Essential Utilities Inc (WTRG) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Aqua America third-quarter earnings conference call.

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

I would now like to turn the floor over to Christopher Pertill (ph).

Sir, the floor is yours.

Thank you very much.

Good morning, everyone, and welcome to Aqua America's third-quarter 2004 earnings conference call.

We're very pleased that everyone was able to join us today.

If you did not receive a copy of the press release, please contact Margarita Sarp (ph) at area code 610-645-1090 and she'll be sure to fax you a copy.

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with David 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 the Company's EBITDA.

A reconciliation of EBITDA to net income is contained in the "Investor Relations" section of the Company's website, located at www.AquaAmerica.com.

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

Nick?

Thanks, Christopher, and Cheryl sends her apologies.

She's under the weather today.

I'll start by saying I'm very pleased with the quarter despite terrible weather.

And you know the third quarter is usually a water company's most volatile earnings quarter because of the impact of hopefully hot, dry weather.

We had hurricanes in Florida and North Carolina, floods in Pennsylvania, and the wettest year in history in Ohio that greeted us this quarter.

Despite that, the core operations of the Company did very well.

And I'll go through those pieces for you.

Growth through mainly acquisition; our capital rebuilding program, which this year, we're going to be adding over $200 million; our rate relief, a status report which we put in the release and I'll go through a little more detail for you; and then the cost-cutting, particularly in our newer acquisition states, which has the highest -- were the highest cost centers, and the reorganizations of those companies -- that's done very well.

So I think our assets are performing well, and I guess that's the main issue.

I'm confident in the earnings power of our growing net plant, which is now close to $1.75 billion that we can earn on.

And then quick, we have another 300 million or so of contributive property, which we use, but we don't earn on until we put it into service.

And I think we have now the pace in the 11 states we're in to continue to grow our customer base, not at the pace we've done over the past two years, which have been a phenomenal 25 percent.

And this year we're up over about 12 percent through acquisitions.

But the nice, steady, slow growth of 3, 4 percent that we've been projecting all along.

This was a very, very good quarter for us and allowed us to have the confidence to increase the dividend, effective December 1st, to shareholders of record November 15th.

The dividend will go from 12 to 13 cents quarterly, 52 cents annualized, or an 8.3 percent dividend increase.

And this will be I think the 14th dividend increase in 13 years.

And we've been averaging a little bit higher than the normal 5 percent we projected years ago.

We've been averaging close to 6, 7, and now this year is 8 in the last couple years.

Then again, that's because of the confidence we have in the earnings power of our assets.

We also had two major acquisitions this quarter.

We acquired Heater Utilities on June 1st.

That was 54,000 customers, roughly a 7 percent growth just in that one acquisition.

And then we acquired the remaining systems of the ALLETE system in Florida, called Florida Water Company, which we merged with our Aqua Florida activity.

And both of those acquisitions -- that was about 13,000 customers and about 13.8 million.

And both of these activities have been immediately accretive, even before we started looking at organizational cost-cutting and so on.

Also, we had a very positive end to our acquisition of AquaSource this quarter.

We did argue over the final purchase price with the Duquesne Power Company -- DQE it was formally called.

And we did win the arbitration -- I guess that was back in July or August.

We were awarded 12.3 million refund on the money we paid last year, plus interest.

So if you want to look at what we paid for the 140,000 plus customers that we bought from AquaSource, the final purchase price was -- the minimum price was about 178 million, which included about 5 plus in tax benefits.

So probably the low 170's is really what we paid for the assets.

A little bit about Heater and Florida Water.

The Heater Utilities acquisition was a $76 million stock purchase, 48 in cash, and we assumed 28 in debt for those 54,000 customers.

It's been accretive to earnings, even with the bad summer and start-up costs you always have with a new acquisition of about a penny in this year's earnings.

We filed a rate case within a month or so of getting the system because they had not gone in for rates in quite awhile.

The rate case request was over 20 percent, 3.2 million.

We're in discovery as we speak, and public hearings are scheduled for next month.

I can tell you we're very pleased with what we found at Heater.

Strong management team, to the extent that we pulled some of their management team out to help us in Florida during the hurricanes.

It's a very well-run system, and most of the executives are going to be kept in place.

And to me, it was one of our more strategic acquisitions, making us a major player in North Carolina, which is a great place to do business in.

As a matter of fact, we announced last week or two weeks ago with the governor, Gov. Easley, that we plan to put one of our three call centers in Cary, North Carolina, and that will be our Southern call center.

Florida Water, about 16,000 customers were added, as I mentioned, to our base in Florida.

Florida is a fast-growing state for us.

It had a high O&M to revenue ratio, which we expect in small systems, and had been managed by our large electric utility.

The O&M ratio was over 70 percent when we took it over, and we're bringing that down very rapidly.

Nothing really more to say over the AquaSource arbitration other than it is done, and we've now been able to book all the various amount of rate base in each state so that we're ready now to move into rates in many of the states that we have not moved in yet -- Florida, Virginia, planning, and Indiana.

Revenue on the third quarter, although it was up 17.8 percent, was mainly through acquisitions.

It was not a good quarter for a same-store sales basis because of the weather.

As a matter of fact, our biggest unit, Philadelphia Suburban, actually was down significantly on the revenue side, based on the fact that we just basically didn't have a lot of people watering lawns.

Fortunately, we did get a rate case halfway through the quarter, and Pennsylvania -- Aqua Pennsylvania, which helped us.

Year-to-date, revenues are up 22 percent.

And as I mentioned, it's almost all from customer growth; year-to-date, it's over 11 percent.

I would like to spend a little time on the customer growth piece, because I think that has relevance into future modeling and so on with the company.

The core company, again, Philadelphia Suburban area, is growing at about a percent and a half.

And some of the problems there -- and I say problems; that's probably twice what normal utilities grow, is we've been pinching -- putting a lot of our acquisition attention into the faster-growing Southern states so that we can solidify our base there.

To give you an example, what we call our Aqua North group, which is mainly the old consumer companies, for the first year-over-year through 9/30, grew about 3 percent, pretty steady right along the way.

The fastest-growing being Indiana, one of our new states, which grew about 5 percent.

But Ohio was up 2.5;

Illinois about 3 New Jersey about 3.

So nice, steady growth, some acquisitions thrown in, but most of it was organic growth.

Aqua South is where we grew the most. 70 percent, but of course, that included two major acquisitions.

But if you take out those acquisitions, the core growth in the Texas, Florida, Virginia, North Carolina area -- the North Carolina area we had prior to Heater, grew about 6 percent year-over-year.

So that's a little better than we had projected last year when we said 4 to 5 percent.

AND Pennsylvania, we're not embarrassed at a percent and a half growth.

That's pretty good, especially when a lot of our management time has been spent consolidating and integrating and helping to kick start growth in the other two areas.

And we expect to gear up the acquisition program again in Pennsylvania as we start spending more time there.

So I'm pretty pleased with the growth aspect, especially in the Southern states.

Rates is the other way you grow.

Of course, you capitalize the systems and fix them, and that's what we've been doing.

And I think we didn't want to go in for rates in the Southern states, in the newer states in the north until we fixed them.

So a lot of our capital expenditures have been going to fix things that probably should have been fixed prior.

A lot of that in Texas, a little bit in Florida, a lot in Virginia, a lot in Indiana.

And of course our core state, Pennsylvania, where we're investing well in excess of 100 million a year.

New pipes and infrastructure development.

The run rate will probably stay in that 200 range, although it will start dropping back and only going for growth in the South probably in '05, late '05 and in early '06.

The capitalization, though, does give you a benefit because it then allows you to get earnings on that new capital and therefore, i.e., rates.

Rates being modified by the cost-cutting we're doing and the growth that's occurring.

But still the capital expenditures still overwhelm those two ameliorating points.

In the press release, I tried to list the amount of rates that we've already been awarded this year.

Now the biggest chunk of that was Pennsylvania, which was over 13 million, and that just happened in August.

But of course, that will carry through well into next year.

But if you take a look before big cases, we had Pennsylvania, Illinois, Ohio, New Jersey.

So it will -- already $20 million in annualized revenue.

In addition, we already filed for our first surcharge in Pennsylvania and the surcharge will add, along with the ones we got earlier in the year, another million 7 on top of the rate awards in Pennsylvania this year.

And then we have three other rate filings which we're in the midst of now.

One we're already filling, because that's the rules in Texas.

But if you take the Texas case, the North Carolina case, and a much smaller Illinois case, about a million and a half, that's the 16.7 million that I mentioned in the release.

And we're pretty confident that we'll get a majority of that eventually in the rates sometime, probably, realistically, next year.

Hopefully early next year.

But as I mentioned, Texas we're already starting to collect, and it's trued up after the final hearings are done.

Texas is a very, very progressive state in that sense.

Cutting back on regulatory lag in an excellent way.

The Pennsylvania rate case, I guess the best would be what the Administrative Law Judge said when they recommended our ROE, which was then increased by the commissioners.

We ended up with a 10.6 percent return on equity, which is I think very favorable in today's climate with declining interest rates which you see in the way our interest expenses are going down as a percentage of revenue each year.

Anyhow, this is what the ALJ said, Management's performance, which considers the strength of Aqua's records in the area of water quality, regionalization efforts and customer service, and their performance with respect to acquisitions, were all noted as positives, and the why we got what the ALJ considered a very good ROE.

When you take a look at how much rates will go up since the last rate case, the rate increase was about 5.6 percent.

But if you roll the 5 percent of surcharge in since the last rate request, it was about a 10.6 percent revenue increase over exactly a two-year period since our prior rate case.

The other thing that was in this case -- this case had not only capital and acquisitions, but it also had abnormally high expense increases brought about by two elements -- one is Sarbanes-Oxley, which has added about $2 million in accounting fees this year.

I think when you talk to your other companies you follow, you'll find that the accounting fees have gone through the roof almost everywhere; it hit smaller companies, obviously, more than larger companies.

The good news is it's -- I'm saying this cavalierly -- it can't get any worse.

And most of it is in rates and will be in rates.

Pension is the other area.

Of course, pension at the five-year levelization period.

And we're in the '99 through '04 period now, so you have the bad markets in '99 and '00, and we dropped a good market in '98.

Luckily, '03 was a fairly good market.

The pension expense jumped at least 2 million just in Pennsylvania overall this year.

Once again, we got that back and rates will start recollecting it now as the new rates are in place.

Hopefully, the market stabilizes, pension doesn't become an overwhelming part of our expense budget.

We have taken, as I mentioned on the last quarterly call, steps to limit future exposure in that area by saying that all new employees -- all the new AquaSource employees -- will not be eligible for the defined benefit, but more the contributed plan, which puts a, at least a circle around what the exposure is in the way of post-retirement benefit issues.

Health care -- we've also -- was another big issue in the rate case in Pennsylvania and elsewhere, as you all know, from your own health-care premiums.

We have been able to get through the union negotiations and work with our non-union employees' contributions now, which heretofore have not been happening at most utilities.

And we're now (ph) collecting a percentage of the premium from the employee towards health-care, which has helped keep the health-care costs down in '04 and hopefully into '05.

Unless you have any other questions on the rate cases, I can give you facts and figures on the bad news on how much rain we had.

But I think the best is what I used in the release, that the rainfall was 50 percent above average, just in the five-county area, where about 40 percent of our customers reside.

And the only good news I can give you on that is every reservoir we have is full.

So we're ready for a nice, hot summer next year.

The rain was actually worse, believe it or not, in Ohio.

And of course it caused huge problems in North Carolina, where their normal year June, July, and August is their best-selling months.

Sales were down considerably in those areas.

Regarding cost-cutting, I think this is important, because we really feel we're getting a handle around the AquaSource states.

As you remember, we told you our first goal was to get it fixed and to make sure management was in place that could operate them efficiently.

That's been accomplished.

And now we actually have the final pricing done after the arbitration.

We're now working on the second, third, fourth line of management, and trying to get our efficiency culture baked into the culture at the AquaSource, and we're getting there.

The first thing we did was to get rid of the O&M culture, which is the operation and maintenance contract culture, which is a cost-plus business.

We're down to less than 2 percent of our revenues now coming out of these contracts versus core regulatory assets, where you're rewarded for keeping cost down.

To give you trend lines on the AquaSource states, which is the base 150,000 customers we talked about last year, the fourth quarter, which was the first full quarter we could report to you last year, was 71 percent.

Our O&M revenue -- O&M to revenue.

And the first quarter this year was 74 percent.

So first quarter, you don't sell as much water in certain states.

And it went up even further.

What I did early in the year, because these numbers would be jumping up and down because we're comparing apples to oranges in the sense that we only had AquaSource for one month -- two months in the third quarter '03 and three months in the fourth quarter -- was to try and come up with a pro formaed operation and maintenance expense ratio.

And what I did was told you that we were down to about the 36 percent level on the core part of our customer base, which was 600,000 customers.

And then when we added the 150,000 or so AquaSource customers, I used the 65 percent ratio, which was actually a little more aggressive than what had actually proven in the fourth quarter and the first.

But I felt that because of the summer months, you sell more water, that over a year, it probably should get to that 65 percent.

When you took that weighted average, that meant our new pro formaed basis for O&M to revenue that I asked you to track us on was about 41.5 percent.

And this quarter, we added two new additions of considerable customer base -- about 12 percent of the customer base -- that's Florida Water and Heater.

Heater is a little more efficient than Florida Water.

Florida Water, as I mentioned, in the 70 percent range, which is where all of AquaSource was when we started.

And Heater is in the high 50s, and we think we can get that lower.

In the third quarter, just to give you an example, we were in the low '60s.

So we brought it down from the 74 percent range in Q1 to the low '60s -- 61, 62 percent third quarter.

Heater is running about 58 percent.

We think we can get that down maybe 200, 300 basis points.

And Florida Water is in the 70 percent range.

I think we can get that down almost, maybe 1000 basis points, as soon as we get rates in place and get the final organization in place and continue to have the growth we have.

So the bottom line is, if you give me the luxury of saying, originally we said 41.5; if you weighed in the Florida Water and Heater of about 70,000 customers on a 750 basis, puts them at about 60 percent, a little lower than what we had brought AquaSource in, because Heater is a little more efficient.

The run rate for a full year should be around 42.2 percent.

And through nine months, which only includes a couple months of Heater, of course, we're running right around 41 percent, and we think we're going to get into the low 40s by the end of the year, 40.2 percent.

Now, that's with a bad year in revenues in Philadelphia Suburban, which means that that 36 might have popped up a little bit this year just because revenues did not climb at all.

And that's showing that we're taking almost 10 basis -- 1000 basis points, 10 percentage points, off the core expenditures in Heater, and I'm very pleased with that -- I'm sorry, core expenditures of AquaSource.

Now it's not going to continue.

I mean we'll get to zero pretty soon if we do that.

But we think we can stay in the low 60s and then get it into the mid 50s over the next couple of years as we get rates and continue to look for cost efficiencies.

So I think we're ready now to roll on value addition in the rest of these states and start running our full keep on the assets, which we have not yet because we haven't been in for rates.

We now have our rate base established.

We have the assets being fixed.

We have the right management team in place, and we're moving towards an efficiency closer to what we're used to with Philadelphia Suburban -- Aqua Pennsylvania.

But we haven't gotten the rates yet.

And that's going to be some of the story through, not only through '04, where we've done very well on rates, but '05, where we're going to see Virginia, Florida, Indiana -- and I'm missing one -- where we're going to go in for major rate cases -- oh, Missouri going in for rates.

EPS -- just one comment on the EPS.

I know we hit First Call, which was 26.

With the pretty bad quarter, many of you had adjusted knowing the weather was bad.

That's all you had to do was look out the windows in many places on the East Coast.

The 26 cents we did hit compared to 26 last year, did have -- last year had almost 2.5 to 3 cents of a onetime land sale, but it's part of our core program we've been doing for 7, 8 years now.

That was the big sale we had up in our Pennsylvania property, that the governor of Pennsylvania dedicated and it's turned into a state park.

If you look at -- that's why I used operating income in the comparison this time, because I thought it was more relevant, trying to take out the land sale, which is GAAP earnings, and we'll take cash every time.

But it does show you, even with the bad weather, the earnings power of these assets and how the growth and the efficiency cleanup we're doing at AquaSource is really kicking into the bottom line.

I think that basically wraps up the presentation.

Maybe we can open it up for questions.

(Operator Instructions).

Your first question is coming from David Schanzer of Janney Montgomery Scott.

My first question is, how in the world did you ever schedule earnings release on Election Day?

Well, to be honest with you, it was going to be tomorrow, and we said well, we will never have anybody listening tomorrow.

So we figured we'd do it today!

That was the biggest surprise of it all.

In your press release, you kind of talked around it, and in your comments, you kind of talked around it.

But I wondered if there was any way -- and I know it's difficult, given the diversity of the Company in terms of geography -- is there any way to actually tell what the actual effect on earnings per share was as far as weather is concerned?

I mean the difference between what you experience and what normal is?

Yes, I did ask that question of Dave.

And I think we came up with 3 cents.

That's as good a guess.

And I think I told you last quarter, Dave, about a penny.

We had a bad June.

It was (multiple speakers)

Right.

I know the problem gets harder and harder as we go on -- as you get more territory in different places.

Harder to figure it out.

They even had a lot of rain in Texas.

So I mean this has really just been a terrible winter -- terrible summer for us.

My next question has to do more -- without getting specific -- just more of a generic feel.

Going forward over the next 12, 24 months, do you see the same kind of environment for tuck-in acquisitions as you usually see?

Actually, I'm even more optimistic.

I was referring to the fact that we're not a heavy management team.

And we've been concentrating on making sure the things we bought, which really gave us 4 or 5 years of tuck-in acquisitions all in one or two years, when you look at the Florida Water's and the AquaSource's and the Heater's -- to make sure they're working properly, get our regulatory relations, and getting in for rates.

So I, personally, Kathy Pape, you know, Dave Smeltzer, we've been spending a great deal of time working with regulators in 10 new states, basically.

I shouldn't say 10 new, but six new and then the four we already had in addition to Pennsylvania.

With Pennsylvania still being one of our most important 40, 50 percent of our assets and revenues.

That means you're not talking to mayors as much.

And in order to do the municipal acquisitions, you just have to always be working, and they take the gestation period from municipal acquisition is more -- even longer than a corporate deal.

But we saw these corporate deals coming up.

As you know, you follow the utilities elite.

This was -- made up their mind, they were getting out of the water business.

That was the time to bid it and win it.

And we did -- their two properties.

And AquaSource was a unique situation.

So we've really put much more time into corporate-type activities than the traditional municipal and small.

So we've not, at least on the horizon, too many of these left.

And I think we're over the hump on managing the new assets.

Now it's a matter of getting it in rates and getting our value added.

We're now ready to concentrate more on the 11 states -- actually 10 states we're in.

We're not going to concentrate in New York -- to do the tuck-ins and hopefully some municipal.

Okay,.

And then the last question, again, is more of a generic question.

In terms of how you see land sales rolling out in the future, will it be pretty much the way it's been historically?

Yes, I think we have another four to five years left.

See every time we buy a new acquisition, we find new land.

And you know, it's funny because I go in and I ask the engineer who's usually in charge of all the assets, do you have any land?

And they said, no, we don't have much land.

When I asked that question when it came to Philadelphia Suburban, I found we had about 400 acres of lake-front land that they were using to store old wood that they used to chop (ph) on (ph).

So this all depends on what you consider an asset.

We've been able to turn a lot of that in.

We have some huge land holdings left in Maine and in Pennsylvania.

We have a little bit left in Ohio.

But now we're finding bits and pieces in North Carolina and Texas.

So I think we have a good number of years left in land sales.

We also, in the fourth quarter -- I should give you this as a forecast -- we don't try and flip properties.

But when they aren't earning and the regulators are upset, the local mayors and all of them get upset -- we do negotiate.

We did one about two years ago in Ohio.

We're going to do another one in Ohio in the fourth quarter.

It's called Geneva, and we should be able to book a considerable gain on that of a couple of pennies.

I wouldn't call that -- that's an asset sale more than a land sale, but (technical difficulty) much more onetime.

But I should give you that as a forecast.

(Operator Instructions).

Your next question is coming from Tim Winter of A.G. Edwards.

Good morning, Nick.

My sympathy for the Cardinals.

Yes.

We're trying to get through it.

A question for you regarding the earned ROE at AquaSource and Heater.

Can you give me a ballpark range -- what type of ROE those businesses are earning?

Yes.

Dave, you're going to have to help me.

It's off the top of my head.

I think Heater was earning about 6 percent.

I'll firm these up afterwards.

But roughly around 6 on their equity prior to the rate case being asked for.

And I think even with the rate case, we're not going to get much more than probably 8 on the equity.

Only because there's other assets we have to go in for rates on.

Because we're only going in for the biggest unit they have.

In the AquaSource state -- Dave, we did do -- that was at what, about 105 percent? 105 percent.

And that's without the additions we're putting in now.

Now in Texas, we're earning 12 percent when we get the case finalized on the equity piece that we have.

And of course, that doesn't include any additions after '02, I think it was.

But good depreciation -- '03?

We got it up to '03?

So anything we're doing this year and next wouldn't be included.

So we'll probably have to go in again.

But no arguing over it.

They give you 12 percent on equity at 50/50, Kathy?

I think we went in at?

So once we get in these rates, you'll see that part of the value addition, in addition to the new capital we're putting in, and additional to the new growth happening.

I think the biggest fear analysts had, and of course we had some trepidation, was whether we could put our hands around so many diverse systems, and whether we were going to find a lot of stuff under the rocks when we turn the rocks over.

Pleasantly surprised.

We have a huge capital program.

The regulators are happy that we're fixing it finally.

And we really do see light at the end of the tunnel in getting these assets to the point where we can go in and ask for full earning on them.

And the management team, unfortunately, there is only one person in the whole AquaSource team of, I guess about 50, 75 managers that's left.

We basically had to make wholesale changes.

And that takes time, but we're very pleased with how things are starting to roll.

So how long before you think you can get them -- the ROEs up to like 10 percent?

Kathy, you'll have to help me out.

I think it's about two years.

Two year phase in?

So I'd say we started in '04 with Texas, although you're only seeing a month or two of it. '05 will try and get part way there, and then '06, full way there, but then we're ready for our '07 cases again.

But we'll still -- then we'll get onto the cycle like Pennsylvania, where we're only not earning on our incremental capital -- non-disk (ph) capital, while we're still pacing our earnings at the 10 percent level and everything else or more.

Okay, last question.

How are you accounting for the Texas rate increase?

Given that -- (multiple speakers) subject to refund.

Yes, as you know, we're allowed to book what we ask for.

And we are reserving a -- what I think -- a conservative amount that would be reflected as a negative, obviously, in the third quarter from what we theoretically could have booked, which was the full amount.

In anticipation that there might be some final negotiations when we finalize this next year.

Thank you.

Your next question is coming from Deborah Coy of Schwab Washington.

Yes, thanks.

Good morning, guys.

Kind of a big picture question, Nick.

You said that Pennsylvania is now about 45 percent of assets and revenues?

I think it's actually higher in revenues because were a little higher at Pennsylvania because of the disk.

I think it's like 55 in revenue, 45 in assets.

Okay.

And you said that the CapEx still going in there is about 100 million a year?

Actually, moving up.

Because, see that 5 percent of revenue then generates a factor of almost eight times capital.

So as your revenue goes up, the total amount on the 5 percent of X -- a larger X gives you more times 8, which gives you the amount of capital.

So probably, we're going to -- we're probably going to spend closer to 130 to 140 in Pennsylvania, subject to the surcharge, plus going in for a reasonable case in two years, which probably will still be in the single digit.

Okay.

Well that actually gets to the heart of my big picture question.

Obviously, the Company is becoming more diversified.

You're moving into higher growth areas, but ones that are inherently less capital intensive.

And you said the other approximately 100 million or so you're spending on your other territories, you're having to do a lot of fix ups.

You get kind of where you need to go probably to CapEx declines somewhat.

What I'm trying to understand is how you look at the overall portfolio that you've put together going forward, in terms of continuing to get to the really very impressive, on average, toward 10 percent earnings growth that you have put in over time.

Whether we're going to see the mix of that kind of shift a bit more toward acquisitions because you will have your CapEx kind of more caught up, if you will?

Or whether you still see a lot of additional growth going forward as you continue to put CapEx into all these systems?

Yes, I would say the CapEx total for the Corporation probably will stay in that pretty heavy range of 200 million a year.

But the shift will be -- right now, we're probably putting more in the South, especially for compliance versus growth, than we will in the future.

And I think we'll see much more rapid, organic (technical difficulty), but we think there's some acquisition potential.

So we're pretty confident we can continue growing well in excess of 4 percent.

At the point we get the rates in, which is, as Tim had asked, '05, '06, and depreciation, we think that we won't be going in for too many more rates because of the growth and the fact that most of the capital -- I mean when you look at these systems, they're 300, 400 customers, well small thank, meters, with the builder paying most of it.

And what you're providing is the expertise and the service and maybe some contributive property that you give -- some contribution to give them a reason to come with you.

So probably the run rate of the growth is plenty enough to take -- and depreciation is plenty enough to take care of the capital needs.

That means free cash starts flowing to the north, where we are always going to be negative cash as we do the infrastructure rebuilding.

So it's a nice complement of one throwing off cash and the other using it, where that means we are continually going to be in the rate business, in Illinois, Indiana, Ohio, Pennsylvania and New Jersey; and probably not in the rate business if the South continues to grow like it is in Florida -- there's always a new regulation, (multiple speakers) saying there's no -- some new arsenic that comes down the line that we don't know about.

Texas, Florida, Virginia -- we won't be as much in the rate business there other than the index filings they allow you to have.

The South is very good.

To give you an example, Texas -- I already gave you 12 percent ROE, which is very good.

Florida allows you to do 100 percent equity.

Kathy, give me help -- 9.2 percent?

If you're willing to take 9.1 percent, they'll give you 100 percent equity.

And when you look at that on paper with using stock selling at 2 times book, that's okay.

In the other Southern states, Florida and Virginia, and there's one other -- gives us index filings -- 2 percent a year just for inflation.

Is that about right? 1.6 percent a year for inflation.

So you do those filings, you get it right away.

That keeps you out of rates, too, if you're growing fast enough and you have all your major capital in rates.

Pennsylvania, we have -- it's all pipe after -- after '06, '07, it's almost all pipe.

So we're going to be a pipeline business.

And we're looking for some municipal governments to buy so we have places to fix.

And the regulators want us to do that.

Because, as you know, the cities are just deferring maintenance.

The big cities some day will afford it because they have to.

But the smaller cities -- it's a choice of tax ratables or raising water rates.

And it's just such a negative feedback to a small mayor who has to worry about everything, police, fire, pension, and now the water bill -- that it becomes easier to purchase those than it is like to do something with the City of Philadelphia.

And that's why I always show that demographic chart, where we concentrate on the sweet spot, which is the 10,000 or less.

So to me, adding all that up, it sounds to me like as the business grows, you kind of catch up with the new major Southern acquisitions.

You get to, as you say, the point where you're not having to file rate cases.

You're generating cash.

You're obviously earning at progressively higher ROEs, I would think, as you depreciate.

Yes, I think if (multiple speakers) rates start going up, the ROEs go up.

And even that you -- without having to file rates, you can earn ahead anyway because you're not having to file, right?

Right, exactly.

And so that you're generating sufficient additional capital that you should be able to make acquisitions for -- at a lower cost of capital overall?

I guess what I'm trying to add all this up to say is it looks to me like Philadelphia Suburban -- the old Philadelphia Suburban -- is heading toward, over the next two, three years, to a place where you should have, potentially, even somewhat higher levels of earnings growth than you've had historically, based on the cash flow characteristics that are likely to start accruing to you.

Not to jump too far ahead, but --

No, I think, obviously, weather-dependent, as we fix pipes, we have less expenses.

Remember that, too.

So the winter doesn't hit us as hard.

So the pipes are newer, they don't break as much as when they're older.

But I would say we have really started to become -- with a hedge -- with the weather and regulatory --

Of course.

-- much more of an asset accumulator.

And the play over the next two years is to get the full earnings on those assets.

And once we're there, we could continue to earn on them without adding a lot of new stock.

That's really the issue.

Exactly.

Exactly.

Right now as you look at our earnings, we're up 10 percent with 7 percent dilution on the nine months.

And you won't have to issue as much equity if you're generating cash.

Exactly.

Okay.

Thanks.

(Operator Instructions).

I'm showing no further questions at this time.

I would like to turn the floor back to the presenters for any further or closing comments.

Well, if anybody has any questions that you think of later, feel free to call C. J., Kevin, myself, or Dave, and we'll answer anything more in detail.

And if not, we appreciate your time, and make sure you vote!

Thank you.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines, and have a wonderful day.