AWK
#Thank you, Carrie.
Good morning, everyone.
And thank you for joining us for today's call.
We will keep the call to about an hour.
At the end of our prepared remarks we will open the call up for your questions.
During the course of this conference call, in both our prepared remarks and in answer 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 statements deal with future events they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.
Additional information regarding these risks, uncertainties, and factors is provided in the earnings release and in our 2015 Form 10-K, each as filed with the SEC.
I encourage you to read our Form 10-K for a more detailed analysis of our financials and other important information.
Also, reconciliation tables for non-GAAP financial information discussed on this conference call, including adjusted EPS and our O&M efficiency ratio, can be found in the appendix of the slide deck for this call, which is located at the Investor Relations page of the company website, as well as our earnings release.
We will be happy to answer any questions or provide further clarification, if needed, during our question and answer session.
All statements in this call related to earnings and earnings per share refer to diluted earnings per share from continuing operations.
Before I turn the call over to <UNK> I would like to take this opportunity to introduce you all to Melissa [Schwartzel], our new Director of Investor Relations.
Melissa has been a member of American Water's finance team in Lexington, Kentucky since 2009.
Her experience includes supporting rate cases, infrastructure filings and other regulatory matters in seven of American Water's regulated states.
She has worked on most of the company's cost components and she's tackled challenging recovery issues.
She's also provided rates-related financial planning support throughout the American Water footprint.
I know that you will all find Melissa to be very helpful and a pleasure to work with.
And now I will turn the call over to American Water's President and CEO, <UNK> <UNK>.
Thanks, <UNK>.
Good morning, everyone and thanks for joining us.
With me today are <UNK> <UNK>, our CFO, who will go over the fourth quarter and full year financial results and <UNK> <UNK>, our COO, who will give key updates on our Regulated Business.
On January 1, 2016 <UNK> assumed additional responsibility for operational and safety best practices across our AWE market-based businesses.
So periodically he'll give you an update on those efforts as well.
The employees of American Water delivered strong results in 2015 for both the fourth quarter and the full year.
We invested significant capital into needed upgrades for our systems to provide reliable and safe water and wastewater services.
We continued our focus on managing costs and deploying technology so that our services remain affordable for our customers.
And we treated and delivered water that consistently met and surpassed EPA drinking water standards.
This includes the lead and copper rule, which has generated a lot of news recently due to the crisis in Flint, Michigan.
American Water samples for lead on a routine basis in our water systems continue to be in compliance with that rule.
We expanded our regulated customer base in 2015 by nearly 42,000-metered customers.
About 9,000 customers resulted from organic growth in our existing footprint, 24,000 customers joined our system from acquisitions that closed during the year.
An additional 9,000 are from acquisitions where we have written agreements in place and are just awaiting regulatory approval.
We also continued to grow our market-based businesses through new contracts and new customers.
As you can see on slide seven, we reported operating revenues of $783 million, a 7% increase above fourth quarter 2014.
For the full year operating revenues were nearly $3.2 billion, an increase of about 5% over 2014.
Earnings from continuing operations were $0.55 per share for the fourth quarter, a 5.8% increase above fourth quarter 2014.
Annual earnings were $2.64 per share, up 8.6% over 2014 adjusted EPS.
The fourth quarter includes a $5 million contribution to the American Water Foundation, whose work I will discuss briefly before our Q&A session.
Turning now to slide eight, you can see that we delivered on our strategies in both the regulated and the market-based businesses in 2015.
We made about $1.4 billion in total annual investment, the highest in our company's history.
We invested $1.2 billion in our regulated system, which improves our long-term service reliability and water quality for our customers.
We're able to increase our investment at this level because of the expertise of our hard-working employees and our continuous improvement in both O&M and capital deployment efficiency.
We're proud of our ability to deliver on our growth goals and effectively manage every dollar to deliver excellent customer service while we keep our customer bills affordable.
Even more importantly, we know that our customers need to be able to trust that the water we provide is clean and safe.
So while consistently meeting and surpassing all EPA requirements in 2015, we continued our focus on further strengthening our critical assets.
Let me give you a couple of examples.
We upgraded two of our company's largest water treatment plants, which serve over 300,000 customers in St.
Louis County, Missouri.
In Champagne, Illinois we upgraded chemical treatment facilities nearly the end of their useful lives with improvements that included replacing gas chlorine facilities with safer technology.
In addition to these regulated system investments in 2015, we also grew our customer base organically and through regulated acquisitions.
Our market based businesses continue to grow as well.
In December our Contract Services Group was awarded a ten-year O&M contract in Camden, New Jersey with revenue of approximately $125 million.
Our military service group expanded to 12 bases with a successful 50-year contract bid for Vandenberg Air Force Base with revenue of approximately $300 million.
Our Homeowner Services Group expanded to 1.6 million service warranty contracts and we grew our utility partnerships by adding Rialto, California and the Orlando Utilities Commission, as you know we expanded our business through the acquisition of Keystone Clear Water Solutions.
So in summary we produced excellent results for the year through our ongoing customer growth, highest annual capital investment in our history, and we continued our O&M and capital efficiencies.
This continues our progress toward achieving our goal of 7% to 10% EPS growth through 2020.
Based on our performance, our Board declared a cash dividend of $0.34 per share during the fourth quarter and we are affirming our 2016 earnings guidance range of $2.75 to $2.85 per share.
And with that, <UNK> will now give you his update.
Thank you, <UNK> and good morning, everyone.
In the fourth quarter and for the full year of 2015, American Water continued to deliver strong financial results.
As shown on slide 14, earnings per share from continuing operations for the fourth quarter was $0.55, up $0.03 or 5.8% over the same period last year.
This slide shows the contribution by business line to quarterly and annual results.
Let me walk through the numbers.
Then I'll discuss the drivers of the key variances on the next few pages.
For the quarter the Regulated Businesses contributed $0.54, up $0.01.
The Market-based Businesses contributed $0.06, flat to the fourth quarter of last year.
And the parent, which is primarily interest expense on parent debt, was $0.02 better than the fourth quarter of last year.
For the full year 2015, earnings per share from continuing operations was $2.64 per share, an increase of $0.21 or 8.6% increase compared to adjusted 2014.
The contribution from our Regulated Businesses was $2.63 per share, up $0.18 or 7.3% over adjusted 2014.
The Market-based Businesses contribution was $0.24, up $0.02 or about 9% over last year and the parent improved $0.01 per share.
These annual increases are consistent with our long-term growth triangle.
Turning to slide 15, let me walk through the components of our quarter-over-quarter increase in earnings per share.
The primary driver was higher regulated revenue of $0.09 per share from infrastructure surcharges and other rate increases to support our regulated system investments.
This was partially offset by a higher O&M expense of $0.03, mainly from the timing of maintenance-related work as well as higher claims and pension-related costs.
Depreciation, taxes and other increased $0.05 per share driven mainly by our investment growth.
The improvement at the parent of $0.02 per share was mainly due to lower taxes from state tax apportionment benefits partially offset by the $5 million contribution to the American Water Foundation that <UNK> mentioned.
Also, please note that the Market-based Businesses were flat for the quarter as higher growth in our military and Homeowner Services groups was offset by a 2014 tax benefit.
Turning to slide 16, let me walk through the elements of our $0.21 increase from year-over-year.
The Regulated Businesses benefited from higher revenue of $0.18 per share, from authorized rate increases to support investment growth as well as increases from acquisitions and organic growth.
In addition, there was a $0.05 increase due to mild weather during 2014 and an improvement in O&M costs of $0.02 per share.
Offsetting these improvements was higher depreciation and taxes of $0.07 per share, driven by our investment growth.
Overall the Regulated Businesses increased $0.18 year-over-year.
The Market-based Businesses were up $0.02, mainly due to additional construction projects under our military contracts and the addition of Hill Air Force Base and the Picatinny Arsenal in 2014, as well as geographic expansion in Homeowner Services.
Parent and other was $0.01 better than 2014 due mainly to lower taxes from state tax apportionment benefits partially offset by the foundation donation.
Now let me cover the regulatory highlights on slide 17.
As <UNK> mentioned, we should receive the rate order from the West Virginia rate case soon.
And as such we currently have four general rate cases in process, Missouri, Virginia, Illinois and Kentucky, for a combined annualized rate request of $87.4 million.
For rates effective from January 1st, 2015 through today and including the $18.3 million for West Virginia, we received a total of $98.6 million in additional annualized revenue from general rate cases and infrastructure charges.
We encourage you to review the footnotes in the appendix of the slide deck for more information.
Slide 18 highlights our improved financial performance across the board.
During the fourth quarter of 2015 we made total investments of $386 million, primarily for regulated system investments.
For the year we invested a total of $1.4 billion.
This includes $1.2 billion for regulated system investments, $64 million for regulated acquisitions, and $133 million for the acquisition of Keystone.
Excluding the Keystone acquisition, capital investment increased about 27% from 2014.
Going forward, we expect to invest $6.4 billion over the next five years, of which about $5.5 billion will be to improve water and wastewater systems for our customers, $600 million for regulated acquisitions, and $280 million for strategic capital.
For the full year, cash flow from operations increased $82 million or 7% to about $1.2 billion mainly due to the increase in net income.
And our adjusted return on equity for the past 12 months was 9.43%, an increase of 57 basis points compared to last year from continued execution of our strategies.
We also announced the in the fourth quarter of 2015 a $0.34 common stock cash dividend payable on March 1, 2016.
On slide 19, as many of you will recall, during our investor day in New York, we gave 2016 earnings guidance of $2.75 to $2.85 per share.
Today we affirm that guidance range.
There are certain important factors that could impact our 2016 results and as we have done in the past slide 19 outlines those factors that we have included in our earnings guidance range.
Swings outside of these ranges could cause results to differ from guidance.
Weather is generally the largest variable impacting our earnings.
Our range of plus or minus $0.07 represents what we consider to be normal weather variation that we have included in our earnings guidance range.
For our regulated businesses we see variations of plus or minus $0.03, primarily from the timing and outcome of rate cases, the timing and completion of capital projects as well as variations in O&M and production costs.
American Water Enterprises variability is driven mostly from the timing of future capital upgrades in military services, and realization of our expected growth as well as claims costs in Homeowner Services.
Variability for Keystone is primarily driven by natural gas prices and drilling activity in the Marcellus and Utica.
I would also like to mention that our 2016 earnings guidance range includes estimated legal defense costs of about $0.03 per share related to the 2014 Freedom Industries chemical spill in West Virginia.
As you may recall we included $0.02 per share of legal costs in 2015.
And lastly I would like to address the expected impact from the five-year extension of bonus depreciation.
From a cash perspective we are in a federal tax net operating loss position so we do not receive a current cash benefit from bonus depreciation.
We look at electing bonus depreciation on a state by state basis.
In those cases where adopting bonus depreciation would be in our customers' best interests and where we expect to be able to utilize our NOLs, we will do so.
Assuming we elect bonus depreciation in our regulated states, this would increase our NOLs and push out the expected timing of when we would become a cash taxpayer by about one year to 2021.
From an earnings perspective, while this would be expected to reduce rate base and earnings, we do not see a significant impact to our 2016 earnings guidance range.
Nor do we see a significant impact to our 7% to 10% compounded annual EPS growth rate for 2016 through 2020 because the rate base impact is largely offset by lower financing needs in 2020.
We also have flexibility to mitigate some of the rate-based impacts by redirecting a portion of our strategic capital already included in our five-year plan to our Regulated Businesses.
As well as accelerating certain investments that continue to strengthen our critical assets for our customers.
And with that I'll turn it back over to <UNK>.
Thanks, <UNK>.
Before taking your questions, let's review the American Water Investment Thesis we shared with you at our investor day and briefly discuss the American Water Foundation on growth.
On growth, we affirm our EPS growth goal of 7% to 10% for the next five years.
We talked about our unprecedented 2015 capital investment, our continued O&M and capital efficiency, and our plans for 2016.
We know that reputation operational excellence, reliability and dependable water quality are critical to our growth.
Where and how we expanded our customer base in 2015 leverages these strengths, growing through tuck-ins, adding wastewater customers where we already serve water, and growing our Market-Based Businesses.
Our people have deep utility expertise and diversified experience and they are our biggest competitive advantage.
They also care deeply about our customers and the communities in which they be live and serve.
This was clearly demonstrated by what our employees dealt with in both Missouri and Illinois during the last week in 2015.
Record rainfall of up to 12 inches fell during a powerful three-day storm across the midwest, hitting the St.
Louis area hard and causing record flooding.
Homes and businesses were submerged, highways closed and water and sewer utilities faced extraordinary challenges.
Missouri American has two plants on the Meramec River supplying water to about 20% of our customers in the St.
Louis county area.
Thanks to early planning and the construction of a system of temporary pipes and pumps, our customers never lost service and we maintained excellent water quality throughout the event.
Our wastewater teams also worked around the clock during the heavy rain to remove pumps and motors that otherwise would have been lost to flooding.
But it's not just what our Missouri team did for our own customers, it's what they did for the surrounding communities in need.
A local public water district had a flooded plant and lost the ability to serve its 20,000 customers.
By opening a connection between the systems, Missouri American was able to help the district serve many of those without water.
Additionally they worked with the National Guard to fill more than 500 tanker trucks that delivered our water outside of our service area, which brings me to the American Water Foundation funded by American Water's parent company, which keeps the communities we serve and have a better quality of life.
One key foundation partnership is with the Union Sportsman Alliance, where we have worked with local union members to build walking trails, public access areas and fishing facilities for communities including projects for special needs kids.
The foundation also has a partnership with a National Recreation and Parks Association in support of building better communities.
Here we focus on building or enhancing nature-based playgrounds for children and educating people on water and environmental stewardship practices.
The foundation also matches employee donations to qualified charitable organizations up to $1,000 per year per employee.
Earlier this month, the foundation made a $50,000 donation to the Flint Child Health and Development Fund, to help the children of Flint, Michigan get the resources they need to deal with the lead exposure many have experienced.
These examples of doing good as we do well demonstrate the dedication, expertise, strong character and the work ethic of the 6,700 people I get the privilege working with every day.
Certainly our employees' commitment translates into our strong financial performance.
But it also lets you know, as our investors, that we are a company whose people believe not just in what we do, clean water for life, but also in how we do it.
And we believe that it is critical for a company who wants to be as successful in the coming decades as we are today.
So with that, we are happy to take your questions.
Sure, Rich.
And thanks for the question.
I will start and then <UNK> may want to jump in.
So when we look at all of the different uses of our capital in terms of growth, in terms of raising our dividend, in terms of regulated investment, all of those different things, we look at a balance in optimizing those and also where we get the biggest value from every dollar that we spend.
So we look at growth and the returns we get there.
We look at regulated investment, and let me be clear that in our investment plan, the first thing we do is we invest whatever is needed in every one of our states to ensure that we provide safe, clean water that meets all EPA standards.
So then beyond that, is what we refer to as discretionary but there is a base amount, which is significant, well over half of our capital that we spend to ensure that we provide those services.
Then beyond that, we look at our dividend growth which, as we have said, we want to keep consistent with our EPS growth.
So we want those to be correlated.
So that's the guidance we've given.
And we have a 50% to 60% payout ratio and currently we're at the lower end of that range so there's room there.
When we look at things like debt, and I'll let <UNK> talk about this more, the question we ask is, what is best for our customers and our shareholders with the next dollar that we invest.
Or whether we pay down debt or whether we're able to provide dividends.
So as you know, to be in a strong financial position as we are, we have a lot of optionality and we're always looking at how we optimize that optionality.
And, Rich, I would add to that that as we look and as we outlined in our investor day, when we look at the capital structure over the next five years we continue to look at about a 45%, 55% equity to debt capital structure.
Thanks, Rich.
Well, thank you, Carrie, and thank you all for participating in our call today.
If you've got any questions, please call <UNK> and Melissa and they will be happy to help.
I would like to remind everyone that our 2016 first quarter earnings call will be on May 4, 2016 and our annual stockholders meeting will take place on Friday, May 13, 2016.
Thanks again for listening.
And we'll talk to you in May, if not before then.
Thanks.
