consolidated effective tax rate offset somewhat by increased interest expense.
For market based businesses the year to date improved results reflect among other things. The addition of customers under new partnerships at homeowner services and growth from the 2018 additions of two bases in the military services group.
Moving onto slide 17, its been a very active year. So far on the regulatory front, we have $93 million in annualized new revenue. This year. This includes 45 million from rate cases, and $48 million from infrastructure surcharges.
The continued successful execution of our regulatory strategy is a key element of our ability to consistently deliver results.
We're also affirming our long term earnings compounded annual growth expectation on an earnings per share basis to be in the top half of that 7% to 10% range.
Now moving on to Slide 17, Slide 19, excuse me as we noted in the release on October 29, 2019, the company's board of directors declared a quarterly dividend of 50 cents per share of common stock payable on December the fourth 2019.
We continue to be a top leader in dividend growth, we have grown our dividend at a compound annual growth rate of 10.1% over the last five years and we expect to continue the growth at the high end of that 7% to 10% range.
Regulatory execution, along with strong results from our market based businesses allows us to consistently deliver on our earnings commitment.
We believe that delivering on results combined with our strong earnings growth and superior dividend growth expectations continues to provide excellent value for our investors and with that let me turn the call back over to Susan Thanks, Susan.
Many factors go into producing our consistent financial results at the top of that list is the commitment to be the best at the fundamentals of the business one of the most basic things we have to do at the water utility is the quality of the over 1 billion gallons of water, we provide everyday throughout the United States and whether you call. It our purpose our mission or just.
Our DSG, we know that if we don't deliver water that is safe and reliable nothing else. We do matters you see on the slide just a few of the headlines were all rating about threats to the safety of drinking water, including lid Legionella provides insight into toxins. These are real threats that require expert and knowledgeable people and organizations.
Who have the breadth depth and experience to ensure the safety of the critical human native water and had American water, we never forget that at the end of every water pipe Theres a family that depending on us to provide this critical need and that every fire hydrant lives can depend on the right pressures and volumes and that every wastewater plant serves as a shield against potential disease.
And at the end of the day, we also know that what we do and our customers and communities best long term interest will also be in our investors best long term interest and Thats, what we believe it means to be a truly sustainable company.
I want to close our prepared remarks by saying how much our hearts go out to the millions of people who are affected by the horrific fires in California, and how much we are in all of the amazing work being done around the clock by the incredibly brave and talented firefighters.
May be facing during these difficult times, we were able to maintain service the entire time during the Kincaid fire in power outages, which affected two of our smaller operations in geyser avail, with approximately 300 customer connections and Lark field with approximately 2100 connections our infrastructure assets have now.
We will now begin the question and answer session to ask a question you May Press Star then Ryan on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then to at this time, we will pass momentarily to assemble our roster.
The first question today comes from sharp Peraza of Guggenheim Securities. Please go ahead.
Hey, good morning, guys.
Good morning sharp.
To that can you just touched a little bit on sort of some of the publicly available data in the media that we're seeing early.
Around Jay and sort of year interest there, maybe just high level structure of your bid because it does have an electric business. So curious if you're bidding for the entire system or just the water portion of it.
So short one thing that I will remind everybody is that Jay has publicly announced two would be in the next round of participation and we're very respectful of J EA and their process and so we can't really comment any further on anything additional about Jay EA.
And all I will say is that we've not made any changes to our previously communicated business model strategy.
Got it and then just maybe you know it's somewhat of a large transaction is there any disclosures assuming that you are the winning bidder, how you would finance that transaction.
Yes, we really can't comment about anything on the process at this point.
Okay got it that's helpful and then just around.
The military services, congrats wall thrown westpoint and obviously the joint base anatomic deals.
Is there anything else for the balance of year that we should certainly be thinking about and maybe just just quickly on on how we're thinking about the opportunity set.
You know at one point, we had said we expected.
Ward of up to three basis.
We don't like to predict what the department of Defense, we'll do the two that were awarded this year that we won all both came in September we're not sure. If there will be any others that are awarded we do currently have five outstanding RF piece that we expect over the next 12345 years. We do think there may be some that are awarded in 2000.
20.
Got it got and just lastly on California.
Is there any remaining approvals and around the desalination project, because I guess, a little bit of pushback at the local level, but is there anything you guys made permanent or approvals to sort of move forward.
Our Walter here, we need the approval from the California Coastal Commission. There next meeting is scheduled on November 14th and Theyre going to take it up at that meeting so thats a next approval that we need.
Terrific. Thanks, guys congrats on the results today.
Thanks, Sir.
The next question today comes from Julien.
When Smith of Bank of America. Please go ahead.
Hey, So quick question can you elaborate a little bit more on Indiana and for respect the prospective impacts of any legislation that state just to get going here.
About how we can play a role to help the communities.
But it is in terms of good translating back to more tangible.
Opportunities is still a little bit on the way the fee.
Yes, I mean.
Well, we think that there'll be more discussions, but it's going to take time to work this through and have the communities realize that they do have these options, but it's just part of the the overall favorable legislation and we're seeing across the country. Because again I think legislators are realizing that we can play a significant role in helping these communities.
But some context stratagraft, specifically about what Julian.
There was some media articles out there about water quality, so 100 matches nationally.
Right. So I think what you're referring to is.
There is a great call the environmental working group that.
Rather than looking at EPA guidelines and regulations or state regulations or even.
Some of the unregulated contaminants that EPA is looking at I think they have come up with some other on standards and they run stories that GE, even though we have all these water quality results, they're not living up to whatever standard. This group has decided is appropriate. So I mean, our response to that is that.
We take water quality and safety very seriously the EPA establishes drinking water standards to protect the public health, we treat and deliver water that is major surpasses every one of those and in fact, the EPA has a special program that's called the unregulated contaminant monitoring rule, which looks at another 40 contaminants that really aren't ready.
Related but we voluntarily have adopted those so that they can look and see what the impacts of those are we made or surpass all of our state.
At the end of the day there a lot of groups out there who may decide that they're going to set their own goals and their own policies, but we really can't follow what every individual group does along those lines. So, but we're meeting all of the EPA, we're voluntarily adopting 40 that aren't even regulated but that we're continuing to monitor.
And we're acting as if there they are regulated and meeting all state requirements.
Excellent. Thank you so much so kerry.
The next question today comes from Durgesh Chopra of Evercore. Please go ahead.
Hey, good morning.
Good morning Durgesh.
Good morning, Susan just a follow up on Charles' question on the military bases congratulations on the win win.
What's the can you just help us think about the size of those bases.
Relative to the existing fleet of base that you have currently and how should we think think about margins in revenues coming in is it more sort of a 12 to 16 month lag from your own.
Yes, so durgesh joined by San Antonio because it is comprised of two army into Air Force bases. I believe is the largest that we have in our 16 bases in terms of the 50 year over 700 million revenue, it's the largest that we've had and.
West point is nice sized military installation also we do know debt just like across the us where there are infrastructure needs. We're finding it the military bases that a lot of their infrastructure is from right. After World War two when most of the military bases were built so if you remember we make money three ways with the military bases.
Theres, the 50 Euro and Im contract then when we take over there is typically upgrades, we need to make and then any future projects that are capital or working capital on these bases. We then can add that as part of the and Nam and we get paid to do those plus a fee. So what we're finding is the military bases also needs.
Infrastructure upgrades and investment just like the rest of the country does so we're looking at the pace in terms of all three of those areas. So we're very pleased you know in Texas. We have four Hood, which is also I believe one of the top two or three largest bases. We have so it's very exciting to us to be able to grow in that respect.
And then we look in the Air Force and the army continue to be quite active.
Theres a lot of opportunity in Navy, we believe they have really not done much privatization. So we're stepping back looking at the bases and facilities across the country again, we have five outstanding RFP.
That were already in the middle of the process and we're looking to any new ones that may come up in the next year.
Thanks, Susan and what about the margins I guess I was really asking the.
The margins from the two leases that were just awarded.
This past quarter when should we model those.
Hitting the bottom line is it 12 to 16 months out from here or or longer than that so.
So first of all we don't talk about margins. However, it's a great point, while technically we assume these contracts on September thirtyth, there's pretty much a standard eight month transition for each of these basis and by June Thirtyth of next year, we will be fully operational on those bases with the full amount of revenue that we get from those bases at that.
I think.
Awesome, that's great and then just one final I'm sorry did you do first not June thirtyth.
Okay Perfect and then just one quick clarification did we lowered the capex guidance for this year I'm not sure if I'm reading this correctly no no and you know what so maybe a little confusing what we did on the chart as we broke out regulated acquisitions capital from the infrastructure. So we're still looking at around one per.
9 billion, which is what we had guided too. So it's 1.9 billion total and what we expect that break down to be is around 1.7 billion into our existing regulated infrastructure and probably 250 260 million on regulated acquisitions.
Awesome. Thank you so much that so.
Thanks to cash.
Last question today comes from Richard Verdi of Coker and Palmer. Please go ahead.
Hi, Good morning, everyone. Thank you for taking my call a nice quarter as well. Thank you. Thank you Rick.
Thanks, Susan.
So quickly on things in some of my other questions have been answered, but I do want to actually revert back to a question I would periodically asking that pass for an update due to some of the events that transpired during the quarter in.
To avoid being granular on what assets on a very high level.
So what we think about the company's portfolio, obviously has a nice portfolios states given the quarter report given quarter reports going back for many quarters, but.
It doesn't mean that there theres not opportunity in states outside of the portfolio.
The other home state for the company has a footprint are very compelling from an upgraded infrastructure perspective, and also on the regulatory front. So moving forward in the near to intermediate term is.
Is the strategy, maybe more to work within the space in which the company operates in Cardiff stand within those states or could we maybe expect to complement to more and more analysis.
And at our other states.
Hi, Rich Walter here, Hi, we'll know it's really it's really both we continue to invest in our infrastructure in the states, where we operate we continue to look for opportunities in those states, but we also look outside our footprint and for us to enter a new state we really need a good.
Business environment, a good regulatory environment, and then the opportunity to grow there were certain size because we just don't want to buy a small system and just be.
Just have that system. So we want to be able to expand in the state. So we're looking at that and we actively look at that but.
We do both and as far as growth goes inside our growth. We're investing as we said 1.7 billion. This year and we're going to be spending over 250 million to acquire systems in our footprint, which is.
I think tremendous and just shows the the dedication and the value that we're providing to these communities and Walters exactly riding into remind many of you and I think we've said this in the past when we look at and we do have a corporate business development group and we're always looking at every state across the country, we actually have them.
Kind of in a looking at the regulatory environment the business environment, but the thing that typically will slow us down from going into new state is we believe it's important that within five years, we have 50000 customer connections because part of our brand is affordability and the fact that we're looking at our NIM efficiency and.
And if you just have a couple of 3000 in the state it's very hard to get those efficiencies. So we're we're looking at whether we would go into new state those are kind of the three gates that we have that we would go through.
Okay. That's great I appreciate the color guys. Thank you and great quarter again, thank you very much thanks rich.
The next question today comes from David Pitts, South Wolfe Research. Please go ahead.
Hi, good morning.
Good morning, just just back to the diesel project in California, I know you guys mentioned you still.
We need to permits to get approved there, but just given that the the staff recommended denial can you maybe just provide a little bit more color.
And I guess, if youre in a knock at the permits how does that impact the project and the and the capital plan going forward.
Yes, I'll take that questions as Walter.
The primary reason as a staff voted no was there they see the expansion of the pure water Monterrey recycling project is capable of providing sufficient water to meet the future demands.
We don't agree with that and it's actually not inline with what the P. you see.
Discovered as well as far as the future demand. So that's the real area of contention and so the November 14th hearing and meeting we're going to be putting our views forward on that but.
You bet Thats, where the.
Disagreement comes in and we actually had an environmental impact report that stated the demand was much higher as well.
Great and just to the extent that I guess order Naco Ford.
The capital plan I guess the expectation. There is this is that you just kind of backfill any kind of capex that were lost.
Yes, Thats right.
Great. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Susan story for any closing remarks. Thank.
Thank you Melissa. Thank you all for participating in our call today. Please know that we value you as our investor owners and as the financial analysts who research our company for the benefit of your clients and their futures, we always want to be open and transparent in all of our discussions and dealings with you. So you can have confidence in your decisions around our in your investments in our stock if you've not been able to.
I get your question out or if we havent answered them thoroughly please call adder RAF and I'll be happy to help.
And we're very excited that while we've been the only water utility, which was an E. Associate member for the past three years. We're very pleased that he has added a new category a strategic partners for water utilities and because of this we will be attending our first E financial conference in a couple of weeks and we'll see many of you. There also we.
We will be hosting our investor day on Wednesday December 11th in New York City, We look forward to seeing you all their expect an invitation very soon from our IR team. Thanks again for listening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.