Good day and welcome to the Aqua America’s Q4 2018 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Brian Dingerdissen. Please go ahead sir.

Thanks Brad. Good morning, everyone and thank you for joining us for Aqua America’s full year 2018 earnings 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. The slides we will be referencing and a webcast of this event can also be found on our website. 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, a reference maybe made to certain non-GAAP financial measures. A reconciliation of these non-GAAP to GAAP financial measures is posted in the Investor Relations section of the Company’s website. Presenting today are Chris Franklin, Aqua America’s Chairman and Chief Executive Officer; Dan Schuller, Chief Financial Officer; and Matt Rhodes, Executive Vice President of Strategy and Corporate Development. And I am Brian Dingerdissen, Vice President, Chief of Staff and Investor Relations. At this time, I like to turn the call over to Chris Franklin, after his presentation, we will open the call up for questions.

Hey, thanks, Brian, and good morning, everyone. Let's take a look at Slide 5. As we reflect on 2018, to say it was a historic year for Aqua. The strategy we initially described to many of you in the winter of 2016 is really working and it's manifested in a number of important ways and is really thanks to the hard work and dedication of the team. We excelled in each of the core competencies and we've described these many times to you, but it's infrastructure investment, our work on regulatory issues and operational excellence. Last year, we built unprecedented momentum in our municipal acquisition strategy, which was largely the result of the passage of fair market value legislation in a number of our states. Most importantly, for the future of our company, we announced our entry into the regulated natural gas industry. I'd like to highlight a few of our significant accomplishments from 2018 for you. First, it was another year of solid financial results, in line with guidance, adjusted income per share rose 4.4% and revenue was up 3.5%. And Dan will get in a lot more details on the financials in just a moment. Also, we filed our Pennsylvania water rate case, the first one filed since 2011. And just recently, we filed the settlement of that case, I'll mention in more detail in a moment, but this was a significant undertaking and will really help ensure that we're able to provide reliable high quality service and continued investment in infrastructure for our customers. The six municipal acquisitions we completed in 2018 helped us to reach a milestone for the company of $1 million water and wastewater customers. It's a big deal for us. One of the things that helped drive this growth is the passage of…

Thanks, Chris, good morning, everyone, and thanks for joining the call. Turning on Slide 14, you'll see that we're reporting non-GAAP numbers this quarter, which adjust for the impact of the Peoples transaction. I'm going to focus our discussion on the full year results, but you can find the quarterly results and the quarterly waterfalls in the appendix. We reported revenues of $838.1 million in 2018, up 3.5% compared to $809.5 million in 2017. Operations and maintenance expenses were $308.5 million in 2018 compared to $28.2.3 million in 2017. Moving onto GAAP net income, which includes items related to Peoples transaction, we reported $192 million compared to $239.7 million in 2017. GAAP earnings per share including Peoples-related expenses were $1.08 in 2018 compared to $1.35 in 2017. When adjusted for Peoples related charges, income was up 4.6% from $239.7 million to $250.8 million. Now moving to the bottom row of the table, on an adjusted basis, you'll see that income rose 4.4% to $1.41 per share up from $1.35 per share in 2017. Now, let's move to the revenue waterfall on Slide 15. Breaking down the 3.5% revenue increase, you'll notice that rates and surcharges was the biggest contributor at $20.6 million. Next, regulated growth, which includes acquisitions, as well as organic growth, added $6.6 million to revenue. Other items added $2.5 million and these other items included additional wastewater revenues of $2.9 million due to increased treatment volumes at one of our Indiana utilities. Revenue from market-based activities declined by $1.2 million. And as you'll recall, we've been exiting many of our market-based businesses and we've done that over the last couple of years, so you can see the impact here. Next, let's review the O&M waterfall, on Slide 16. Operations and maintenance expenses were $308.5 million for 2018…

Thanks, Dan. Moving to Slide 21, fair market value legislation has been a major catalyst in our municipal growth strategy in 2018 and we completed six municipal transactions totaling over $100 million in rate base. In addition to the five regulated transactions in the table, and to be clear, Peotone Water & Wastewater is accounted separately. In December, we also completed the acquisition of the Valley Creek Trunk Sewer System from Treddyfrin Township Municipal Authority for $28.3 million. This is a unique opportunity to own a wastewater system that connects five municipal systems to a treatment plant and includes 49,000 linear feet of gravity sewers, as well as two pump stations and force mains. When we add these acquisitions to our organic growth of approximately 8,500 customers, our total customer growth was over 22,700 customers or about 2.3% in 2018. This was in-line with the guidance we set for 2018. Turning to Slide 22, you can see that we expect another year of strong customer growth performance in 2019. This is largely a result of the fair market value legislation-driven municipal activity we are seeing. We currently have signed purchase agreements to acquire seven municipal systems and one additional privately owned system in Northern Neck in Virginia that we expect to close in 2019. This totals approximately $100 million in additional rate base and approximately 20,000 additional customers. Looking further ahead to future opportunities, we are also seeing a solid pipeline with an increasing number of municipalities showing interest in turning to Aqua as a solution. Our list of top prospects includes over 250,000 new potential customers. And now I'd like to give you an update on the Peoples acquisition process. So, starting on Slide 24, for those of you who are new to our story, Peoples is a transformative…

All right. Thanks, Matt. I think as you would agree, 2018 has been a truly remarkable year for our Company and a year that I think as we look back on it, we’ll consider it a milestone in the Company's history. Let's conclude the formal part of our discussion today by providing the 2019 guidance. On Slide 30, you'll see that Aqua's stand-alone guidance for 2019. As we discussed previously, we were waiting on the Pennsylvania rate case to be finished before we published our guidance for this year. We expect income per share for Aqua alone to be in the range of $1.45 to $1.50 on an adjusted basis. We plan to invest approximately $550 million in infrastructure in 2019, another record amount for us, and approximately $1.4 billion of CapEx will be spent over the next three years, call it through to 2021. And just a reminder we always give that this CapEx doesn't include any investment in the purchase of systems that we would acquire or the CapEx that would then be spent to fix those systems in that period. Aqua's water and wastewater rate base growth is expected to be approximately 7% through 2021 and we filed a joint settlement agreement of our water-wastewater rate case in Pennsylvania on February 8, as we've said, and we expect PUC approval in Pennsylvania sometime so that rates can be in effect in May of this year. Year-over-year, we expect total customer growth to be between 2% to 3% and we expect the Peoples acquisition to close mid-year in 2019. And with that, let's open it up for your questions.

Thank you. [Operator Instructions] And we'll take our first question from Ryan Connors with Boenning & Scattergood.

Hey Ryan.

Thanks, Chris. How are you doing? So I got a couple on water and then one on Peoples as well. So starting on this [indiscernible] panel last week regarding fair market value and there was some talk about affordability as an emerging concern, particularly where there is the potential for rate shock in more I guess economically challenged areas. So, obviously you've got a track record of closing deals in communities where that's not likely to be a problem, Treddyfrin is a great example of that. But could give us your take on those panel comments about affordability and how that plays into your fair market value strategy assessing opportunities going forward?

Absolutely, and we've told the story before Ryan, that we'd actually walked from opportunities and sizable opportunities that where we believe that the rates wouldn't be sustainable in communities from an affordability standpoint. And we continue to look at every deal with that same eye so that it has got to be a win for customers as well as shareholders and employees. And if it can't be a win all the way around, then we have to seriously evaluate whether that was a real opportunity for us. And I would say that, that annually we review our position in rates across our platform with our Board of Directors because we have a team focused not only at the management level but also at the board level on the continuation of making rates affordable for our customers. And one last comment I'll make and it's really about the incremental increases that are allowed by the distribution system improvement charges, customers don't like sharp rate increases. They do appreciate an investment in their infrastructure that make sure that they have reliable, clean, safe drinking water and they would prefer to get those increases on a incremental basis as opposed to sharp increases. And so we work carefully to try and make that happen. So I'll just include that piece , Ryan, by saying we have a sharp eye on affordability.

Got it, okay. My other one on water was just kind of been a bit of breaking news but a lot of movement on PFAS the last couple of weeks. You had EPA saying they wouldn't regulate it, then they're saying they will, and then Pennsylvania came out they are going to regulate it, it looks like. I want to see if you had a chance to look at any of that and give us any comments. And my particular question is, if in fact, that is going to be regulated, both federally and in Pennsylvania, are we right to interpret that as a rate-based tailwind as those – presumable those investments will become deemed prudent and you can move ahead with some additional capital investments there?

Yes. So let's think about this. First, let's take rate out loud. We are in full compliance with the federal health advisory standard, right. And so we weave that 70 parts per trillion, in most cases, we are well below that. We are in the process currently of going through every system in our company to make sure we've thoroughly tested all systems to make sure that whatever PFAS or PFO we find, we address. And, yes, we believe that any treatment or requirement of treatment from the EPA or DEP in each of our states would be fully recoverable through rates as we – as it benefits the customers. And in fact, in some cases we've already put treatment on, I would point to our plant in Bucks County, Pennsylvania where we put treatment on and that is – will be in rates in – as of this case. So I would say this, though, Ryan, as you think about the tailwind, it's an opportunity for us but given the size of the company, I wouldn't say this is a massive investment that we would expect to have to make across the company. PFAS and PFO are – have been found, but it's not – it has not been found in all of our systems.

Got it. Okay. And then, my only one on Peoples was, you mentioned the rate case, obviously, there's a lot of data they threw out there as part of that rate case which is great, but on the other hand it raises some questions. And my question was on the tax rate. When you look at their stuff, it’s pretty clear that they've been operating at a higher tax rate considerably different from Aqua. And I presume that has to do with them not having a same repair tax type of treatment. How should we think about the tax rate of the combined entity? The hypothetical combined entity going forward? Is that closer to your rate, their rate? Somewhere in the middle or any guidance there?

Yes, Ryan. This is Dan. So I think, yes, you're absolutely right. They do have a higher tax rate than we do and it is tied to the fact that they have not taken the repair tax election, they've not implemented that. So I think going forward, still work to be done in terms of that resulting tax rate, but you can presume that it's between the two, but you'd have to think about it in terms of that scale and the two entities that are being – coming together here as well.

Sure, right. Okay. Great, well, thanks for your time.

Thank you, Ryan.

Thanks, Ryan.

We'll take our next question from Durgesh Chopra with Evercore ISI.

Hey, good morning.

Hi Durgesh.

Hey Durgesh.

Thanks for taking my questions. Just can you help us on the $47 million, Dan, just to clarify, does that include the district revenues or does it not? And then, ultimately, like what are the drivers of that number? So if I'm thinking about the – what ultimately, goes to the bottom line, is that the complete $47 million? Or some of that is deprecation expense?

Yes, so a good question, Durgesh. So the $47 million is – does not include the DSIC or DISC that's already in place, we have a 7.5% DISC that's in place, so that is about $28.9 million, call it, $29 million and in terms of revenue. And so you add the $29 million plus the $47 million to get to really the increase in base rate that come when you reset the DISC to zero. Does that help?

Yes. And then, as part of the – that helps, thank you very much. And as part of the rate settlement, unless I missed it, I'm assuming that DSIC would be, sort of, available to you prospectively, after these rates go into effect?

So following the fully projected future test year, so you can't implement the DSIC during the fully projected future test year but subsequent to that, for capital invested after that point, you can.

Okay, so a year or two. Perfect. And then, just one last question, just in terms of just – I think you've said this earlier but I just wanted to make sure because the CapEx plan was extended another year, so when you look at the CapEx projections both on the water side and the gas side, fair to assume under normal course of business, you would fund that with internally generated cash and/or debt with like kind of modest or no equity issuance needed, under normal course of business, the CapEx plan as you laid out?

Yes, that’s correct. So I think as we've said on prior calls, we would expect further equity issuances in the event that we need to fund significant municipal transactions, but in terms of funding the CapEx program for the businesses we would expect that to come from combination of operating cash flows and debt.

Perfect. Thanks. And appreciate the additional color on the timing of the financing of the Peoples acquisition, that's super helpful. Thank you.

Thanks Durgesh.

We'll take our next question from David Katter with Baird.

Hi, guys. Thank you. I have a quick question on the prospectus, you guys talked about for your municipal acquisitions. How has the Peoples acquisition impacted that list? Have you seen any turnover there? And more broadly, how are the municipalities responding to the Peoples deal?

So the 250,000 of perspective customers that I mentioned is something that sometimes changes but we have good line of sight to a lot of those acquisitions and so that's why they're included on that list. As we think about the Peoples acquisition and what that has added, obviously, it will put us in a different part of the state than we currently operate, for the most part, and could potentially open up different opportunities in that – in the Pittsburgh area. And so we'll be closing monitoring those going forward once the Peoples acquisition has closed. It also puts us in two new states, West Virginia and Kentucky and we're just starting an evaluation of the opportunities, both on the water and the gas side, four municipal acquisitions in those two states as well. So that's something we've started looking at and will continue to look at as the Peoples acquisition comes closer to closing.

I would say, David, just on the last part of your question, the municipals that we're talking to now, I think they find it interesting that we're – we've opened up another platform. As you know there's not nearly as many municipal gas – natural gas systems as there are water, so I would say generally no impact from the acquisition of gas to those interested in water. They're primarily interested to understand the impact of the fair market value legislation and that seems to be the nature of many of other questions.

Got it, that’s helpful. Then, congratulations on the settlement in Pennsylvania, don't want to get too far ahead of ourselves here, but can you kind of walk us through where your next focus is on the ratemaking front? Which rate cases are coming due?

Just while you pull that up, Dan, I would say, as we think about, although, we don't own Peoples yet, David, but that's certainly going to be a focus of ours. We have responsibility to – of sign off on a settlement discussions and that rate case can certainly be concurrent or nearly similar timing on what the acquisition case itself. So – and that's assuming a settlement, it would go more towards a fully litigated case you can push deeper into the summer or early fall, but assuming a settlement of that case, it could be as early as, call it, July. And we would hope that the transaction could be completed at the moment. So the Peoples rate case is one that we'll be keenly focused on, in addition to our water and wastewater cases. And, Dan, I'll turn the water/wastewater stuff over to you.

Yes, so the quick answer there, the two that are coming, or ones in progress, it's the New Jersey water case that's in progress and we would expect the New Jersey wastewater case late in 2019.

Got it, thank you guys.

Yes, great.

Thank you.

And we'll take our next question from Richard Verdi with Coker & Palmer.

Hi, good morning, guys. And thanks for taking my call here.

Hey Rich.

I jumped on a little bit late here. And so I apologize if I might have missed my two questions. But my first question is this for the Peoples acquisition. I know that we're very early in the whole concept here and – but when you think about, it's a good strategic fit for us, right. And when we think back to Aqua back in the 1990s it was Philadelphia suburban and now it's grown, it's over and – it's more than a half a dozen states where Aqua has regulatory footprint. Thinking over the long-term for Peoples, I mean, could that be something where five years, 10 years from now, we're in more than three states, maybe we're in six states, maybe we're in 10. Could you just talk about the long-term vision for Peoples for us?

Sure. I think the way we thought about this, Rich, initially is, you're right, it's a great strategic fit, obviously, key states and puts us in two additional states. There's a lot of reasons that the strategy works. As we think about long-term, what we said is, let's take this a chunk of the time. First, for the next couple of years, we've got a good size integration to do. We said this is not about synergies, this deal is not about synergies. And so as we roll the Peoples SAP platform over Aqua, right, we are not on SAP today, there are probably opportunities for efficiencies as we rolled out across. So that's going to take us a little bit of time and as we think about this digestion period, what we're also going to look at is whether or not our book, our hypothesis is correct and that is that the multiple that will survive this transaction with 70% water, 30% gas transaction, the multiple will be either on top of very close to the water only multiple. And so we want to see how the digestion goes and then how the multiple fares and then, let's take a look at how the growth occurs. I think also considered in that formula is throughout that period of digestion, we will continue to do municipal transactions and that will continue to at least temporarily tax the balance sheet while we bring those units in for rates and get full revenue associated with them. And then, we'll look at what opportunities are there in gas, and Matt Rhodes has already begun to look at opportunities in gas. But I would just caution you that for the next couple of years, I think we would say you won't see major M&A in gas as we digest this one. And then depending on where the multiple lands and how strong our currency is, maybe there's opportunities to do some other things. Last thing I'll say about it is, we are obviously not shy about getting into additional states. We'd love to expand our platform, both in water and in gas, and so as we think about new and additional states, I will say that we have a couple – I own a couple already. And so, don't be surprised if you see expansion in other states in the coming years.

That's great color. Thank you, Chris. And just for the second question. For the guidance range – this is what I'm concerned. I might have missed, I apologize if you need to repeat this. What would cause the Company to come in closer to that $1.45 mark and what would cause the Company to come in closer to that $1.50 mark?

Good question. Look, you always have the weather component that can always impact and we always say that could be a couple of pennies either way in any and that's one of the reasons we provide a range. But as we think about the progress of this year, there's a lot happening in 2019, not only with the transaction, obviously, better – that's considered separately but other things that could come up. And Dan, I don't know if you have any additional color you want to put through beyond that.

No, I think that's good, Chris.

Okay. So, you guys would say it's just more maybe weather based than anything else?

Yes, I mean weather and some things that are kind of beyond your control that come into the cost structure right that either break your directional little bit or break the other way.

Perfect. Thank you for that. And I just want to follow-up actually on the first question on your commentary, Chris, regarding the SAP. That's something – am I understanding that right, you're going to take what Peoples has with SAP and then overlay that into the water format there at Aqua?

That's the plan.

Okay. And then, so I'm assuming that if you – that cost savings and could generate additional dollars to put back into CapEx in the rate base then right?

I think – one way to think about it is, number one, we would do like we do all CapEx, we would spend it prudently. So we would expect to recover any cost associated with SAP in terms of that's all – that would be a capital project. And then further, if we can find efficiencies in our back office and I think there's opportunities to do that, maybe hit some efficiencies in the field over time. But as we said, Rich, we see the need to keep all the people. And so we don't see a reduction in force in anyway. Over time, might there be opportunities to attrit some people in areas where we find the efficiencies, I would say the answer is probably yes.

Okay. Okay, great, hey, thank you very much for the time guys. Great color. I appreciate it.

Thanks, Rich.

Thank you.

We will take our next question from Jonathan Reeder with Wells Fargo.

Hi, Jonathan, how are you?

Good morning, how are you all doing?

Good, Jonathan.

Very well.

So the water settlement, is it filing on the traditional rate of return parameters, in particular ROE as has been the case in the past?

It was. So it's a black-box settlement. So, no specificity around those things.

Okay. Can you share your perspective on how the Peoples regulatory approval process has been going in all three of the states so far?

Yes. So we testified in Kentucky just last week. Dan Schuller and I were both in Kentucky, as well as management from Peoples. And we felt very, very comfortable with the line of questions, the answers we provided and the discussion, I would say, was a very constructive hearing. And we had some follow-up questions from the Commission and the Attorney General who has access to consumer advocate essentially in Kentucky and those follow-up questions are questions that will need to answer in the coming days. There was nothing that was of any concern, they were standard questions. And so we expect that the Commission will stay on track. They want to be finished on time, which would be put it – call it March 20 timeframe, Jonathan, for approval. And then we would hope that West Virginia would be soon to follow the Kentucky approval. Those discussions with West Virginia continue in terms of discovery and answering questions. And then of course, Pennsylvania would follow that and just to give you an idea of timing, the testimony from the interveners of which there are 11, is due on April 5 – I'm sorry, April 2nd. And so…

That's in PA.

In Pennsylvania, yes. And so, we would expect that informal discussion while discovery is being promulgated and answered – we would expect informal discussion around settlement to occur in the coming weeks and it would be our hope to get to a settlement in early April and then that would allow us to proceed. We'd like to have line of sight to that settlement before we put the bulk of our equity up, Jonathan. So that's timing as we think about it now, obviously it's very dynamic.

Okay. Now you said you'd like the line of sight before you put the bulk of the equity out. Does that mean you're still considering maybe private placement, something like that and if so, are there any like barriers or milestones that we should think about whether it's quiet period, anything along those lines?

So yes, we are still interested in a private investment call it a pipe type arrangement and. And so the hope would be that that would be either just before or concurrent with our equity raise or larger equity raise. So those discussions continue.

Okay. And then that's great color by the way, Chris. Did PA ask people to file the rate case while the merger proceeding was ongoing or was that completely up to them. And then since the deal is kind of ongoing and like you said the timing of that case and a potential settlement is potentially shaping up around the timing of deal close, should we expect those to kind of merge together like a global settlement, if you will or anything like that?

So, the answer to your first question is, no. There is no – they were not called in. So the decision to file a rate case at that timing was solely that of Peoples Natural Gas and SteelRiver Partners who owns them. So that was – the timing was theirs. In terms of putting the two cases together, the acquisition case, approval case and the rate case, I can only tell you that history would tell you that Pennsylvania does not do that. They take very separate issues and they keep them very separate. And I think there is plenty of cases where that – which suggest that's the history of Pennsylvania. And I would say – more recently, I would point to our case during the Pennsylvania Aqua rate case, despite the fact that the acquisition case was ongoing, it was – the two are not intertwined, they were kept very, very separate. And so, we would expect the same treatment of the Peoples case and the acquisition approval case in Pennsylvania.

Okay. And then last question, I know, it is really modest amount, but you kind of bumped up the equity portion of the Peoples deal to 2.5 from 2.4, anything that prompted that or anything we should read into it?

No, it's just math – really just about making sure that we have plenty of dry powder on our balance sheet for additional municipal water acquisitions and just making sure that we maintain the strong investment grade credit rating but nothing really more than that to read into it.

Okay, great. Thanks for taking the time to answer my questions. Really appreciate it.

You bet, Jon.

Our last question is from Angie Storozynski from Macquarie.

Thank you. So I have a question – actually, two questions about the rate case settlement in Pennsylvania. So number one, I see the – that the settlement includes a regulatory asset or liability associated with the repair tax deduction and so how does that compare to the previous setup before the rate case? And secondly, based on this outcome, you remember before the rate case, you were saying, it might take you a couple of rate cases to see an increase in earnings more commensurate with the rate base growth. Given that there is a stay out until the next rate case until early 2021. How do you see this EPS versus rate base growth? Thank you.

Yes. Why don't I jump in there, Angie. So in terms of the repair tax, previously, there wasn't any sort of limit to the repair tax deduction. So, what's incorporated into this case – and as you recall, as we've talked about this case what we've said is, through this case, the repair tax benefit really shifts from the shareholder to the customer because the lower effective tax rate is being incorporated into this case. So that's one piece of this and a piece of them that settlement is this concept of a limit on the amount of capital eligible for the repair tax. So, again, repair tax benefit going to the customer, and limiting the repair tax eligible capital, so there is not any kind of wiggle room around that or there's very little wiggle room around that. Is that helpful?

Yes. So how does it tie into your earnings growth expectations in Pennsylvania? I see the 7% growth in the rate base. I understood that this is for the entire Company. So on a stand-alone basis when or if – when will we ever get to that 7% earnings growth?

So you'll see that occur over a period of time here that includes a couple of rate cases, think about it that way that your effective tax rate will step up from case to case. And as that effective tax rate returns to a more normal level, you'll see the rate base growth and the earnings growth become more aligned.

Okay. So, we are talking more like 2023 or even – and beyond, right, because we – you cannot file the next rate case until April of 2021?

Yes, I think that's fair.

Okay, thank you.

Thanks, Angie.

That concludes today's question-and-answer session. Mr. Dingerdissen, at this time, I will turn the conference back to you for any additional or closing remarks.

Thank you all for joining us today and look forward to any follow-up, you might have, we're always available. And I appreciate your time today. Thanks so much.

This concludes today's call. Thank you for your participation. You may now disconnect.