Aqua America Inc. (

WTR

)

Q4 2011 Earnings Call

February 28, 2012 11:00 AM ET

Executives

Brian Dingerdissen – Director, IR

Nicholas DeBenedictis – Chairman and President

David Smeltzer – CFO

Analysts

Michael G. Roomberg – Ladenburg Thalmann

Ryan Connors – Janney Montgomery Scott

Stewart Scharf – S&P Capital IQ

Michael Gaugler – Brean, Murray & Carret

Michael Roomberg – Ladenburg

Jonathan Reeder – Wells Fargo

Cleo Zagrean – Macquarie

Presentation

Operator

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Good day and welcome to the Aqua America Incorporated Fourth Quarter Full Year Earnings Conference Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead, sir.

Brian Dingerdissen

Thank you, Jeremy. Good morning, everyone. Thank you for joining us for Aqua America’s fourth quarter and full year 2011 earnings conference call. If you did not receive a copy with the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com, or by calling Fred Martino at 610-645-1196. There will also be a webcast of this event available on our site. Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with David Smeltzer, the company’s Chief Financial Officer.

As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risk, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risk and uncertainties.

During the course of this call, reference may be made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the company’s website.

At this time, I would like to turn the call over to Nick for his formal remarks, after which we will open the call up for questions.

Nicholas DeBenedictis

Thank you, Brian and good morning, everyone. Very pleased this morning to announce Aqua’s 12th straight year of earnings gains for the year ended 2011 and a strong fourth quarter, beating consensus of – and our quarter was $0.24 versus $0.21, up 14% on 1% more shares outstanding.

For the year 2011, GAAP from continuing operations was $1.04 versus $0.86, up 21%. Our investors have come to expect consistency in our results and predictability in our business model of growth and efficiency and 2011 was no exception.

We had our 12th straight year of increased EPS for a CAGR over 10% over the 12-year period with 2011 rising on a GAAP basis, 14%, on a GAAP from continuing operations basis, 21%. It was our 20th straight year of dividend increases. We looked at a 20-year CAGR and it comes to 6.4%. This year, we raised the dividend 6.5%. So as you can see, pretty consistent.

We predicted at the beginning of the year a capital spend between $3.25 and $3.35 and we came in at $3.31, only the landing of the Space Shuttle was more accurate. However, one of the key items that I’m very proud of is that we’ve now addressed all our environmental issues and we’re investing in more green projects to reduce energy use and for reducing purchased water, which is an expense and turned it into a capital outlay.

We maintained and bettered our industry-leading efficiency ratio, lowering it again for the fifth straight year. In 2011, Aqua improved 70 basis points from a 38.7 – from 38.7 excuse me to 38, now that’s a non-GAAP measure and we’ve started tracking this 15 years ago and simply an operating expense or your operating expenses over your revenues, as you can interpret in a lot of different ways.

And once again for the 12th consecutive year, we’ve lowered our embedded cost of long-term debt to 5.30%, while Aqua Pennsylvania maintained its A+ rating, it’s – we are proud to say its ranked as the fourth highest out of 235 utilities ranked by S&P. So once again, 2011 was another predictable and successful year.

But 2011 was also an unpredictable and transformational year for Aqua. It was a year of very unprecedented weather to get into, it was a year of rapid rationalization of our regulated portfolios, something we’ve been talking again, but it really came thunderous in 2011. It embarked a venture into a burgeoning energy fields at Pennsylvania and Ohio, which three years ago we wouldn’t have even known existed.

And tax policies, which we’ve, obviously, accepted, but utilized and generated an unexpected additional cash flows and an additional $10.07 in earnings, which I’ll explain later in the call. The year ended with a major reorganization of our Senior Management Team to better align the team with our strategic planning and the extension of my employee contract for three additional years to ensure a smooth management succession.

When we ended last year, we had 14 states and we were suggesting over the last couple of years a pruning, which is another word for rationalization program, that was needed to maximize our earnings potential, and honestly management did not believe it would have happened as quickly as it has. Within months, we’ll be operating in four fewer states and expect to continue increasing our net income as a result of this rationalization. We work very hard and very closely with our other water industry peers to do some transactions, I think that truly make sense for both parties. And let me take a minute of your time to just summarize them.

Late in ‘10, we sold a very small operation and money-losing operation in South Carolina. In May of ‘11, we sold our Missouri operation, which was only 3000 customers to American Missouri. And over the years, eight years, we owned and we lost an average $200,000 annually to maintain that property into run at rate. 2011, we expand in Texas through the purchase of number of systems and 5000 customers from American as part of the trade and I can tell you after six months we’re already earning the same ROE as the rest of Texas because we initiated and implemented our program immediately and in just six months, so you can normalize this, we earned over 200,000 in that six-month period, turning a loss from Missouri into a gain in Texas.

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