Essential Utilities, Inc. · NYSE:WTRG
Essential Utilities — Aqua America — Investor Day (January 2016)
94 slides from Essential Utilities's investor day presentation, Jan 14, 2016
Slide 1: NYSE Analyst Day 2016
January 14, 2016 – NYSE Analyst Day 2016 NYSE: WTR Exhibit 99.1
Slide 2: Forward Looking Statement
Forward Looking Statement This presentation contains in addition to historical information, forward looking statements based on assumptions made by management regarding future circumstances over which the company may have little or no control, that involve risks, uncertainties and other factors that
Slide 3: Presentation Agenda
Presentation Agenda Overview of Aqua America – Christopher Franklin Operations Overview – Rick Fox Financial Update – Dave Smeltzer Regulatory Update – Kim Joyce Strategic Growth – Dan Schuller Summary and Outlook – Christopher Franklin Q&A Session
Slide 4: Thank You for Joining Us
Thank You for Joining Us 1886-2016 celebrating 130 years. NYSE: WTR
Slide 5: Today's Objectives
Today’s Objectives Senior Leadership Team Introduction Company Overview Transparency and Guidance Growth Strategy
Slide 6: Today's Presenters
Today’s Presenters Christopher Franklin President and CEO Dave Smeltzer EVP, CFO Richard Fox EVP and COO Regulated Operations Dan Schuller, Ph.D. EVP, Strategy and Corporate Development Brian Dingerdissen Chief of Staff Kim Joyce Director, Legislative and Public Affairs and Regulatory Counsel
Slide 7: Senior Leadership Team
Senior Leadership Team Franklin President & CEO Dingerdissen Chief of Staff Smeltzer CFO CAO Donatoni Market-based Activities Joyce Legislative and Public Affairs & Reg. Counsel CHRO Luning General Counsel Schuller Strategy & Corp. Development Fox COO Cust. Serv. IT
Slide 8: Overview
Christopher Franklin President and Chief Executive Officer Overview NYSE: WTR
Slide 9: Building for the Future
Building for the Future +$1.1 Billion Planned for Next 3 Years
Slide 10: Regulatory Affairs
Regulatory Affairs NYSE: WTR AQUA 10
Slide 11: Operational Excellence
Operational Excellence
Slide 12: Capitalizing on Our Competencies
Capitalizing on Our Competencies Capital Investment Operational Excellence Regulatory Affairs Growth
Slide 13: U.S. Regulated Water and Wastewater Industry Overview
U.S. Regulated Water and Wastewater Industry Overview Water 53,000 systems 85% of population served by municipalities Aqua serves 1% of U.S. population Aqua serves 0.1% of U.S. population 97% of population served by municipalities 16,000 systems Wastewater
Slide 14: EPA's Estimate of the National Need for Infrastructure Investment
EPA’s Estimate of the National Need for Infrastructure Investment Water Wastewater American Society of Civil Engineers Grade for Drinking Water and Wastewater Infrastructure = D
Slide 15: Company Overview
Company Overview 130 years of history Large multi-state water & wastewater company Proven growth model Strong balance sheet History of industry leading profitability Above average dividend growth
Slide 16: Mission: Protecting and Providing Earth's Most Essential Resource
Mission: Protecting and Providing Earth’s Most Essential Resource Communities Shareholders Employees Customers Sustainability Regulatory Innovation Civic Involvement Steward of Environment Rebuild Infrastructure Promote Economic Growth Compliance Near 100% Reliability Responsible Rate Increases Trus
Slide 17: Aqua's Growth Platform
Aqua’s Growth Platform Capital Investment Acquisitions and Organic Customer Growth Market-based Activities
Slide 18: Why Invest in Aqua?
Why Invest in Aqua? Aqua is one of the largest, publicly traded water and wastewater companies, poised to address the nation’s significant infrastructure needs Aqua is a balanced growth investment with a long track-record of dividend growth and strong performance Aqua’s commitment to a strategic app
Slide 19: Regulated Operations
Rick Fox Executive Vice President and Chief Operating Officer, Regulated Operations Regulated Operations NYSE: WTR
Slide 20: Infrastructure Footprint
Infrastructure Footprint $3.4 Billion in Total Rate Base +12,500 Miles of Water Main 183 Wastewater Treatment Plants 20 Surface Water Filtration Plants +3,000 Wells +860 Water Storage Tanks +1,100 Vehicles (50 powered by CNG)
Slide 21: Infrastructure Investments
Infrastructure Investments Proactive Reactive
Slide 22: Building for the Future
Building for the Future Regulated Operations +$1.1 Billion Planned for Next 3 Years
Slide 23: Capital Investment Spending
Capital Investment Spending Regulated Operations 3 Year Total = +$1.1 Billion
Slide 24: State by State Comparison
State by State Comparison as-of Sept. 30, 2015 State Rate Base ($millions) Water Connections Wastewater Connections PA $2,369 426,709 19,773 OH 251 143,493 6,649 IL 209 62,610 9,614 TX 192 60,256 15,681 NJ 132 52,012 5,984 NC 125 77,894 16,974 IN 69 874 24,646 VA 63 24,202 7,370 Total $3,412 848,050
Slide 25: Efficiently Serving our Customers
Efficiently Serving our Customers an Essential Product 7:1 Business Model Examples Purchased water reduction Eliminating costly outside services Conversion to CNG powered fleet
Slide 26: Purchased Water Reduction
Purchased Water Reduction Contract expires in 2017 3.5 mgd of high cost purchased water Capital investment: $17M Source Pumping Transmission facilities Annual expense savings: $7.3M Ratio: 2.4 to 1
Slide 27: Outside Services
Outside Services Aqua North Carolina historically used an outside contractor to clean wastewater lift stations and grinder pump tanks for maintenance Capital investment : $292k Pumper truck Drying pads (4) Annual expense savings: $54k Ratio: 5.4 to 1
Slide 28: Compressed Natural Gas (CNG) Vehicles
Compressed Natural Gas (CNG) Vehicles Initiated in 2011 Fleet of 50 vans, dump trucks & bi-fuel pickups (all OEM) Constructed 3 “time-fill” stations in PA 90 CNG vehicles planned by 2020 Received grants totaling $383,000 (PA Act 13, AFIG & ACE programs) Ongoing fuel savings Ratio: 4-7 to 1
Slide 29: Electricity Load Response Programs
Electricity Load Response Programs Demand Response Peak Response VirtuWatt real time monitoring technology Participation by 22 WTP’s & boosters Cost savings of $500,000/year National Association of Water Companies award Platt’s Global Energy award finalist
Slide 30: Continued Success and Growth in Alternative Energy
Continued Success and Growth in Alternative Energy Aqua’s four solar fields generate over 4 million kWh or $400,000 savings per year US EPA Green Power Partnership Investigating additional alternative energy projects
Slide 31: UltraBattery Deployment
UltraBattery Deployment Upper Merion, PA Water Treatment Plant 750 kW capacity battery for frequency regulation on PJM grid $500,000 grant awarded to Constellation (battery owner) As battery “host”, Aqua shares in proceeds from PJM Payments expected to be $75,000 per year Batteries manufactured in P
Slide 32: Aqua S.E. Pennsylvania Main Break Averages
Aqua S.E. Pennsylvania Main Break Averages
Slide 33: Compliance Reporting and Disclosure
Compliance Reporting and Disclosure Corporate Compliance Committee State Presidents Chief Environmental Officer State Compliance Managers State Operations Environmental Regulators Internal & Outside Laboratories
Slide 34: Source Water Vulnerability Tools
Source Water Vulnerability Tools Centralized GIS-based source water assessment tools Dynamic multi-source database Risk planning Support for emergency response In-stream toxicity sensor
Slide 35: Water Scarcity
Water Scarcity Source: USDA, Economic Research Service using station-level data from U.S. Department of Commerce, National Oceanic and Atmospheric Administration. Aqua Water System
Slide 36: Employees
Employees More than 1,600 employees 435 licensed operators Employee development Licensing “Aqua University” Tuition reimbursement
Slide 37: Safety is Non-negotiable
Safety is Non-negotiable Defensive Driving Course Equipment Safety Safety Day WAVE Recognition Personal Protective Equipment Trench Safety
Slide 38: Financial Update
Dave Smeltzer Executive Vice President and Chief Financial Officer Financial Update NYSE: WTR
Slide 39: Growth in Income from Continuing Operations
Growth in Income from Continuing Operations
Slide 40: How Does Aqua Earn a Fair Return? Step 1: Establish Rate Base
How Does Aqua Earn a Fair Return? Step 1: Establish Rate Base Deployment of Capital: Annual Capital budget New Systems Ratemaking Deductions: Accumulated Depreciation Deferred Taxes Contributed Capital
Slide 41: How Does Aqua Earn a Fair Return? Step 2: Establish Operating Costs
How Does Aqua Earn a Fair Return? Step 2: Establish Operating Costs O&M Expenses Depreciation Other Taxes Operating Costs
Slide 42: How Does Aqua Earn a Fair Return? Step 3: Establish Return on Capital
How Does Aqua Earn a Fair Return? Step 3: Establish Return on Capital Rate Base X Equity % X ROE = Net Income Gross Up for Taxes Rate Base x Debt % X Cost of Debt = Debt Expense Return on Capital
Slide 43: How Does Aqua Earn a Fair Return? Step 4: Establish Revenue Requirement
How Does Aqua Earn a Fair Return? Step 4: Establish Revenue Requirement Operating Costs Return on Capital Revenue Requirement
Slide 44: Implementation of the IRS Repair Tax Deduction
Implementation of the IRS Repair Tax Deduction Evolved from a FedEx case in 2005 Deduction for jet engine replacement denied Supreme court decision A new tax deduction was created Typically done via deferred tax accounting
Slide 45: Pennsylvania Repair Tax
Pennsylvania Repair Tax Repair tax deduction introduced in PA 2011 rate filing PA is one of several “flow through” states Flow through method required in final order (2012) 10 year amortization of catch up deduction required Requirements for amortization established Key stakeholders understood benef
Slide 46: Aqua PA Adoption of the Repair Deduction
Aqua PA Adoption of the Repair Deduction On a water main network of 5,600 miles, replacements of minor portions (generally less than 1 mile) are considered expense (not capital) for tax purposes Primarily Infrastructure Rehabilitation Related Mains & Services Valves Hydrants
Slide 47: Continued Capital Deployment in PA
Continued Capital Deployment in PA * 2015 amount is forecast More than $800 million of capital deployed in PA since the last rate filing Year PA CAPX ($thousands) 2012 $129,923 2013 $212,721 2014 $214,155 2015* $248,200 Total $804,999
Slide 48: PA DSIC & Rates
PA DSIC & Rates PA DSIC / rate case timing Rate base increase of over $1 billion from 2011 filing Typically require revenue increase of 45% Expect increases of DSIC + 5 – 10% rate increase Full incorporation of repair benefit into rates
Slide 49: Repair Deduction Benefits
Repair Deduction Benefits ‘ojected Aqua Pennsylvania Customer Water Rates 4 - - - - - - - - - a - - - $8.86 -7 $6.55 -? $2.06 7 2012 2013 2014 2015 2016 2017 2018 2019 —Rates w/o Repair Tax —Rates w/ Repair Tax Rates w/o Repair Tax Projected Rates w/ Repair Tax Projected
Slide 50: State Comparison: Allowed vs. Earned ROEs
State Comparison: Allowed vs. Earned ROEs As-of Sept. 30, 2015 New Jersey Illinois Ohio Indiana Virginia North Carolina Pennsylvania Texas
Slide 51: 2015 Highlights
2015 Highlights Diluted Earnings Per Share Continuing Operations (TTM) *Includes estimated organic growth for Q4 2015 Customer Growth 4 municipal, 12 private acquisitions 17,900* total customers Annualized Dividend Rate of $0.712 Increase of $0.052, or 7.9% 25 th dividend increase in 24 years 1.9%*
Slide 52: 2015 Guidance
2015 Guidance *Discussions underway on appropriate valuation of Marcellus JV Earnings Full-year earnings per share between $1.25 – $1.27* Customer Growth Operations and Maintenance Expense Same-system O&M increase of ~2% for full year Ongoing rate base growth of 6 – 7% More than $325 million Capex ~
Slide 53: Trailing Twelve Months Financial Results
Trailing Twelve Months Financial Results as-of Sept. 30th, 2015 In millions except per share 2014 2015 Variance Revenue $775.6 $808.5 4.2% Operations and Maintenance $288.2 $305.6 6.0% Income from Continuing Operations $211.2 $222.3 5.3% Income from Continuing Operations per Share $1.19 $1.26 5.9% U
Slide 54: Revenue Components
Revenue Components TTM as-of Sept 30th, 2015
Slide 55: Operating Revenues YTD Q3 2015 vs. YTD Q3 2014
Operating Revenues YTD Q3 2015 vs. YTD Q3 2014
Slide 56: Operations & Maintenance Expenses TTM
Operations & Maintenance Expenses TTM as-of Sept 30th, 2015 Category Percentage of Total Expense Employee-related Costs 43% Power 9% Administration 8% Purchased Water 7% Maintenance 6% Outside Services 5% Other 5% Chemicals 4% Insurance 3% Sludge & Wastewater Treatment 3% Transportation 2% Leases, L
Slide 57: Operations & Maintenance Expenses YTD Q3 2015 vs. 2014
Operations & Maintenance Expenses YTD Q3 2015 vs. YTD Q3 2014
Slide 58: Income from Continuing Operations YTD Q3 2015 vs. 2014
Income from Continuing Operations YTD Q3 2015 vs. YTD Q3 2014
Slide 59: Growth in Income from Continuing Operations
Growth in Income from Continuing Operations
Slide 60: Dividend History
Dividend History 7.9% increase to annualized dividend rate of $0.712 effective 9/1/2015
Slide 61: Change in Payout Ratio
Change in Payout Ratio Payout Ratio on Income from Cont 2010 2001 2012 aoe 2014 2015* e: Aqua Annual Re} *2015 based on mm point range of EPS guidance at $1.26 AQUA
Slide 62: Financial Strength
Financial Strength Strong Balance Sheet A+ S&P Rating (Aqua PA) Capital structure 50:50 Substantial Debt Capacity Room on balance sheet for growth Plan to repurchase dilutive shares Shares used for acquisitions and/or employee equity awards
Slide 63: Regulatory Update
Kim Joyce Director, Legislative and Public Affairs and Regulatory Counsel Regulatory Update NYSE: WTR
Slide 64: What is Our Regulatory Compact?
What is Our Regulatory Compact? Maintain Regulatory Compliance Excellent Customer Service / Reliability Controlling Operating Expenses Investing Capital Timely and Prudently Rate Case Management Continued Consolidation of Water / Wastewater Systems Education to Customers and Stakeholders
Slide 65: Successful Implementation of Consolidation Strategy
Successful Implementation of Consolidation Strategy Economies of scale Facilitates growth Increased reliability Capital planning/management Technological expertise Rate consolidation smooths increases for customers over time State Rate Divisions PA 4 VA 4 NC 5 OH 6 NJ 6 TX 7 IL 10 IN 11
Slide 66: Emerging Water Regulatory Trends
Emerging Water Regulatory Trends 2/14/12 1. PA WW DSIC 2. Forward Test Year 3. WW Consolidation 10/23/12 4. NJ DSIC 6/6/13 8. NC W&WW DSIC 3/27/14 10. IN WW DSIC 3/27/13 5. OH Expanded DSIC 6. Forward Test Year 7/1/15 13. IN DSIC Increase to 10% 8/9/13 9. IL Fair Market Value 2/5/15 11. NJ Fair Mark
Slide 67: States with Infrastructure Surcharges
States with Infrastructure Surcharges State Allowed Surcharge OH 12.75% water 9% wastewater IN 10% PA 7.5% water 5% wastewater NJ* 5% IL 5% NC 5% * Water only
Slide 68: Infrastructure Improvement Trends
Infrastructure Improvement Trends North Carolina Recognizes wastewater infrastructure Secondary water quality Ohio Recognizes wastewater infrastructure Additional replacement beyond water distribution pipe Encourages more replacement over a longer period of time
Slide 69: Valuation Legislation
Valuation Legislation Illinois – appraisal value legislation effective August 2013 Indiana – legislation to facilitate acquisition of distressed utilities effective May 2015 New Jersey – legislation to facilitate acquisition of “troubled systems” effective February 2015
Slide 70: Strategic Growth
Dan Schuller Executive Vice President, Strategy and Corporate Development Strategic Growth NYSE: WTR
Slide 71: Strategy & Corporate Development
Strategy & Corporate Development Our team functions as the strategic thought-partner for the senior leadership team Analysis-based Growth-focused Long-term Mindset Sustainability Fiduciary Integrity Rooted in Core Competencies Process-oriented & Disciplined
Slide 72: We have Significant Room to Grow
2035 Population (%) 25 75 IOU Muni We have Significant Room to Grow We currently play in a small part of the market…but we can help change that. IOU Muni 15 85 2015 Population (%) Total (%) 100 Total (M) 320 Total (%) 100 Total (M) 375 Source: US Census Acquire IOUs Acquire Munis Growth Plays Serve
Slide 73: Refining Our Growth Focus
Refining Our Growth Focus Establishing new organization with increased focus on strategy and corporate development Maintaining a growth-focused dialogue amongst the management team Training state presidents and BD managers Providing targets Developing frameworks to identify and evaluate municipals a
Slide 74: Strategy & Corporate Development Organization
Strategy & Corporate Development Organization Daniel J. Schuller Executive Vice President Strategy and Corporate Development Mkt. & Acq. Coordinator Strategy Associate / Analyst VP, Corporate Development Business Development Manager Business Development Analyst Business Development Analyst Business
Slide 75: Avenues for Acquisition Growth
Avenues for Acquisition Growth We see three primary avenues for acquisition growth Market-based Activities (MBA) Strategic M&A Municipal Acquisitions
Slide 76: Historical Acquisitions
Historical Acquisitions 280 Total Acquisitions 19 Munis - 18,000 connections 261 IOUs - 404,000 connections 422,000 Total Connections 4% Munis 96% IOUs 96% Water Connections 4% Wastewater Connections 2000-2014 16 Total Acquisitions 4 Munis – 7,900 connections 12 IOUs – 2,700 connections 10,621 Total
Slide 77: Municipal Acquisitions – Identification & Tracking
Municipal Acquisitions – Identification & Tracking Identify and prioritize leads based on: System size System compliance records Other factors that indicate a willingness to sell Each state business development manager is focused on the top 20 water and top 20 wastewater targets in his state (i.e. 3
Slide 78: Example: Wastewater Systems
Example: Wastewater Systems Estimated equivalent service connections served by individual plants Cumulative equivalent service connections Based on our estimates there are 239 treatment plants between 2,500 and 25,000 equivalent connections In this state, there are 1,026 wastewater treatment plants
Slide 79: Corporate Development Investment Process
Corporate Development Investment Process I.C. meets every two weeks Board discussion following I.C. approval for larger regulated deals, all MBA deals Chris Franklin Dave Smeltzer Dan Schuller Rick Fox Chris Luning Bill Ross (Engineering) Stan Szczygiel (FP&A) Bill Davis (Corp. Dev.) Prospect ID Due
Slide 80: Current Market-based Activities
Current Market-based Activities Segment Outcome Transportation Services Divest Construction Harvest Field Services Maintain; redeploy some staff Cross-connection Reposition within Aqua O&M Optimize how we manage each contract Consulting/training Continue to assess Home Services Maintain Tri-State Gr
Slide 81: Marcellus Shale Pipeline Joint Venture
Marcellus Shale Pipeline Joint Venture Source: SRBC The value of the pipeline is under review Drilling Site Ogontz Impoundment Site
Slide 82: Assessment of Market-based Segments
Assessment of Market-based Segments Further Assess Table Quantitative Assessment Step 1 Products / services - fundamentals and differentiators Selling process / business model Market and competitive landscape Customer segments and buying behaviors Margins Transaction multiples Target companies Step
Slide 83: Avenues for Acquisition Growth
Avenues for Acquisition Growth Expanding the foundation Opportunistic growth Captures growth in infrastructure renewal and management spending Complements our regulated business We see three primary avenues for acquisition growth Market-based Activities (MBA) Strategic M&A Municipal Acquisitions
Slide 84: Outlook and Summary
Christopher Franklin President and Chief Executive Officer Outlook and Summary NYSE: WTR
Slide 85: Today's Objectives
Today’s Objectives Senior Leadership Team Introduction Company Overview Transparency and Guidance Growth Strategy
Slide 86: 2016 Guidance
2016 Guidance Earnings Full-year earnings per share between $1.30 – $1.35 Customer Growth 1.5 – 2.0% year-over-year customer growth Capex More than $350 million Ongoing rate base growth of approximately 6 – 7% Operations and Maintenance Expense Same-system O&M increase of 1 – 2% for full year More t
Slide 87: Q&A Session
Q&A Session NYSE: WTR
Slide 88: For more information contact
For more information contact: Brian Dingerdissen Chief of Staff 610.645.1191 bjdingerdissen@aquaamerica.com Thank You for Attending Aqua America’s 2016 Analyst Day
Slide 89: Appendix
Appendix NYSE: WTR
Slide 90: Aqua's Board of Directors
Aqua’s Board of Directors Nicholas DeBenedictis William Hankowsky Non-executive Chairman Director since 1992 Committees: Executive Risk Mitigation Director since 2011 Committees: Corporate Governance Risk Mitigation Director since 2005 Director since 2004 Committees: Executive Audit Lon Greenberg Co
Slide 91: 2015 Acquisitions
2015 Acquisitions 12 water and 4 wastewater acquisitions 12 private and 4 municipal systems * Municipal System System Date Closed Water Customers Wastewater Customers Total Customers North Maine Utilities, IL 4/30/2015 4,716* 2,693* 7,409 Captain’s Cove, VA 12/1/2015 977 280 1,257 Wintergreen, VA 7/
Slide 92: 2016 Acquisitions
2016 Acquisitions as-of January 8, 2016 System Date Closed Water Customers Wastewater Customers Total Customers Superior, PA 1/1/2016 3,868 3,868 Total 3,868 3,868
Slide 93: Rates and Infrastructure Surcharges Completed – 2015
Rates and Infrastructure Surcharges Completed as-of January 8, 2016 The Pennsylvania wastewater infrastructure surcharge is being billed subject to refund due to an appeal underway at Commonwealth Court This is step three of a phased-in rate case docket Rates and Surcharges differentiated by water (
Slide 94: Rates and Infrastructure Surcharges Completed – 2016
Rates and Infrastructure Surcharges Completed as-of January 8, 2016 Rates and Surcharges differentiated by water (w) and wastewater (ww) systems Rates or Surcharges Received in 2016 State Docket Number Type Awarded Annualized Revenue Increase ($thousands) Illinois N/A Surcharge (w) $600 North Caroli