Good day, ladies and gentlemen, and welcome to the Aqua America's Q1 2014 Earnings Conference Call. Please note, today's conference is being recorded. At this time, I'd turn the conference over to Mr. Brian Dingerdissen, Director of Investor Relations. Please go ahead, sir.

Thank you, Holly. Good morning, everyone. Thank you for joining us for Aqua America's Frist Quarter 2014 Earnings Conference Call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com, or by calling Alex Whitlum [ph] at (610) 645-1196. There will also be a webcast of this event available on our site. Presenting today is Nick DeBenedictis, Chairman and President of Aqua America; along with Dave 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 risks, 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 risks 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.

Thank you, Brian, and good morning, everyone. Another solid quarter despite a rough winter that cost us about a $0.01 in increased expenses. But despite that, the company earned $0.24 versus $0.23 from continuing year-over-year, and that was on a 2.3% increase in revenues. The revenue increase was about 1/3 from consumption; that's because we had very low consumption last year, first quarter; 1/3 growth from customer base, new customers; and 1/3 from rate awards, which I'll get into later in the report. Thanks to our regulatory ruling regarding the repair tax in Pennsylvania, we've been able to avoid both surcharges and any rate increases, base rate increases, despite a record amount of capital that we're deploying in Pennsylvania. Our calculations show that our PA customers have already avoided $30 million in rates through Q1. And if we can avoid a base rate increase through the remainder of 2014, our customers' savings will grow to about $70 million. Now, the company's shareholders are also being rewarded with earnings and cash from the flow-through treatment of the tax repair benefits. But if you wanted to do a normalization rate, and we would have gone for the normal way of getting rates, our increase in Q1 would have been about 5% in revenues. So it's just taking the revenue -- it's off the revenue line, but it's coming back to the tax line. That's a very simplistic non-accounting way of describing it. Of course, the biggest advantage, in my mind, of the accelerated capital program has been the visible increase in service reliability and improved water quality for our customers. Really life [ph] examples came through in this first quarter. Despite having a terrible winter, probably the worst for breaks in over a decade -- and we had 350, roughly, breaks in…

[Operator Instructions]

Okay. Hopefully, there's somebody on the other line. But if not, call in. But if so -- somebody is coming in?

And our first question comes from Jonathan Reeder with Wells Fargo.

Just a question on the acquisition you announced yesterday, the municipal deal. The $22 million purchase price, is that roughly approximate rate base? Or how should we be thinking about that from an earnings standpoint?

Yes. The reason we said up to $22 million was the -- we're analyzing now, that under the new Illinois law, you get 3 estimates. And the sale is going to be based on the -- those estimates. We think it's going to be around $22 million. But if it's lower, we would pay lower. The second part of your question, which is is it approximate rate base, absolutely. The estimates would be what rate base would be because the municipal government has never been in for a rate base. So therefore, the official people that do this would be determining the initial rate base.

Okay. And you're capped at paying $22 million at the most, but it could be lower? Is that right?

Yes.

Okay. And then, on the Fort Wayne sale, and then that agreement to kind of, I guess, treat the wastewater, does that -- from an earnings perspective, do the 2 kind of wash out on an ongoing basis? Or...

Yes. I'm glad you asked that. First of all, last year, the $116 million -- first of all, Fort Wayne makes money. Let's start there. So last year's continuing ops earnings of $116 million, you're going to see this year when we -- and the year's going to be readjusted to $115 million because Fort Wayne makes between $0.01 and $0.015 a year -- this piece of the Fort Wayne. Remember, we still are running the sewer system instead of water system. The wastewater -- we're going to expand the plant, and we're doing some diversions now. This is the fast growing area of Fort Wayne. It's outside -- it's called Allen -- Aboite Township and Allen County. So we anticipate, over the next 20 years, we're going to be needing at least 1, maybe 2 major expansions. So what's happening is we are, with the charge to Fort Wayne -- and this is with their acknowledgment, because they want to offload some of their system's new -- expected use of capacity because they're -- they have what they call CSOs, and they're spending a lot of money to fix it in Fort Wayne City. What we'll end up doing is investing probably $8 million to $9 million into an expanded water plant that will handle their waste for the next 10 to 15 years as our waste grows into it. And the plant will be paid for with the use of that money, if that helps answer your question.

It will be paid for with the -- part of the sales proceeds, you're saying?

Yes. So in other words, we'll maintain -- rather than a rate case, because we've promised to stay out of rates until 2016 -- this will offset the need for the rate case because they're going to be giving us new revenues we don't have now. So the whole rate is down, but we will earn on an additional $9 million, if you want to call it that, in rate base because that's what the count -- amount we're putting in. But part of that revenue requirement will be offset by the revenues, obviously, coming in from Fort Wayne. And what I'm saying is in the beginning, it balances out, and then it actually helps later as our new growth comes in. So we will get return on that $9 million -- the $8 million to $9 million we have to do on the plant immediately because of the Fort Wayne take-or-pay. It's a...

Okay. So initially, it's kind of neutral. And then, longer term, there's still growth opportunity there, you're saying?

Oh, yes. In two ways, Jonathan. One is the additional rate base we wouldn't have had sooner than -- maybe it would have been 15 years from now we're building this $8 million or $9 million expansion. And the second would be the revenues offset obviously some of our costs which helped enhance returns. But we -- yes, so we had to commit not to go in for a rate case until 2016.

Okay.

That's a trade-off for them, paying us for this.

All right, Nick. Are you seeing a pick up in any of these municipal opportunities or even smaller deals right now? Or was the Illinois just kind of a one-off item that you guys have been working on for a while?

No. There are at least half a dozen that we're talking to currently. As you know, if you want to count Detroit in that, we were asked to look at that one. We looked at it for a little bit, but we're seeing 2 or 3 in Pennsylvania which are municipal authorities. And I'll tell you what's driving it. I think the pension squeeze is really starting to affect raising taxes or raising rates in order to pay the pensions and rather than just say we're cutting the pension out, which is very politically difficult, I think it's driving -- and then, you have EPA rules coming on top of that. I think we're seeing more activity in the municipal sector, as you can tell. We've had 5 or 6 just in the last couple of years than we had seen in the prior 10. So I'm optimistic that we're starting to see -- some of this 20 that I talked about, a couple of those should be municipal, too.

Okay. And then, last question. Kind of talked about some of the increased cash that you have just kind of stockpiled up, waiting to strike. If the opportunities of size don't come, can you kind of just talk about the thoughts around the dividend policy, size of increases, as well as potential share repurchases?

Sure. The answer to all 3 is yes. The -- it's unique for me after 22 years to actually say we have extra cash. As you know, the first, what, 21 years we were always -- we didn't have enough internally generated cash to pay for the capital programs. So we always had a borrowing program, an equity program, and so on. Now our equity levels are growing pretty rapidly because -- not only because of the retained earnings picked up from these sales, which count as your equity, but also the fact that we're building equity in the businesses with our profits. So we're getting stronger as far as the ratings agencies look. And this, I'll call it, onetime infusion of these 3 sales, we're looking at how to deploy that in addition to the extra cash coming in. Now the extra cash coming in from operations with the $300 million, $325 million capital program, still doesn't clear our healthy dividend. But it's a lot different than it used to be where we're borrowing the whole dividend plus. So I think the fact that we were always willing because of the nature of our business to feel the future was bright enough to pay the dividend even though the cash wasn't there but the earnings were, I don't see any difference. We'll make that decision at our August retreat with our board. We'll have the usual debate, but we've raised it 23 times in the last 22 years. The last one was 9%. CAGR was 7% over that 22 years. So I would anticipate that that trend will continue with another healthy increase. Regarding the opportunities, you're absolutely correct. There's only, what, 8 of us, 9 of us that are publicly traded. And we're talking to almost every one of the larger privates, if you want to call them, which are usually 10,000 customers, 15,000 customers, absolutely bite-sized, that we could do with cash in each of the states we're in. And we did announce that we have a 600,000 or 700,000 share buyback plan. Dave's running that, and he's analyzing when and if we should go into the market for that. But we -- the purpose of that, Jonathan, is basically to cut any more dilution. We started buying stock back for the dividend reinvestment so that's... Didn't we start that?

Yes.

So that's already actively being pursued. So this would be for any option dilution, things of that sort so that we don't continue to show the 0.5% to 1% dilution each year in earnings. So that should help earnings a little bit. But we're not doing it for that reason. We're doing it because we want to keep our equities to total cap ratio in line with the industry. Does that help?

Right. Yes, it does. I mean, that's kind of the way we see it. Equity ratio keeps creeping up in a good way, I guess, from all those cash generation and earnings, but at some point, does a larger buyback come into play is kind of the question down the road if you don't have a sizable M&A deal.

Right, right.

And then, I guess kind of the last question. Nick, if you could just talk a little bit about how, I guess, the company and the board thinks of succession planning. I know you enjoy what you do. But at some point, you got to step aside. So just kind of wondering if you could comment a little on that.

No, no. It's a very, very good question. My contract expires on June 30, which is 14 months from now. The board, and me as an active chairman, have been meeting consistently and actively working on the plan and options for the company leadership, including board membership. We have a couple of board members who just retired at age 72 at this meeting. And a lot of it has to do with my own personal future roles, which I'm still figuring out so far. My energy level hasn't decreased. But as you mentioned, it's -- I'm getting up there. Our goal is to have a defined plan later this year, which would permit a smooth transition. That would still be a 6-month or so, or more -- 8-month transition, which we think is good. So we're working on it as we speak. It was the bulk of our meeting yesterday after our board meeting after the annual meeting. I mean, I think one thing I can say to the analysts though that's important is we worked hard. The management team here is as experienced as I am. Most of us have been here over 20 years, almost all in the water business. And I think any change is going to still continue with our successful long-term direction of just what we're doing, growth through acquisitions. We think we're one of the best of the water companies and a viable option to municipal governments and especially for regulators who don't like these small under-capitalized systems. And the customer is always first. So rates are always important. And we've shown 14 years of consistent earnings growth. We think we'll get to 15 after this year. And the shareholder value, we showed our shareholders yesterday, and anybody who bought the stock 20 years ago, it was up over 800%. So I mean, there are parameters that the board's looking at as we say where are we going with next group of leaders in the company.

Yes. There is no doubt that you've done a great job at the helm there, Nick. That's for sure. But so, just so that we're kind of clear, when you come up with this plan, you intend to, I guess, communicate with the investment community it sounds like maybe either on the Q3 call or some time late 2014?

Yes. I think the activity -- we're looking and trying to recruit a couple of board members, that'll be the first announcements, and then some kind of organizational structure that will show how the transition will take place.

[Operator Instructions] Our next question comes from Spencer Joyce with Hillard Lyons.

I want to revert back to Fort Wayne for just a second. Nick, I believe you've mentioned a $67 million figure. Is that a net proceeds that you all should see this year from the sale? It seems like I was thinking a little bit less than that. And if that's the right number, is that sort of better than you were expecting?

No, no. Thank you for pointing that out. The $67 million is total. They tried to condemn, and actually did legally condemn a portion of our water system back in 2009. And we've been arguing in court over the valuation of that. This deal affixes that valuation and stops the costly litigation. That was about $17 million. $16.8 million, something like that. And that money has been held. I mean, we basically have it. But we had -- it has not been flowed through the -- is that right, Dave? We haven't flowed it through the...

P&L.

P&L yet. So technically, it's wrapping up. The check that will be delivered won't be $67 million. It'll be the $50.2 million.

Okay, fantastic. And then, also, on Fort Wayne, just sort of a housekeeping item here. And I think, Nick, you've referenced this a little bit, but we'll cease [ph] a little bit of restatement activity of 2013 ongoing operating results from an income statement perspective throughout the year. Was this first quarter -- the first quarter that you all had backed out, a piece of Fort Wayne from operating results?

Yes. The continuing $0.24 doesn't include maybe $0.005 from Fort Wayne and same with the $0.23.

[Operator Instructions] And at this time, we have no further questions in the queue. I'll turn the conference back to over to Nick DeBenedictis with any closing remarks.

No. Just thank you, everybody, for joining us this morning. And talk to you in a couple of months.

Thank you. And again, ladies and gentlemen, that's our conference for today. We thank you for your participation.