AWK
#Thank you, Amy, and good morning, everyone, and thank you for joining us for today's call.
As Amy said, we will keep the call to about an hour and at the end of our prepared remarks we will have time for your questions.
During the course of this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events.
These statements are predictions based upon our current expectations, estimates and assumptions.
However, since these estimates deal with future events, they are subject to numerous risks, uncertainties and other factors that may cause the actual results to be materially different from the results indicated or implied by such statements.
Additional information regarding these risks, uncertainties and factors, as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our 2016 Form 10-K each as filed with the SEC.
Reconciliation tables for non-GAAP financial information discussed on this conference call including adjusted earnings per share, adjusted return on equity and the O&M efficient ratio, can be found in the appendix of the slide deck for this call.
The slide deck itself can be found on our Investor Relations page of our website.
All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share.
And before I turn the call over to <UNK>, let me briefly talk about the American Water investor relations team.
As you know, Melissa Schwarzell was promoted recently to a new position in our Rates Team.
And almost at the same time, Cathy DeMots, our IR Executive Assistant decided to retire after 30 years with American Water.
I'd like to take this opportunity to thank Melissa and Cathy for all their hard work, dedication and comradery during their time in the Investor Relations Group.
Now, as part of American Water's commitment to developing talent from within, we promoted Ralph Jedlicka who has been part of the Finance Team since 2007 to be our new Director of Investor Relations.
And then we were lucky to find Kelly Uyeda, a professional with 10 years of IR experience to be our new Executive Assistant.
I'm personally very excited about our new team.
Most of you folks have already interacted with Kelly and Ralph, and we look forward to meeting you all when we go out on the road on investor visits.
And with that said, now I'd like to turn the call over to American Water's President and CEO, <UNK> <UNK>.
Thanks, <UNK>.
Good morning, everyone, and thanks for joining us.
Today, our CFO, <UNK> <UNK> will cover the fourth-quarter and full-year financial results, and our COO, <UNK> <UNK>, will give key updates on our operations.
We will highlight a number of 2016 Company records and achievements throughout our presentation.
Just to name a few.
We accomplished record levels in safety, capital investment, O&M efficiency, and regulated acquisitions.
All of these achievements are possible because of our engaged employees, our safe and efficient operations, and our smart investments.
And this enables us to achieve top quartile customer satisfaction, continued 7% to 10% long-term EPS growth, and top dividend growth.
Our employees delivered another strong year of results by successfully executing our strategies.
In 2016, we invested about $1.5 billion, the highest in our Company's history.
$1.3 billion of that was invested in our regulated systems to improve service reliability and water quality for our customers.
We're able to increase our investments to this level because our hard working employees continually improve both O&M and capital efficiency.
We're proud of our ability to deliver on our growth goals, while effectively managing every dollar so we can deliver excellent customer service while limiting the impact on our customer's bill.
Most importantly, we know our customers need to trust that the water we provide them is clean and it's safe.
Once again, we met or surpassed EPA requirements in 2016.
In fact, our systems were 21 times better than the industry in drinking water quality and compliant as measured by the EPA's drinking water database.
This is absolutely foundational to our business.
Our customer base is growing by a record 82,000 customers through closed and pending regulated acquisitions.
This is in addition to the 13,000 customers added from organic growth in our existing service areas in 2016.
Our military services group completed two price redeterminations in the fourth quarter for a total of $0.75 million in annual fee adjustments.
Keystone Clearwater ended 2016 as we projected.
For 2017, natural gas prices have rebounded and both drilling rig counts and well completion activity have increased significantly.
Keystone continues to increase market share by offering total water management solutions at competitive pricing to Appalachian Basin E&P.
At the same time, they expanded their overall services outside the oil and gas industry to the municipal water services market.
As you can see on slide 7, operating revenues were $802 million during our fourth quarter.
We experienced continued growth in our regulated businesses from investments, acquisitions and organic growth.
And while we faced headwinds throughout the year in our market-based military services group, we benefited from two price redeterminations in the fourth quarter and four in the full year.
<UNK> will discuss the quarter's drivers in more detail in just a few minutes.
Operating revenues for the year increased 4.5% over 2015.
And our 2016 annual earnings, without the effect of the Freedom Industries' binding agreement in principle, were $2.84 per share, up 7.6% over 2015 EPS.
Turning now to slide 8.
Today, we affirm our 2017 guidance of $2.98 to $3.08 per share and continue our progress toward achieving 7% to 10% EPS growth through 2021.
Additionally, we project we will grow our dividend in 2017 at the top of our long-term EPS growth range, following the double-digit growth we have had for dividends over the past four years.
In summary, it was another really good year and we thank all of our employees who made it happen.
With that, <UNK> will now give his update.
Thank you, <UNK>, and good morning, everyone.
We reported earnings of $0.57 per share in the fourth quarter of 2016, up $0.02 over the same quarter last year.
As a shown on slide 16, our regulated segment and market-based businesses were each up $0.01, and parent was flat to the prior year.
For the full year, we reported earnings of $2.62 per share.
Excluding the $0.22 charge from the binding agreement, our adjusted earnings per share were $2.84, up $0.20 or 7.6% compared to the prior year.
These adjusted results were driven by our regulated segment which was up $0.23 or 8.7%.
Our market-based businesses were down $0.01 and parent was down $0.02 as expected.
Turning to slide 17, let me discuss the quarterly results by business segment compared to fourth quarter last year.
Our regulated operations were up a $0.01 overall.
Revenue was up $0.12 from authorized rate cases and infrastructure mechanisms to support investment growth, acquisitions and organic growth.
O&M expense was higher by $0.05, $0.03 of which was due to timing.
As we mentioned in our third quarter earnings call, we expected about $10 million of certain maintenance, repairs and campaigning expenses to be completed in the fourth quarter of 2016.
We also had higher depreciation and general taxes of $0.03 each, driven primarily by our investment growth.
For our market-based businesses, we were up $0.01, mainly from the 2016 addition of Vandenberg Air Force Base in our military services group and price redeterminations at several military bases.
We record price redeterminations related to prior periods in the quarter they are completed.
Turning to slide 18, let me walk through our 2016 adjusted earnings per share compared to the prior year.
The regulated businesses adjusted earnings were up $0.23 or 8.7% with four major drivers.
First, revenue was higher by $0.43 per share, of this $0.43, $0.32 was from infrastructure surcharges and authorized rate increases to support investment growth.
$0.08 was from acquisitions and organic growth, and $0.03 was from balancing accounts and other.
Second, adjusted O&M expense increased $0.06 from several factors.
We had higher production and employee-related costs to support growth in our business.
We also had a $0.05 negative impact from several non-recurring items, including a judgment on a contract dispute, a technology write-off, and the 2015 benefit from finalization of the California general rate case.
These increases were partially offset by lower casualty insurance claims and lower uncollectible expense.
Third, depreciation expense increased $0.09 from investment growth, and finally general taxes, interest and other increased $0.05.
Again, attributable to our investment in infrastructure to provide reliable service to our customers.
I would also like to point out that although there was no year-over-year weather impact in our regulated business, we did have a favorable weather impact of $0.05 in 2016, mainly from the dry weather conditions in New Jersey that <UNK> discussed.
Next, the market-based businesses were down $0.01 year over year.
We previously shared with you some headwinds we were facing from lower capital upgrades in our military services group, and Keystone's efforts to manage their business to be earnings neutral despite a very challenging natural gas market.
With that said, the military services group ended the year flat compared to last year.
Although revenue was down $21 million due to lower capital upgrades compared to 2015, the impact was offset by the addition of Vandenberg Airforce Base and price redeterminations in the fourth quarter.
In our home owners services group, revenue was up $11 million compared to last year.
But it was more than offset by higher claims, increased marketing expenses, and costs associated with investment in a new homeowner services group customer information system.
And lastly, Keystone's results for the year were essentially earnings neutral as we anticipated.
Parent and other costs were higher by $0.02, primarily from higher interest expense on long-term debt, higher short-term debt balances and increased interest rates on short-term debt compared to the prior year.
Also in 2016, we contributed $2.3 million to the American Water Foundation, a 501(c)(3) organization which exists to help the communities we serve offer a better quality of life to their citizens.
Turning to slide 19.
We have a total of $125.4 million in annualized new revenues effective since January 1, 2016.
This includes $92.2 million of new authorized revenue in 2016, of which about two-thirds was from infrastructure mechanisms with the remaining one-third rate cases.
And we have another $33.2 million in new annualized revenues that have been authorized since the beginning of 2017.
We have also filed and are awaiting final orders on four rate cases, a California step increase and two infrastructure surcharge requests for a total of outstanding revenue request of $71.7 million.
Slide 20 highlights our key financial performance metrics that continue to create customer and shareholder value.
You heard <UNK> and <UNK> talk about our record level of capital investment this year of $1.5 billion.
This includes $1.3 billion of regulated system improvements to better serve our customers.
These investments increased our estimated rate base at year-end 2016 to $10.7 billion, a 7% increase from the prior year.
The remaining $200 million was for acquisitions, with Scranton being the largest acquisition with an adjusted net purchase price of $151 million.
Our cash flows from operations grew 8.2% to $1.3 billion in 2016.
This was driven by our strong adjusted net income growth and higher working capital.
Working capital increased from lower capital upgrades in our military services business, continuous improvements in collection efforts in our regulated businesses and the timing of expenses.
Our adjusted return on equity improved from 9.4% to 9.6%.
With the conclusion of our Illinois rate case, including the 45 basis point improvement in the authorized ROE in that state, our weighted average authorized return on equity across our regulated footprint remains approximately 9.9%.
And we continue to narrow the gap between our authorized and achieved returns through a continuous improvement culture that focuses on O&M efficiency, capital efficiency and constructive regulatory outcome.
Turning to slide 21 and looking forward to 2017, we are affirming our 2017 earnings guidance of $2.98 to $3.08 per share.
The major variables included in our guidance range are consistent with what we've shown you before, with plus or minus $0.07 of weather or what we consider normal weather variability being the most significant.
Events or variations outside of these ranges could cause our results to differ.
We also continue to be a leader in dividend growth, compared to the Dow Jones utility average, the UTY and our water utility peers.
In fact over the last four years, we have had dividend increases at the top end of our long-term 7% to 10% EPS compound annual growth rate.
Subject to Board of Directors approval, we project our 2017 dividend growth to be at the top of that 7% to 10% long-term EPS growth range.
With that, I'll turn it back over to <UNK>.
Thanks, <UNK>.
Before taking your questions, I want to highlight very briefly our Company value of environmental leadership and what it means to our customers.
As a company that relies on environmental protection for the services we provide, American Water is naturally focused on sustainability.
Not just because it's the right thing to do, which is certainly is, but also because it's our business imperative.
It is more than just compliance with laws and regulations, although we are proud that our systems are 21 times better than the industry.
It extends to partnerships with the environmental groups in our local watershed to foster protection and education on water issues.
It also means that we are front and center on national policy issues around sustainable water supply, water quality and replacing aging infrastructure.
There are approximately 53,000 water treatment plants in the United States, with about 400 of those participating in the EPA and AWWA's Partnership for Safe Water program.
In 2016, only 33 plants received the President's Award, the program's highest honor.
Pennsylvania American Water was awarded 9 of these 33 out of a total of 53,000 water treatment plants.
Also in 2016, American Water was recognized by the Environmental Business Journal for our water quality and sustainability, and named by Newsweek as one of America's top green companies.
Our efforts have also translated into eight patents, most dealing with water treatment technology as well as $43 million of research grants awarded over the years.
And of course, that is because of the people we have at American Water.
Our R&D group of 15 employees includes eight PhDs and four people with other advanced degrees.
They work hard every day with researchers across the globe to find better ways to sustain, treat, deliver, and recycle our precious water resources.
And our 6,800 employees, including operations, engineering, water quality and environmental lab professionals, are always finding better ways to serve our customers and protect our environment.
While awards are good, the best recognition is highly satisfied customers and their peace of mind.
With that, we're happy to take your questions.
Hello, <UNK>.
Right.
So our Keystone Clearstone operations are in the Appalachian Basin, and we're the only water services provider that does the cycle of water management.
Except of course, we do not at the end of the cycle take the waste at the sites and put them into the deep wells that have been controversial.
So because of that, we're finding that more and more of the E&Ps want to deploy their capital for their own, for example, development of pipelines and for their own services.
So we can step in and basically handle providing the water and recycling the water on the site, and they don't have to worry about it.
So we've gone from 20% when we purchased them in July of 2015 to 35% now.
We still believe that there are opportunities for growth in the area and in fact what we're finding now is that there's so much work in the area that we're seeing some of the pre 2016 downturn, we're seeing some of the pricing come back for the services and the need for the largest E&Ps especially to feel comfortable that they have a partner who has a very strong commitment to environmental sustainability.
So we do think that there is further room to grow in the Appalachian Basin.
One of the things were excited about, for example, there's a lot in the press about drones and delivering packages.
We're actually in New Jersey America and utilizing drones and infrared to actually go over pipes in the ground from the air, and we are finding that were able to spot leaks and find leaks before they ever occur in main breaks.
And you don't have to dig up the ground or anything, it's pretty cool some of the things we're doing.
And there was an FSR that I was out with in northern New Jersey a few months ago, <UNK>, and he had the smart phone.
And when I say we went into a house, I say the royal we, he went in a changed a meter and I was with him in the house and we walked outside, and this gentleman has been with the Company 38 years, and he looked, he goes, watch this.
He said I can read this meter immediately on my smart phone.
So there's a lot of really neat things going on in terms of deploying technology in very practical ways.
Not just the high-tech level ways, but things that make it easier for our front-line employees to serve our customers better and we're just at the beginning of that we believe.
Sure, <UNK>.
Thank you for the question.
I will start and then <UNK> can talk specifically about the New Jersey situation.
So interestingly, I've been involved with the bi-partisan policy center working on looking at the whole infrastructure issue around the administration and their efforts.
And it's interesting, there are a lot of parties that are interested.
We have a coalition with the US Chamber and NAM and several groups that are looking at this.
I think the question is remains is where is the money coming from.
So for us on the infrastructure, we are very excited that there is a focus on infrastructure.
We like that there is a lot of interest from both sides of the aisle on public private partnerships.
So we'll just have to see how that plays out.
But the good news for us is regardless of what plays out nationally, we have such a strong capital investment program.
And being an investor-owned water utility, we could see a bump but for us we're just continuing to our business which is robust, and as we said, we continue to invest more and more capital.
So there could be something down there.
We're monitoring it closely and hopefully we'll see some become from that.
The last question you asked and then <UNK> can talk about what's going on in New Jersey with the issue around municipalities.
We're constantly, as we said at investor day, we survey the landscape of all municipalities and companies that are out there that meet our guidelines and our discipline in terms of acquisition.
But we are very disciplined.
So when we look, we don't see the need to grow for the sake of growing unless it is a good investment for us for the long term.
Our financial models, we're always looking at so what will this mean 5 years, 10 years, 15 years, and ensuring that we have a discipline around those acquisitions.
But that doesn't mean we're not looking or that we don't have substantial data and information on these opportunities, it just means that we will not get out there and do something for the sake of just saying that we have an acquisition.
And I do think, it's interesting.
We've been waiting, as you know, following the water industry as long as you have, everybody keeps talking about there will be, no pun intended, the flood gates opened on municipalities to be privatized.
But it is a one-by-one battle.
As municipalities have to look at their own particular circumstances, and at all the options that they have available to them.
So our entire strategy is we're in these communities, we're on the ground, we're there to be a solutions provider.
We think in many cases we can provide services at a lower cost, and we believe that we can improve water quality, improve service, and give predictability of cost in many locations better than what exists there and it is incumbent upon us to make sure that we tell our story.
And the New Jersey situation is very interesting, <UNK>, if you want to talk about that.
I think the thing this points out, <UNK>, is not just this but EPA.
What we have found in the past is where as we would immediately need to and would address issues that came up in terms of any noncompliance in wastewater, for example, that there are many municipalities and cities that have had noncompliance items for decades.
And there was just a different standard of holding them accountable than us.
And I think one of the things we learned from Flint, Michigan is safe water is for everybody.
And regardless of who provides that water, whether it is private or public, there should be the same standards for safe clean water and that we have great waste water services and sanitation services.
So I think that as some of these things have happened, people have realized it doesn't matter who the purveyor is there needs to be standards that everybody follows.
And for us, it's the ability to have a level playing field.
Absolutely, <UNK>.
So in the investor material and in our slides, we outlined the overall acquisition process.
And if you look at page 12 of our slides, it really starts with the agreement process.
So when we look at the Scranton acquisition, we have now closed Scranton as of December 2016.
That means that we take on the customers, we begin to integrate them into our system.
And generally, from a financial standpoint during the timeframe between when we close and when we get through a final rate case decision, we finance those acquisitions with shorter-term debt and we would expect these acquisitions to meet certain financial metrics including being accretive to earnings.
And so that is the process that we go through until we file our next rate case decision or rate case.
In the rate case process, then we will coming out of that process have our authorized amount that is included in rate base upon which we would earn ---+ have the opportunity to earn a full return.
It's different for every acquisition.
But yes, once you get that full amount in the rate base, that's what you would generally expect.
This is <UNK>, <UNK>.
I think everybody is just wondering what's going to come out of Washington.
They're looking at the issue of infrastructure and what that means.
They're looking at any potential changes in the EPA, and for the electric side the clean power plant and what does this mean and the waters of the US and I think everybody is also carefully watching for the tax issues.
So I think there are state issues that continue to be state to state, but I think at NARUC, just like everywhere else, we're watching to see what is going to happen on the new landscape.
And we're all speculating and we can draw general models, but at the end of the day we're waiting to see ---+ even proposals.
If we have proposals, we can model and see what the impacts are.
At this point, we're just guessing.
And I think everybody is pretty much in that situation.
We continue though to look at investment opportunities regardless, NARUC, does, with the President of NARUC, Rob Powelson, of course, Pennsylvania has always been very innovative in the way that they look at infrastructure and ensuring that their citizens are taken care of that are our customers.
So I think it was the same theme but an uncertainty of so what will the new rules be, and how long will it take for us to know what those new rules are.
Hello, <UNK>.
No, <UNK>, we don't do that because it's so small.
Basically, they were extremely capital light.
We are open to looking at design build and operate on a 5-year basis, and we would actually look at that 5-year for any capital investment from a depreciation standpoint at least for our models.
But right now, it's just not significant enough, and we're just not really disclosing it because it's so small.
Well I think it depends on your definition of normal, what normal is.
I think going back to the low turn we've had from the middle of 2015 say through the end of last year, we know things are picking up.
You can just look at natural gas prices, even though they've come down a bit because of the really warm weather we've had this winter, we know that of course going into the summer, 2015 natural gas was 33% of power generation, coal was 33% and nuclear was 20%.
Now we're starting to see as gas prices are so affordable, that will probably continue and we will probably see gas increase.
And those of you all who cover electric also know that regardless of what happens with the clean power plan, a lot of plans are already underway.
And people are already building significant new combined-cycle facilities.
So we believe that we've turned the corner.
We see activity tremendously growing as I said in my comments.
We're seeing rig counts up, we're seeing well completion activities up, along with the natural gas prices.
We believe that we're getting back to a more normal.
What that normal is, I think we're going to have to see over the next few months.
And will continue at our quarterly discussions to say, is it higher than we thought or less than we thought.
But we do, as we always are, want to be conservative, and make sure that we have a few more months under us to see what can we look at that's more predictable.
So it's much better than last year, will it be back to 2014, 2013, 2014, I think we'll just have to wait and see.
Well it's not settled, and we had two different firms who did not participate.
And so we currently ---+ one of them requires arbitration, and we have begun the arbitration process.
The other, we have filed a lawsuit in West Virginia against, and that is public information.
So we're continuing, as you know, these things don't happen quickly.
But we are in process, October 28, we actually filed in Kanawha County against Star Indemnity and that one is public record.
And then the other insurer, we have actually started arbitration process.
Since they are located offshore, there was mandatory arbitration.
And we actually have had the panel, the chairperson of the panel has been selected.
So we're continuing that process, and both of those, that level of insurance together is $50 million, $25 million each.
Yes, it would be both.
And if it were, as you know, the entire settlement was on West Virginia American Water's books because they were the ones that the lawsuits were against.
And so if we do recover any additional funds, it would go back to West Virginia American.
Thanks, <UNK>.
And I would tell you that for those that we have not been able to answer your questions, our Investor Relations will get back with you.
We appreciate all of you participating today.
We appreciate those of you who were at our investor day.
If you have any questions, again, please call <UNK> and Ralph.
They will get back if we didn't get a chance to answer your questions.
I'd like to remind everyone that our 2017 first quarter earnings call will be on May 4, and our annual shareholders meeting will take place on Friday, May 12.
Thanks again for listening.
We hope you have a great spring, and we will talk to you again in May.
