Essential Utilities Inc (WTRG) 2004 Q1 法說會逐字稿

Good morning, and welcome to the Aqua America first quarter earnings conference call.

The at this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It's now my pleasure to turn the floor over to your host, Cheryl Hansen.

Ma'am, you may begin.

Thank you.

Good morning and welcome to Aqua America's first quart 2004 conference call.

We are pleased that you are all able to join us today.

If you did not receive a copy of the press release this morning, please contact Tracy McGonigal at area code 610-645-1090 and she will either e-mail or fax you a copy immediately.

Presenting today we have Nicholas DeBenedictis, Chairman and President of Aqua America as well as David Smeltzer, the company's Chief Financial Officer .

As a reminder, some of the matters discussed during this call may involve forward-looking statements involving 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 description of such risks and uncertainties.

During the course of this call reference may be made to the company's EBITDA, a reconciliation of EBITDA to net income is contained in the investor relation section of the company's Web site at www.aquaamerica.com.

At this time I'd like to turn the call over to Nick for his formal remarks, after which we'll open the call for questions.

Nick.

Thank you, Cheryl and good morning, everyone.

Thank you for joining us.

We're report this morning earnings of 17 cents versus 16 cents, and I'd like to put that in perspective.

Unlike many of the other water companies who have already reported to date which had disappointing earnings mainly because of the harsh winter in northeast and regulatory lag mostly with the west coast companies.

Once again our company was able to consistently beat the prior year's quarter.

Last year was 16 cents.

And not have the typical saw tooth type earnings pattern in between rate cases that most regulated utilities have and I think that's because of our surcharge mechanism and the fact that we continually grow in between rate case, customer base and cut costs which gives us that chance to continue to consistently earn more than the prior year.

I think the significant issues in the first quarter however, were, that are relevant and could reflect through the rest the year what's important for the analysts on the call today.

First of all, the significant issues that I see in the first quarter was not for the bulk of our area it was not a great year because of the colder than normal February.

So we had more main breaks than normal.

But not to the point where it was overly excessive but maybe up to a penny of extra expenses that we not have normally incurred and sometimes it's cold, sometimes it's not and you win or you lose depending on the weather.

The real influx of weather as you realize in our business is really the May through August time period in the northeast and midwest, and probably a little less and probably 2Q, 3Q, little bit of 4Q in the southern states although we're finding the southern states we did not see a big influx of new revenues coming in in the first quarter due to weather or anything of that sort.

It's a very close pattern, a little more extended as the northeast.

The -- we are seeing the expected regulatory lag in our first quarter, and it'll happen in the second also because our rate cases are all being decided now but until they kick in you don't see the instant reaction to revenues and, therefore, earnings yet expenses continue, interest expenses continue because we keep building the capital at pretty healthy pace of a run rate of over $150 million a year of investment into our system.

I do have some good news.

We did settle our Illinois rate case which was one of our big ones and we asked for 24% and we actually got an award of 21%, we're very pleased with that.

Illinois is treating us very fairly and that was for our biggest division in Illinois, the Kankakee division, which is about 40% plus of the state.

We're sitting now in process, I'll get into these in detail later.

Pennsylvania our biggest case, Ohio, we had two cases pending there, New Jersey, we're in settlement discussions, hopefully we'll be able to settle sometime this summer, Illinois I just mentioned.

We just were awarded the Kankakee division, the other large division, second largest division for a million we plan to apply for probably within the month.

And our biggest southern state, Texas, we're preparing for a rate filing sometime within the next week or so.

And I'll explain that as we get further on.

The third issue, so the first was weather.

The second was expected regulatory lag which I think we can analyze as I give you ideas on where the rate cases are going and timing and how it'll affect revenue stream and therefore, earnings.

This is really the quarter we really dove into a little bit of the lower fatten and towards the muscle of the AquaSource, the yearly cuts were the obvious, over head and dual accountants in Pittsburgh and so on on and some of the computer systems and so on.

This last three months we really started looking at core operations and where we're changing.

We made some major management changes and we've set management structure and set up a set benefit structure for all new employees and other employees, 401 and things of that sort.

I remind you that AquaSource is non union.

And the other thing we did is we took a very, very strong position that we weren't going to have any of the O&M business just there to have revenues and I want to get into that a little bit because one of the key things we did is cut the amount of O&M we're doing, which cut revenues a little bit but I think it helps the bottom line because some of these are not making money.

We continued with the pruning activity of some of the states that are basically no economy scale on our slow growth states and we decided to concentrate our attention on the other states that we think are faster growing.

On the other hand, you still have to dedicate time and effort to dispose of the ones you don't which takes away time from other things.

And those I can give you a progress report on.

Kentucky, excuse me, Connecticut has been sold.

New York, we expect to have hearings sometime in late May, early June so I think 2Q is reasonable, maybe early 3Q to dispose of the New York properties and our Kentucky properties we understand is within a month.

So as you can see, that phase of that is going to come to an end probably in 2Q.

To give you an idea because the accounting is, we didn't pay rate base for AquaSource as far as what we think is rate base, and so what I'll give you basically, what we're getting gross and what we're paying for these properties but the bottom line is for cash we're actually coming out ahead.

The gross amount that we're going to get in revenues from the three property sales are close to $6 million, and what we paid and allocated of our payment to AquaSource is about $4 million so north of four so it's trend of a million and a half to $2 million cash gain.

On the other hand, from the P&L standpoint no impact because we knew these when we closed the deal so, therefore, they're already locked in at the price we expected to get flute agreement, but it is real cash and more importantly for us it allows management to spend all their time now on the faster growing state.

The other thing that's taken a lot of our time is trying to get ready for another solid growth year, of course, last year because of AquaSource we grew over 20%.

We're hoping that we could have another 10% growth year because of two major acquisitions we've been working on that have again taken a lot of management's time but I'm pleased that we were able to announce the Florida Water transaction couple weeks ago.

We hope that will close sometime in 2Q and Heater is going exceedingly well.

We're just so pleased with the people at Heater.

They'll be really managing our North Carolina operations as we go forward.

The commission has welcomed us and the state government in North Carolina has welcomed us to the point because we'll be the largest water company now in North Carolina, and we anticipate that order being approved sometime again sometime in mid-year.

I'd like to say 2Q but it might be into July because of all the appeal periods and so on.

But, again, we're very pleased, and we're ready to hit the ground running at Heater.

And both of these acquisitions are accretive immediately and I think we have yet to decide how we're going to capitalize them based on the S&P ranking, we'll talk to them and so on.

But these are accretive on an EBITDA basis right off the bat so if we capitalize on the debt, of course, we make a few more dollars, but that's not the way we run our business.

We like to keep a solid balance sheet.

I thought before I get into into the specifics on the revenues and the expenses and drill down, put again in perspective what's happened because although our net income was up over 16% or EPS being up a penny was really only up 6, 7%, and the reason is we floated so much stock in '03 and I thought if I could give us just a thumbnail sketch it puts it all in perspective especially some of those who have not followed us as long.

In '02, the year '02 we did very well with rates, all our big states we got rate awards.

Midway through the year which then carried into '03.

That was Pennsylvania, New Jersey and Ohio at that time.

But the real story in '02 was the Vivendi turn over of their shares to the general public at which point we had to buy shares.

It took about two months of management's time, probably even more of getting ready and then selling the shares.

And we actually ended the year with less shares I think than the year before because we had to buy shares back in the treasury so that meant our share expansion that year actually helped our earnings or lack of it, helped earnings.

In '03 just the opposite occurred.

We then [ [ refloated ] ] the shares that we bought from Vivendi and carried short-term debt in '03.

Actually helped book.

We made $3.00, $4.00 a share on each of the shares and we also purchased AquaSource and we made a crucial decision at that time.

We felt our S&P rating and holding the A+ was very, very important and we wanted to make sure that we showed S&P that we were not going to carry it with debt and try and make have a earnings on it, that we would capitalize it and get it ready for the traditional rate case regulatory type process which is 50/50 right off the bat and that's how we did it.

We sold 4 million shares worth of stock which got us up to the 50/50 level in how we view AquaSource and got our debt equity ratio up to a level that maintained our A+.

That meant we had a 10% share expansion which we have to now run faster to absorb, and we are doing that but I have to let you know and I told you this when I bought AquaSource, obviously it wasn't making money for Duquesne, by cutting overheads and making some immediate cuts we made it accretive last year for about a penny or a penny and a half, and it will be accretive again this year.

But the real story on AquaSource is the pruning, getting the right management in place, building rate base, getting it acknowledged in rates and earning a fair return on it.

And if you want to look at how we're handling equity at AquaSource, the numbers are interesting.

Probably with the cuts, if we had a run rate in '03, had we taken all the expense cuts immediately and sold them which obviously was impossible if you own the company first, probably it would have earned about 5% on equity, accretive but not overly accretive.

This year we're hoping to get that equity levels up to seven or eight again by more cutting trimming of O&M and getting only the profitable O&M and we did get a small rate in Indiana, and a small rate case in Florida, we got an index filing May 1 in Virginia so we're being very aggressive not leaving anything on the table but the big cases are going to be in Virginia for the remainder of the systems, North Carolina when we buy Heater and most important Texas where we'll be filing a major case probably within the month.

And in Texas, the rates had not been raised since 1999.

On the other hand, over $80 million of capital has been spent either by AquaSource which we paid for or by us finalizing all the environmental issues which are right on target now but that recovery, of course, is going to be a huge requirement.

And when and if we get that, that'll help get our equity levels up to a reasonable level, and we're shooting for going from 5 maybe to 7 1/2 in '04 because it's partial year, and then hopefully next year getting right to the full level of 10, 11% which then we can enhance by other activities and further cost-cutting, things of that sort.

So you can see that's the real story on AquaSource but to get there you have to clean up, some of the environmental issues which we're doing, get the right management in place which we're doing, get the right customer service in place which we're doing, get the right records, CPR records, which you need accounting systems to do and we've done that and then go in for the cases and that's the tough part because that's the controversial part and then it becomes more of a routine or more routine operation like it is in the old Philadelphia Suburban and consumer operations.

So really when we look at '04 we're digesting AquaSource, we're doing two more deals which means we have to get orders through and that's Florida and Heater but that gives us more rapid growth in our model which is 4%, we'll probably be closer to 10 in '04.

We're going to continue to prune and finalize pruning of O&M and the states that we want to exit in AquaSource which will give us more time to look at the regulatory process and grow regulatory customers.

And summer is always the big question.

We didn't have a great winter, it wasn't a horrendous winter more breaks than normal but really May through August is where we know if we are going to do well or not do well.

Could be as much as 3 to 5% difference with a real hot summer or wet summer and then the rates are the big issue this year which we'll carry into '05.

The rates are the Pennsylvania case which I want to discuss, the New Jersey case, the Ohio case and then the Texas case.

And then if they're all successful as we move through this year they'll help not only the rest of '04 but all of '05.

The other thing we did dramatically this year was change our name and I want to report that so far, so good.

People are still paying their bills to Aqua America versus the former company names.

And we think we've gotten all the shareholders who wanted to know what happened to PSC that they now they look and punch WTR and that's worked well.

Just a quick analysis on some of the subelements of the 17 -- of the earnings.

The 17 cents.

Revenues were up 24%.

The bulk of that being from AquaSource because last first quarter AquaSource was not in.

And so if you want a breakdown it's about $15.5 million is AquaSource's numbers and if I have $4 million core company, as the increase, the $4 million increase.

And then the expense to revenue ratio right on target from where we want to be.

As the core company's expenses were about a million and a half so you're right in that same range of the first quarter, normal first quarter which was 37 to 39 range.

It always gets better in the second, third quarter because that's when you have more revenues coming in with the same expense level, that's our heavy revenue year time.

And the AquaSource was in the low 60s, when we bought it it was in the high 60s so we're trimming, and we're going to see a great deal more in the second, third and fourth quarter because we had double expenses in the first quarter.

We had to hire temporary people to run the systems as we were transferring from contractors which we think we're going to save a lot of money on on to our systems.

And that's going to be completed by the end of May.

Example of that is the Virginia operations of AquaSource was actually run by a contractor, not by their own employees which when we looked at the cost benefit of that it was definitely paid us to hire employees am the contractor was costing us about a million and a half a year, we think we'll do the same customer service and operations probably closer to $500,000 but to get there we had to double up for a quarter so we didn't get any savings off the cutting of the contractor and had to gear up our people all in Q1.

So, again, $15+ million on revenues for AquaSource which weren't in last year's first quarter and the expenses were about $9 1/2 million, so you can get a feel for our run rate and that as I say was artificially inflated because of the doubling up in the Virginia operation.

The net income was generally from the fact that we had some disc, which is the surcharge on pipe which we continue to do in two of our states, Illinois and Pennsylvania and we just got it approved in Ohio where we'll start filing discs there from one of our divisions and, of course, Indiana already has it, and we'll be filing a disc in Indiana later on this year for the pipe we're doing.

The -- I would say the -- AquaSource added very little because of the high expenses after you take capitalization costs so when we start seeing that expense expansion, we'll still see probably the three to four cents of addition to our normal non AquaSource budget that we told you we'd see in the '04 time period but it'll probably be more in the second, third and fourth quarters.

Looking at acquisitions in addition to the Florida and the Heater which we've written up and I'll answer any questions you have because they're going well to get those into officially our hands by mid-year, we also did 12 other small ones and that's our bread and butter so you can look at the growth pattern is about 1% for the first quarter so we're right on target even without Heater and Florida Water of hitting the three to 4% normal by those small ones and then when you add the Florida Water and Heater to it you'll get up probably 10 or even north of 10 this year.

I'd like to give you a little bit of an analysis of how we did the O&M.

We changed our thinking on O&M.

We always never really thought this was a great business, but where we could make it profitable in consumers and if I Philly Suburban for two reasons, we're right next door and we have incremental labor to utilize or where we had a chance of buying the system if we ran it for a year that's where we would do O&M and just to give you a perspective, we had and still have about $3 million worth of revenue coming out of O&M in the non AquaSource company, the core company. 42 contracts, $3 million in revenues, roughly 1%, a little less than 1% of our total revenues and it represented about 20,000 customers which is about 3% of our customer, old customer count.

AquaSource on the other hand, when we took it over had $6 million in revenues coming from O&M which was 10% of their revenue stream. 40,000 customers, which was 25% of their customer stream, 128 contracts.

We started looking at all those O&M contracts, and basically cut them in half.

Anything that wasn't making money we just let expire or broke if we could and obviously that takes costs too because you're getting out of contracts plus you have to find something else to carry some of the over head which we're doing when regulatory growth.

But you have to I guess invest a little to get out of them and that's what we had to do this first quarter but the end result is our run rate now as we go into the second quarter we still have the same $3 million in revenues coming out of the core Pennsylvania and midwest companies, 42 contracts, we trimmed the 128 AquaSource contracts mostly in the south down to 56.

And the new run rate's about $3.5 million so our tote total now of our revenue stream is about$ 6 1/2 million which I believe is a little more than 1%, maybe 1, 1 1/2%.

But I can also tell you that that $6 1/2 million in revenue is going to earn at least $10 pretax and more than likely $10 after tax because we're raising the prices.

We're cutting the costs and allocations that was that we put toward it and there is no self-affiliation, whatever you call it.

I think when you have a construction company and O&M company, a regulatory company, a bottled water company, sometimes the books can be drifted one way or another and we want to make sure our regulators know we're a regulated company and so what we're fully allocating cost to it and if it's not making money it comes off the sheets, and it'll always be a small piece, so we're not going to run into the problem of are you really a regulated company or an unregulated company and I think that was significant and in doing so we removed these 20,000 customers or so that are O&M off of our customer account.

It was such a small amount we were keeping them in our customer count.

We did not add any O&M to the AquaSource customer count.

So when you look at the year-end K and see that we had 750,000 customers, there are no O&M customers in any of that.

So from here on in we'll take that as our base, grow from that and track that for you.

And the O&M will break out, we're going to shift, put it all into a unregulated legal entity so we can track it, we can tell you how we're doing from it but from the standpoint of the analysts it's a small piece of our revenuers.

And it's earning not what our regulated does but it's a nice little enhancers to our regulated.

On the rate case side and then we can open it up for questioning, this is the current status.

Pennsylvania which is the key one, we filed for $25 million or so back last year.

You sometimes you hope for a settlement which is usually in the 50% range early on during the year.

I don't think that's going to happen because we think we've very solid case, and the consumer advocate in Pennsylvania is arguing over what we should be able to return, get on a return and that's crucial to us.

And the second is how they're going to treat past and future pension issues which we think are very clear by the law and unless there's a very clear indication that it's exactly where we think we want to be from actuarial tables we think we have to take it to the commission where we think it'll be uphill.

So based on that for those of us who modeled us settling early, June, July, I think it's going to be closer to full litigation which would probably be August, mid-August.

So it's probably 1 1/2 to 2 1/2 months of not getting the increase.

Although I think the increase might be closer to 60% than 50%.

I'm guessing at this.

You know, it all depends on what the final judge says and everything else, but I don't think it looks like we're going to settle early which means that that could move a penny or two from this year until next year because that's what the impact is for those, for the month and a half or two months.

But it'll -- I think it's better that we get the formal ruling on the pension so we know how it's treated and also I think we probably will be more reasonably treated at the commission level on the amount we're allowed to earn there's a lot of capital we're putting into the state versus settling with the staff which would like to obviously bring the ROE down.

Texas as I mentioned we're probably going to file a $10 million plus case in Texas.

The way Texas does it you file a case and 60 to 90 days after that you're allowed to implement it with a bonding requirement so the cash comes in and then after the full hearings, six months, nine months, the decision's made and then you would pay back if you asked for more than you should have gotten, it's a very self-governing process, you are very close when you file a case as if you don't have a whole lot of extra, or if they give you more than you asked, obviously they would they would give you more and I guess you get interest on it.

Probably never happen.

But we're finding that the Texas system is very, a very open system.

The regulators are the same people who do the environmental regulation do the rate regulation and we've worked very close with them over the last seven months on getting all the environmental issues on a way to completion, and so, therefore, there's not an argument over why we spent the money.

It's just a matter of again, ROE and depreciation levels and expense levels and I can tell we're going to go in with expenses in Texas, the rate case expenses will be one-third what they were asked for when AquaSource asked in '99 and the operating expenses after five years was less than in the last case so this is strictly a recovery of capital case which we think gives a chance, a better chance of full recovery.

Illinois, I mentioned we got a good case in Illinois, the Kankakee and Vermilion will be filed for probably somewhere in a couple million dollar range and in Ohio we have a negotiated settlement underway in our third largest division and our largest division we have a rate case which is probably two-thirds of the way through the litigated time period so we shall hear from that sometime this summer also.

Answer any questions.

Thank you.

The floor is now opened for questions.

If you have a question, please press star one on your touch-tone telephone at this time.

Our first question is coming from David Schanzer with Janney Montgomery.

Yes, good morning, congratulations on a solid quarter, Nick.

Thank you, David.

Several questions.

In the can Kankakee rate case, what was the ROE?

It was, they gave us, it's interesting Dave because the judge, the commission actually changed what the judge said and the judge had upped what the staff said.

We ended up with getting a little more equity level, not a whole lot, you know.

You mean they changed the equity amount.

Somehow because the way they calculated depreciation we ended up with a little north of 50 and about 10.2 on ROE.

Okay.

So we're starting to see a trends in that increasing equity ratios and lowering the ROE.

Yeah.

Were any of the -- was there any disallowance for use in useful property?

No.

That is the big difference between coming from the electric industry where both you on I were both at one time we have never he lost one dollar in prudency.

Well, we still have to ask.

Yes, it was a hundred percent.

And as far as your talking acquisitions, it seems like you're ahead of the game.

Can you give us an idea of what to expect for the balance of the year?

I mean, I don't think you can sustain this level for the next three quarters so what kind of pattern should we be looking for in the next three quarters?

Well, I think probably reasonably we're shooting for 30 for the year so that would be 18 for the rest of the time period.

Couple of them are a little larger than these, but they're coming in.

I'll tell you which president is paid -- a key part of their bonus is based on bringing in profitable acquisitions, and we're seeing a lot in the pipeline.

I think the other thing is with fewer and fewer large water companies and very few in the states we're in, if somebody wants to sell they know who -- so that's helping too.

Yeah.

Well, that speaks to incentives.

As far as Florida and Texas are concerned, you know, you've obviously established a pretty good foothold in Florida and you are in Texas.

Are you seeing the need for desalination sayings at this point?

In Texas not.

Texas has a backup well provision.

You have to go almost 2500 feet into the ground so the wells aren't cheap, but we're finding adequate supply and quantity -- quality.

Florida, there is much more of an allocation issue.

As you know in Texas you own everything you know your lands.

That's the Boone --- issue and you're allowed to do whatever you want with the water it's a water rights issue so we don't see the governmental involvement as much.

It's strictly engineering involvement than environmental.

In Florida you do have allocation processes, and we're very careful.

We're working with all the river basins and so on and wherever we can buy water from an existing system we will but none of our systems are to the point where desalinization would make it economical.

And last question is in the Pennsylvania case, I guess I'm trying to read between the lines here, but it sounds like the consumer advocate has come in with kind of a really disappointing ROE recommendation.

Can you give us -- I mean, is it public knowledge, can you give us an idea what that is?

Well, we're comparing it to what the published number that American Water got which was just recently in Pennsylvania.

That was 10.6, right?

Yeah, and they were not anywhere close to 10.6 so we said why would we, for a reasonable time period of a settlement and everything else but the bigger question is the pension and it's a very legalistic type issue on how it's treated.

They're not disagreeing with the actuary, it's just how it should be treated legally and with that one plus the ROE difference just made it too much of a difference to settle.

There's too many dollars at stake.

There's no argument about the number of acquisitions, the rate base, expenses, very few arguments so it's a very good case and I think the commission staff and the --- was very pleased with how we presented the case and there's never been a lot back and forth, except for those two big issues but they're big dollar issue.

One last question.

As far as Texas is concerned do you know what the last ROE was in the most recent water case there?

I believe it was 12%.

Great.

Thanks a lot, Nick.

Our next question is coming from Tim Winter with AG Edwards.

Good morning, Nick.

Good morning, Tim.

You touched a little bit on the competitive environment out there.

Could you expand on that a little bit more?

Was the Florida acquisition competitively bid process, and did you have interest in the acquisition that was announced this week in Texas, the T-Con acquisition?

Right.

Well, let me start by asking Dave if, am I allowed to talk about these or do we have confidentiality?

Yeah, we certainly are under agreements with any acquisition that we maybe involved with, Nick, and so --

Let me, I'll blur it then.

I think there is competition for the big ones, Tim.

But the competition has been much more disciplined than it used to be.

And I think people are looking at what's rate base, what cuts can we reasonably make and what type of rate relief can we get if we end up paying more than rate base but there's some other attributes to the system.

And for the small ones, we're seeing very little.

So these are the ones that are I guess you could say what's left of the marque ones.

You know, 20, 30,000 customers, 50,000 customers, versus, you know, a thousand customers we don't see much at all where you used to see AquaSource bidding those up and some of the other companies bidding those up.

At this point, the Florida I can tell you that we're buying at what we believe is rate base with an agreement that says that if [ INAUDIBLE ] has a different number it's trued up, up or down.

And we pay or pay less depending on what the final number is.

So both sides felt this wasn't to try and estimate.

It was basically for them to exit Florida and us to get in.

We do think, and I don't know for sure -- we do think they were talking to other people and we think our advantage was the fact that we're there, we'll now be the I think the largest in Florida, it doubles our size in Florida and I think they feel we have good regulatory relations with the Florida PSC, who is the final authority.

I would suspect they had other bidders and maybe even more aggressive than we were, but I think it was a fair price by all and we were negotiating it.

Regarding the T-Con, I think there was interest in that and I think it was all a matter of what people thought you could get back in rates, and I guess synergies, and I think T-Con did very well with the sale.

And I think, I think probably be better run probably by a professional water company which Southwest is in the south, in Texas and Arizona and so on so I wish them both luck.

Okay.

Are you seeing much activity from the foreign companies that have bought properties over here in the U.S.?

Are they actively looking at growth ventures or do you think they're thrown their hands up and decided that not much is happening?

I think they're being very selective.

Okay.

Okay.

Thank you.

Our next question is coming from Kevin Monroe with Thomas Weisel Partners.

Good morning.

Good morning, Kevin.

You touched on this a bit, Nick.

In terms of the revenue you had about $19 million in revenue this year versus last year.

Can you kind of breakdown where that came from?

I know you said about $15 million from AquaSource but what came from rates, what came from volume and if there are any other acquisitions in there contributing?

On the AquaSource, actually the revenue was adversely affected by the O&M that we lost out of it versus last year.

Very little from rates because we haven't -- the May 1 is the index for Virginia, the Sarasota started in sometime around February so it's a half a month.

And the same thing in the Indiana so very little from rates.

I can get you that exact number afterwards.

Okay.

The growth is good.

I mean, we're still seeing, you know, solid 4, 5% growth, just organic growth in the systems we already have and including North Carolina which we were in before AquaSource.

And that plus the acquisitions we're starting to see, I think we're very, we're very optimistic that we're going to be able to grow the southern states.

The expense is the issue, and we're trimming it down and we decided not to the try and work around existing structures and we just dove in, changed management and as you know as you do that you're investing, double investing until you can get the cuts out and that's what's happening but I think we have's done the temporaries and the two people in the same job and so on, severences and things of that sort.

And I think now we're going to start seeing the expense ratio at -- we call it the expense ratio.

But it's really your expenses over revenue, efficiency revenue start going down.

Right.

I still am very comfortable.

Last quarter the pro forma it was about 41 five mixed and I said I thought we could take a hundred to a 150 basis points off that for the year, taken the whole year so obviously your run rate gets better as it goes along and I'm still comfortable with that.

Okay.

Good.

Thank you.

Our next question is coming from Stewart Scharf with Standard and Poor's.

Good morning, everyone.

Hi, Stewart.

Firstly, I was wondering if your still focusing on focused on the southeast or you're more diversified and looking into other areas southwest, mid west?

Well, after we do what I called the pruning of the three states that we have felt that we just couldn't make it an impact in.

I think you can look at the map and say we're going to try and grow in all of them as we did in Missouri, which was one of our smaller states right now, so concentration will be first in those states.

The second if there are opportunities, if there is a company that may give us a chance of buying into one of the other states, you mentioned southwest, being southwest U.S. not Southwest Company.

Right.

-- that, yes, we'd be interested because we're looking at ourselves as probably a national company although predominantly east.

I don't think we're ready to enter the California market but, you know, the other, Louisiana would be great, Georgia would be great if there's opportunities, we are not afraid to move into a new state but it's always easier if you get in with somebody who's already there and you buy into it like we did in North Carolina and some of the other states.

Regarding other ventures we're hundred percent sticking to our knitting, we're actually trimming back the O&M.

If we can pick up one dollar on antenna revenues or filters that's very much align with our business we'll look at it but our hurdle rate is 10% after tax and on the on the regulated it's 15 so we don't wants to divert anything away from the regulated to get to less earning revenues unless it's clearly incremental and doesn't take one iota of time away from our regulated.

Okay.

On the OEM side you said you expected to trim that about a hundred to 150 basis points.

Yes.

You were mentioning last time you might try to get that down to the mid-30% range.

I think our goal for the he ends of this year would be 40 and 40 1/2 for the entire year but the run rate will obviously be less than that going into the next year.

And what we're hoping is we can continue to bring that down, that same pattern of about a hundred basis points a year, so to get back to where we were which was the 36 range probably will take us three, four years.

Okay.

And are you looking into stock offerings, equity offerings at all?

We haven't decide how we're going to capitalize Heater and Florida Water and, of course, we have our continuing, you know, capital program that we have to fund as we go in for rate cases.

So the timing is off.

We'll always need some more capital because we're expanding so much 10% in customer count maybe this year.

We probably will time it differently than we did before.

We had the credit watch from your debt side S&P and we did not want to upset their rating of us which is A+ so we decided I think we owned Heater -- excuse me, AquaSource all of about two weeks and we fully capitalized it with debt, long-term debt and equity for sale.

We didn't carry it at all with short-term debt to enhance earnings so that's why we're running fast this year to pick up that 10% share expansion.

But we will have that type of pressure to go right out the day we settle but I think we were looking at how we were going to capitalize it long term, and it may be sometime later this year.

Okay.

Thank you.

Our next question is coming from Debra Coy with Schwab Capital.

Yes, good morning, Nick.

Good morning, Debra.

A couple of questions.

How do you feel looking through, you know, met, adding up all these things that you've talk about today?

Your rate cases are a little bit lagged.

You've got a couple of new acquisitions coming in that are fairly sizable.

You're talking about how you have to continue to balance the structure.

I mean, I know you guys don't give earnings guidance, but I'm reading between the lines here and it's sounding like unless we've really strong weather summer that maybe estimates might be a little bit high for the year at 85 to 88 cents kind of range?

I would say where they sit in the quarter would be more the challenge.

Now, I think that range of 85 to 88 is doable.

And depends on what the final outcome of the Pennsylvania case is.

If we get, if we get a good ROE and get our pension, I'm must have more comfortable with it but see the problem is for those of you forecasting we won't know until we get it.

Right.

So that will probably be in August.

So I'd say 2Q if you were figuring a rate case settlement in 2Q that's a penny or two you got to move out depending on how soon you'll be figuring the settlement because I don't think we'll be able to settle Pennsylvania, but if you were figuring a settlement at a lower amount then what we end up with then 3Q and 4Q and next year we'll be enhanced for a next month and a half.

Sure, it seems that things are shaping up for a very strong '05.

Oh, yeah.

Considering what's going on with AquaSource and bringing in the new acquisitions but your wording earlier that Heater and the Florida deal will be accretive on the EBITDA and the equity structure suggests that they may not be accretive on an earnings basis.

Oh, no.

No, they will be.

They will be.

They will be.

Even with the additional equity.

In Florida, what we're going to do there, we're going to be able to get the cost structure down without any rate increases to general rate free cash and also generate earnings.

Whether we do that one with equity right away or wait until we go in and get our rate case --

Right.

-- again they haven't had rate cases since the early '90s.

I know you have some significant rate potential down there.

Yeah.

The way I look at this is we're buying some distressed properties, fixing them up, making sure S&P doesn't downgrade us.

Right.

And eventually it's going to take two, maybe two rate cases, but we're going to get them where we were at Pennsylvania where it was every other year, you do the capital, you cut, trim costs regulators like that and it's a pretty predictable model and this year for analysts it's going to be tough because I have to explain each quarter for the next two quarters how much AquaSource, how much but eventually third quarter a little bit, fourth quarter for sure, it's one blended company again.

When we buy these distressed.

The first thing we have to do is get the right management, cut some costs that are obvious and fix them because there's no sense going in for a rate case if it doesn't have environmentally meeting all the standards, and that's where we're putting the money in.

And then going in and getting fair earnings on them is going to enhance '05 and even into '06.

Yes.

The Heater there's interesting company because they're -- it's the small buying the bigger one and the bigger one is going to run it because we're keeping the management.

It's a great company, good relationships with the regulators and I just can't say enough about North Carolina's openness to private sector to say we want you to work there.

They want us to pick up some of their small companies and that's business we're in and to date they've treated us fairly at hydraulics substandard and treated fairly with Heater.

We'll probably end up after the order it'll be very clear what we're earning on on the order.

Then we have a delayed rate case that Heater was going to file a year ago and they decided not to file when they were filing when they were selling the company.

So, you'll file after --

I think we're looking some time -- Dave, you'll have to help me.

What's the time frame on Heater rate case filing?

Probably be Q3, Nick.

So depending on a six-month case or a nine-month case or three-month case, you can see that affect '05 right away too.

Yes,.

In each of these it's trying to get our equity we've invested in each of these companies earning the right amount.

Cutting costs along the way makes the regulators happy and makes our earnings look better and preserves cash.

But it's really getting the equity levels up to the right earning levels, we think is between a 10 and 11 is a fair number.

And it certainly sounds like you're well on track to get there's a lot coming all at once in terms of transitions that's all over a couple of quarters.

I think we all realize that we're a small company, and we're 20% growth one year, 10 the next, but I'm very comfortable that we decided -- having experienced of a hundred small deals you don't leave all the management in place all the time unless they're really proven and meaning they know how to run a large regulated utility.

It's a different business when you're running's small little private water company looking at cash flow as your number one goal.

The other thing is we've been very, very fortunate on our timing on interest rates.

We did another $87 million two weeks ago right before the pop and moving short to long and that he is in our queue by the way that gets released and the timing of our filings on equity usually are based around -- we don't wants our overall, you know, capital to debt to equity ratio to get out of whack with the S&P and we've had I don't know four or five offerings and no one has ever on an offering paid more than the next one, each one, the price goes up so almost look at it as dollar averaging is the way we're doing it.

Who knows where interest rates are going and everything else but as Dave Schanzer said in the past, higher interest rates are not all that bad for utilities if you look at the bigger picture because we're sitting with over a billion dollars in rate base.

If it goes from 10 to 11.

You'll earn on it.

So it's all a matter of managing the process correctly for your shareholder and your customer.

All right, that helps.

You said your acquisition pipeline still looks pretty full for the rest of the year but I would think that, I don't know what you're seeing in the pipeline, but do you feel like that we're pretty much done for this year with sizable ones, that the other 18 or whatever it was to get you to your target 30 are small?

Yeah, I would say the other 18 will be small but get us up to that normal 3, 4% on a bigger base each year, starting with 750 and next year we'll be closer to 850.

There's one or two sizable ones left that may end up selling, and there's a couple of electrics up in Wisconsin that have talk about maybe getting out of the water business.

And we'll look at those if they have any interest in having us look at them.

So I'd say there's a couple more out there.

I think, I think we're the buyer of choice now, and we're, -- we have the capital, we have the capability, we think we have an enhanced management team to handle it will so I think we've got another year or two of maybe these coming at us and then we get back to the traditional 4%.

Okay.

I got it.

So you feel like that, it sounds like from what I'm hearing that you're still feeling very confident in your management capacity to deal with all this growth?

Oh, yeah, yeah, I mean, we had a good second team that is now part of the first team and when we get these, don't forget, we he get some good people with it.

The Heater team is excellent.

We took some second tier people out of AquaSource and moved them around and promoted them.

It was just the top tier that really has been changed now.

And, you know, we had a lot of depth in Philadelphia Suburban water which had nowhere to go because you had wait for somebody to retire.

And you're hiring them from elsewhere.

There are a lot of people with many soft companies who were really purchased like Karl Kyriss came from American that are looking for new career opportunities.

Okay.

Just last detail question I somehow missed.

On the Illinois case that you just got the Kankakee division, what was the actual revenue amount?

Nick, that was about $2.1 million.

$2.1 million annual?

Right.

Okay.

Thanks, Dave.

Cheryl.

Thanks a lot, guys.

Yep.

Once again, that's star one for any questions you have at this time.

I'm showing no further questions at this time.

Thank you, everyone, sorry for the length of this but there's so much happening with detail, I appreciate your interest.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.