Essential Utilities Inc (WTRG) 2004 Q4 法說會逐字稿

Welcome to your Aqua America fourth quarter and full year 2004 earnings call.

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

At this time I would like to turn the floor over to your host for today's call, Cheryl Hansen.

Thank you Karen.

Good morning everyone.

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

For those of you who have not received our press release, it is available on our Website at www.aquaamerica.com.

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.

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

Nick?

Good morning.

Thank you, Cheryl.

I guess I would like to just start with the numbers, which is always the most important.

The quarter was a good one for us -- 24 cents versus 20.

It did include about 1.5 cents from a systems sale which was discussed in prior calls; that's the Geneva, Ohio system, where we're now running the system.

And we were able to take our dollars out with a gain and reinvest it elsewhere in the system.

So, the numbers -- 20 percent.

I don't want to give the impression that that's our new target, 20 percent EPS growth.

But even with that, it was a good, healthy quarter.

The big news, I think, is really the way we have been able to continue growing the customer base.

And of course this year we were helped by two major acquisitions -- the Heater acquisition, which further reinforced our dominance in North Carolina as the utility; and the Florida Water purchase which happened in June, which gave us more access to Florida, where we had started a year earlier with AquaSource in a very fast-growing state.

The 11 percent growth, if you look at our (indiscernible) with the last nine years, it's right in that range -- 9, 10 percent.

I don't think we can keep that type of growth up because it's coming from larger acquisitions.

But the other good news is that we didn't just depend on those two acquisitions for our growth this year; we did get our normal 3, 4 percent growth out of the rest of the system.

And that is where we are going to depend on future earnings coming from -- the organic growth and the small acquisitions, which have really been our major story over the past 10 years, and it's really given us the platform to build the earnings at this nice pace that's been happening.

Our EPS earnings, or five-year CAGR, is over 12 percent, I think.

I guess that's the two good news.

The bad news, of course, was the weather.

It was an adverse weather year, but even with that, the core strength of just the regulated model and the growth in customers was able to overcome that.

And we did do for the full year 85 cents.

And I think the weather probably affects, as Cheryl wrote in the release, the months May through September, because that's the hot weather months in mainly the Northeast, although Florida is just the opposite; this time of year is when those higher sales occur.

But, the -- that usually affects up from 5 to 10 percent on those earnings, so that is roughly 3 to 5 cents.

And I think this year was not normalized, and I think the 85 cents could be normalized with that.

The other significant thing is that we're -- as you remember, when we bought AquaSource we said first thing we have to do is fix it, put good management in, fix capital needs, new water plants, sewer plants, new wells, and so on -- just get it to our standards.

And then we'd have to start going in for rates. '05 will be the year for a lot of rates in the AquaSource states; however, '04 was a very significant year in one of the AquaSource states, and that is Texas, where we were awarded by bond a preliminary award; now the final hearing is ongoing and we are very comfortable with the results to date.

We have also filed a major case in North Carolina after the Heater acquisition.

Heater had not been in for rates for quite a while because of their pending sale, and we are comfortable that we are going to be treated fairly in North Carolina.

We're done with our hearings now, and it's up to the judge's ruling.

However, in the bank are $27 million worth of annualized rate relief awards that we already got in '04 -- mainly Pennsylvania, New Jersey, Illinois.

And as we speak, we are in rate proceedings in North Carolina, as I mentioned, another section of Illinois -- actually three separate cases in Illinois -- and we are filing ongoing infrastructure surcharge rate requests in Pennsylvania, Indiana, Ohio, which is the first one ever in Ohio.

And, of course, in Illinois.

So, rates continue to be a major part of our story.

And those of you who understand how value is built in a regulated utility, you understand how important it is that investment be made, and then you get fair returns on that investment.

And I would like to acknowledge the fact that the states we're operating in -- and I meet with the regulators consistently -- I was just with most of them at their winter conference in February -- and water has gotten on their radar screen.

They are appreciative of the large amounts of money that the major companies are putting in, and they continually are bothered with the fact that many of the states have these small water systems which aren't meeting the environmental and just management standards that they would anticipate with such an important responsibility.

The ingestion of drinking water is probably the highest responsibility they carry.

So, we think we've been treated fairly and will continue to be treated fairly with the major amounts of money that we are investing.

We have continued to work on operating efficiency, as I mentioned to you earlier.

AquaSource was not a very efficient operation.

They had no economy of scale and so on.

By merging it into our base, it was like an 80/20 mix -- you could look at it that way.

We were able to get some of the overhead spread over their customers and bring some professional -- more professionalism to their operations.

Almost all the entire management has been changed out now, and a lot of new operators, a lot of new practices, new trucks, new tools -- all that has to be invested before you can go in and say we now have this running the proper way and we'd like to ask for a return on our investment.

We have looked at the obvious efficiencies.

And when we started the year, I mentioned to you that the AquaSource properties were running at a high 60s rate on operating ratios, what we call our efficiency ratio, which is basically operating expenses, O&M expenses, over revenue; whereas the rest of the system was running at 36 percent, which is where we had gotten down to from the mid-40s over the last 10 years.

And when you blend that, very simply the 80 and the 36 -- 80/20 mix comes to about 41.5.

So, that was our target as we started the year, to bring the O&M ratio down 100 to 150 basis points, which is much faster than we normally would predict.

But, I knew there was a lot of low-hanging fruit that we were going to go after.

When we brought Heater and Florida Water in midyear that elevated that ratio.

I weighted it -- and I can go over the calculation with you later -- but basically I weighted that for only the last two quarters, but Heater was in the 60 percent -- 55 to 60 percent range.

And the Florida Water was in the high 60s.

When you weight that all out, it comes to somewhere around 42 3, or something of that sort -- in that range, between 42 and 42.5 weighted average for the year.

So, although your CR O&M to revenue ratio hit 40.3, which, obviously, is almost a 200 basis point gain, because of the way the accounting is handled on the Geneva gain, that goes into O&M reduction.

That's the way the accountants do it now.

So, although 40.3 we will take, and we're very pleased with, taking out Geneva -- because I wouldn't say that's going to (indiscernible) there's going to be a sale like that every year -- it comes to closer to 40.9.

But you can see we're right on target in what our goals were (indiscernible) 1.3, 1.4 -- 130, 140 basis points gain.

And we're very comfortable that from that 40.9 we can bring it down another 100 basis points-plus, as we continue to fix now Florida Water and Heater, and look for some synergies in addition to continuing the work on the AquaSource properties.

And there's always a constant trimming and watching of expenses in the other two properties also.

So I think we're very comfortable with how we're working with the integration of our new properties.

Once again, we had our strong financial position validated -- Standard & Poor's.

Very few utilities have gone in and been able to be upheld, and we were.

And we kept our A+, AA- on our secured assets at the Pennsylvania -- at the Aqua Pennsylvania.

And that really has been very good.

We have -- the risk factor is a 2, which is very good in the S&P ratings.

And what that really enabled us to do was to in '04 issue debt and refinance some more debt to the tune of about 130 million, as is mentioned in the release, 132 million.

And I'm very, very proud of the 4.8 percent average debt load on the cost of that debt.

I would put us up against any company in the U.S. on borrowing (ph) that kind of money long-term at 4.8 percent.

Of course, we're still having a lot of short-term debt that we carry to do our investments, and that is still in the low 2's.

So, you can see we've really been able to keep our carrying costs down significantly, and we're trying to convert as much of that short and the long as rates stay down, so that for -- this will be lasting -- these kind of rates for 20, 25 years.

We had another secondary to basically show S&P that we were going to keep our equity structure -- our capital structure where they like to see it to keep that A+ rating.

We did that in the fall, and you'll see that dilution this year was much more -- I think it's over 5 percent (indiscernible) 5 and 6 percent -- was a lot higher this year than a normal year.

But we felt we wanted to show that we would capitalize these assets even before we had them all fixed and went in for rates, to show S&P that we were going to keep our capital structure where it belonged.

And that probably hurt earnings a little bit, obviously, because we diluted because of more shares.

But, it probably would have to have been done midway in this year anyhow, so we think it was a good time to do it.

It was oversubscribed.

The shoe was exercised and 2270 was the price.

I guess what I'm proud of -- I think we've had five or six public offerings during the decade, and no one has ever bought stock on an ensuing offer at less than they could have bought it.

In other words, every price is up over the previous one; so, no one ever bought an offering and then found out that we offered money a year or a year and a half later at less -- stock at less.

We're very proud of that.

The dividend is very important.

Our board feels it's important, and as you can see, we're starting to elevate the dividend increase a little faster than what our commitment was, which was 5 percent annually.

We're now at 8 percent annual run rate.

CAGR on that is well into the high 6's, low 7's over the last five years.

And we're down into -- the 60, 65 percent range, is where we would like to stay.

And we are below that, and therefore, we are optimistic that if the First Call type projections come to be in '06, that we'll be well within the range of looking at the dividend (indiscernible) back in our August meeting, which is when we do.

I think that really covers most of it.

I know many of you may have specific questions about some of the stuff mentioned and the facts mentioned in the release, but I think I'll wait for the questions and get into more detail.

(OPERATOR INSTRUCTIONS).

Michael Vogler (ph) of Blooming and Scattiger (ph).

Congrats on a great quarter (multiple speakers) organization, also on the great job on the O&M expense line.

That's the thing that we feel we as management can add the most value, and we watch it pretty carefully.

Just one quick question for you guys.

I saw your weighted average cost of debt fell from 6.2 to 6 percent flat during the year.

Given the current upward pressure on rates, what is your outlook on the weighted average cost of debt for '05?

Well, we still think we can bring it down another -- bringing 800 million or 900 million -- Dave will have to help me -- on the total debt now down a lot is like turning a big steamship around.

But we've been able to bring it down from mid-8 to, actually 10 years ago, down to the low 6's; now actually broke 6.

We think we can get it into the high 5's.

I don't want to predict any specific basis points load -- 50, 100, whatever -- but you can see even with interest rates rising during the year last year, we still ended up with 4.8 percent money weighted over that last 132 million that we just did.

We still have about 20 percent of our outstanding debt.

Dave, you'll have to help me by looking in the sheets there.

I think about 20 percent of our debt is still well over 6, 6.5 percent, which is the going rate now.

But where we are able to bring the average borrowings down is we are eligible, under public use and because of our environmental nature, to get tax-free money.

And we have been using that quite a bit.

And then there's the state revolving loan funds that each state has to enhance water and sewer projects, which generally are municipally used, but we've been very aggressive.

And to give you an example, we are applying for over (technical difficulty) now in Pennsylvania, and that would be 2 percent money.

So, when you blend the very low subsidized interest rates from the state revolving loan funds, where we always go first, but there is a limit to how much you can get because a lot of municipalities use that.

Then our next up is we look at tax-free money where we have been very, very successful, especially in Pennsylvania, Illinois and Ohio.

And in that case, you're looking at low 5's -- and we're talking 25, 30-year numbers.

And then if we went corporate, we don't go out 30 years but maybe go out 15 years -- we just did a corporate -- Dave, you'll have to help me -- at 5.3?

(indiscernible)

25 million.

So, I think we still have some ways to go, even with interest rates going up.

Of course, the yield curve, Mike, has flattened.

The interest rate rise actually hasn't hurt the long-end.

And when we convert our short, we go -- easily go out 15 years-plus.

And that really lays the groundwork for good rate structure 15, 20 years into the future for the company.

And all of AquaSource was financed, by the way, at 4.87.

So that is the rate structure we're using in those southern states, which gives us a competitive advantage.

David Schanzer, Janney Montgomery.

Congratulations on a solid quarter.

I have several questions.

Actually, I guess it's the after-tax about 1.4 million from the proceeds from the sale of the Ohio property.

There will always be an argument as to whether that's ongoing or onetime, but I guess from a philosophical point -- correct me if you think this is wrong -- wouldn't that relatively small amount of money at best go toward accelerating acquisitions in the year, or maybe adding some small ones?

Is that the way you would look at it?

The accountants looked at it one way.

We had to reduce our customer count for the year, obviously, even though we are running the system now; so we're still getting revenue in, but we don't count those customers anymore.

So we lost 2500 customers in our customer count.

So we would have even done better than the 11.5.

And the gain -- and Dave, help me with this if I'm overstating it -- the gain actually offsets expenses.

It doesn't go into the revenue column, doesn't go into a special column anymore, because it's so small and insignificant.

Having said that, the real business reason we did it, Dave, was this is one where our Ohio president had been trying everything.

The rates were high.

Every time we'd go in and try and do something the town would come out and complain.

And finally we just said -- and by the way, our ROE was about 3 percent.

I mean, we just couldn't get the rates up to what we were investing.

We could put that money in the bank and do better.

But what we are doing with it is we're turning it right around and investing it in the South, Texas for example, where our ROEs are in the high 11's.

That's the point I wanted to make.

Secondly, could you give us kind of a sense of what the current status of the generic topic of eminent domain looks like?

I know you have had to face it a couple of times, Fort Wayne and other places.

Where is that trend going at the moment?

I think the ones that we have had are all ones that we inherited.

So I would like to start there, although I would like to start -- suggest that we may in the future use it in a friendly way if we want to exit pieces of property or a state that just aren't doing as well, because we could put the money and earn better for our shareholders in another state.

But having said that, where it's a forced condemnation, the two that we've had we inherited, and they were facing consumers when we bought them.

We knew that, we stated that, we tried, but it was impossible.

In the southern states we haven't seen much of it yet, but a couple of the philosophies of other companies who have operated in the south -- Utilities Inc. and Florida Water -- basically did recycle properties and looked at that as part of their structure.

I mean that was their model.

And I'm not sure it was all that bad because when something grows and grows out -- because we're talking about not suburbs like we think of in the Northeast, where the next suburb and then the next suburb, and you put your line out; these are all (indiscernible) 300, 400, 500, sometimes a couple of thousand home developments.

Well, in 10 years when they grow out, they don't grow anymore.

And at that point you don't have the growth there; you just have the steady annuity.

And they were basically then -- when they got to that point they had hit their maximum value to a municipality, sell it, and then put it into a growing one again.

That's a viable strategy that we're going to look at, although we have never followed that type of pattern.

The trend I think has increased with foreign ownership, and that is the problem.

Water is a very emotional issue.

When you say you're raising rates 8 percent it sounds like a lot, but when they say, well, your rates are less than $1 a day, it's 8 cents -- people don't get as excited.

On the other hand, the 8 percent can be used and demagogued against if they didn't like the fact that the former owners sold to somebody that is not U.S.-based, things of that sort.

So, I think we're seeing an elevation of it.

I know Tennessee, Kentucky, one in Illinois against another company that is foreign-owned have risen up, and I think it's going to continue until things settle down in that sense.

And that affects everybody in the water industry.

We will fight it vigorously, like in Fort Wayne, if we don't think we're going to get a fair value.

And that's what we are doing.

We are basically saying this is a premier property for us.

This is not a small property that basically is not earning -- can't earn its keep; it's going to be earning its keep.

And if they want to take it away, we understand they're right.

But they're going to have to pay what we think it's worth.

And I think that slows down condemnations, when you stand up and fight, because you have the facts on your side.

A couple of questions about your financial statements.

You made a convincing case, I think, earlier in your comments about O&M, the direction of where that is going, and what you plan to do.

I was just curious as to what the next couple of quarters are going to look like. (indiscernible) any aberrant events that are going to cause O&M to go up, or is it pretty much more of a straight-line movement?

I think if you take the 40.3 which is what you would actually look on the sheet for the full year, I think the last quarter was even a little better than that, but I really think in fairness to the analysts I wanted to tell you exactly what it would be without Geneva.

Because that's -- two years ago the accountants would have said take Geneva as a separate line item.

Now they're saying take it right out of expenses.

So if you look at those, the 40.3 run rate for the year really is closer to 40.9.

And then, if we look at the quarters next year, the first quarter is always the worst.

Last year's first quarter was in the high -- almost 42.

So we'll (indiscernible) a little bit off that.

But don't forget we have Heater this year where we didn't have them last year in Florida Water.

So, really probably as we get in towards the third quarter and fourth quarter you'll have a true -- assuming we don't do another major acquisition, just our normal smaller (indiscernible) 4 percent a year -- you will see the numbers really true-up.

And I think you will see in those two quarters, quarters-to-quarters, a solid 100, 125 basis point reduction.

And then, if you do the 40.9 for the year you will see a solid 100 basis point production -- reduction next year.

And then, as you know, we continue to -- as we growth rates and keep expenses in line, that keeps getting down.

So I think we will be well -- we'll be back in the 30s again, and continuing to go down to the mid-30s.

The other thing -- the copy of the financial statements I have didn't have receivables.

I was wondering now that you've had some experience with North Carolina, Florida, Texas, etcetera, have you seen any change on a system-wide basis as far as level of receivables?

No.

It's interesting -- no worse than Pennsylvania, which I thought it would have been.

The problem we had in Pennsylvania -- the reason the receivables jumped up a little bit in Pennsylvania and Illinois, where we had never experienced these resort-type areas where they -- if you have an empty lot you pay for water and sewer even though the don't have a house on it.

You know the old developments -- you go up, you buy the lot, you're going to build your house there someday, and then things change.

Well, eventually people don't pay that either.

And what we got done in our rates in Pennsylvania and we're doing it now in Illinois is we're no longer using those revenues, because it takes more aggravation to collect them.

It's not a lot of money; it's like $70 a year, but the aggravation is if you don't pay, how do you get it?

You put a lien on the property if they're never going to build on (indiscernible).

So, we -- basically in our last rate case in Pennsylvania, so starting in August of this year, of '04 -- Illinois we're doing the same -- we're no longer counting those availability lots, because basically they may never build a house here.

And the previous owners had counted them in their customer count.

And we're no longer charging a service for that, which means we've taken away one of the inflows that were really the highest part of the receivables.

I think the 0.5 range, Dave --which is not bad -- 0.5 percent write-offs is about where we'll stay.

And we're not seeing Texas or Florida any higher than that.

The other thing that's going on is that we're beginning to convert many of our customers from quarterly to monthly billing.

And in fact, that conversion was so significant in 2004 that we have actually seen a reduction in our trade accounts receivable from 2003 to 2004, despite adding Heater and Florida Water customers in the year.

My last question has to do with something you indicated in the press release.

You were saying that your strategy going forward is to grow both water and wastewater.

And wastewater is not an area that has been something that you've inordinately focused on.

I was wondering what your strategy is there.

You may want to talk about that.

I never was afraid of wastewater, but when I came to the Company, having been a regulator and regulated both, the city does both.

The private companies, including the former American Water who was dominant in our association, just felt that wastewater was a different business.

And they don't think that way anymore now that the Europeans have been involved.

We started maybe five years ago buying small little wastewater systems, because the environmental agency said you've got to help us take these over.

And we have been able to pretty much -- we have a new staff.

We had to build a new profession, because believe it or not, wastewater is a different engineering than water -- different laws, but all regulated by the same EPA.

And we found that the builders really -- so, when I'm talking about this idea of new growth in the fast-growing states -- what the water -- what the builders want is somebody who can handle their wastewater.

And by the way, the water is great, too.

So we've found that it's a better way into the builders from a standpoint of picking us versus trying to do it themselves, because they're more afraid of the Clean Water Act than -- I guess -- than they are of the Safe Drinking Water Act.

People think, oh, you just sink a well and it's easy.

They find out later it's not.

On the other side, you have to get permits in advance, meet certain standards, and it's a little bit more daunting to the developers (indiscernible) doesn't really want to be in the wastewater business.

We have discovered it's a way for growth, but it's also a way to we think get good returns.

Is it also a way in with the somewhat larger municipal systems?

That's a very interesting insight, because it is just happening.

Because of the way -- and I was at EPA at the time -- the way we funded -- the Clean Water Act said we have to clean up the rivers and streams back in '72.

And the way they said we had to do it is the biggest problem are these big cities who are dumping raw sewage into our streams.

So they basically said clean up; here's the new rules; everybody has to meet these standards; and by the way, we'll give you 85 percent of anything you spend.

So, based on almost free money, all the cities and the small towns rebuilt their systems 30 years ago, never built into their rates the maintenance, so there's no TLC involved with it.

And now they're all going back to Washington asking for the second round to fix the plants that should have been maintained all along.

And the money is not there.

So what we're starting to see is (indiscernible) -- I'm going to say middle-size cities, 10,000, maybe 30,000 -- the cost of fixing these without free money, and even borrowing at 2 percent from the state revolving loan funds isn't going to make it.

The rate increases would be so great that they're nervous about it.

And we're starting to see where we didn't see 5 years ago the city saying -- hey, maybe you want to look at our sewer system, too.

They've always been saying the water, because that wasn't free money; that was always their own money and the bond runs out and they have to fix it again.

So I think you're going to see a little bit more privatization in the wastewater over the next 5 to 10 years.

I will give you some numbers. 50,000 water companies, 1,000 of which are "large" -- a couple of hundred thousand person city.

Only 16,000 (technical difficulty) so they're larger because the grant programs force people to work together and regionalize and so on.

So they're a little bit bigger, but five years ago would have scared us because we (indiscernible) no expertise in the sewer business.

But I really see this as a growth area going forward.

Kevin Monroe, Thomas Weisel Partners.

A couple of questions.

Could you give some detail on the components of your revenue growth, in terms of what came from rate increases and volume and acquisitions?

Sure.

Let me see if I have that here.

If not, Dave, maybe you'll have to help me with that one.

The bulk of it was growth from the acquisitions, obviously.

When we look at the full year, Kevin, of the $75 million of revenue growth, about 55 was related to acquisitions.

And that includes the full year for the AquaSource properties, as well as the partial year for the Heater and Florida Water properties, and the other tuck-in acquisitions that we accomplished.

Beyond that 55, the remaining 20 was broken down to about 15 related to the various rate increase initiatives and their impact on 2004.

And then about $5 million for the remaining revenue increase related to the natural growth that occurs on our system, as well as a slight improvement in sales over last year.

Also, could you give us the CapEx for the quarter, and what your expectations are for '05?

Sure.

I'll give you that one.

That's just the part that -- really, we manage top-down across the Company.

And obviously, we put capital where it is needed in line with where we are planning to go in for rate relief.

Obviously, the first thing you do is fix anything that's broken; you can't have -- even if you're not going in for rates, you have to immediately get out of violation.

And a lot of the AquaSource properties when we bought them were in violation.

So we fixed all that or are in compliance agreements to fix it, so we don't have any outstanding (indiscernible) any issues with the regulators.

But, just to give you some numbers -- let me grab that.

We have increased our capital significantly.

I'll give you a five-year trend if I can find it here.

We'll go back -- let's just go back to '02.

We spent 136 million, and that was pre-AquaSource.

In '03, with half a year of AquaSource, we spent 163 million.

So, it's a normal progression of what we're increasing spending in the states we are in because of the disk (ph) and the infrastructure needs and so on.

And remember, I know you'll understand, but that is not all that bad, because if there's legitimate things to spend money on, that is how if your stock is selling above book you can actually create shareholder value.

So, capital is not all that bad; it's just you have to manage it and make sure you can get back in rates and make sure you can capitalize it with good debt figures so your rates don't go up excessively.

So we went from 136 to 163, half year of AquaSource.

This year, full year of AquaSource, half year of Heater and Florida Water at normal growth -- 196.

Next year we are looking at -- so let's say it's 200 roughly -- next year we're looking at the 225 range.

And that will level (indiscernible) often for awhile.

And the run rate on that -- you can take your CapEx to -- your capital to depreciation and get a feel for how much pressure that will put on rates, and how much will be going in for.

But we're looking at all the plants, a lot of is going to go to growth in the future in the South, and rehab in the North.

Last question on filing for rate increases in the AquaSource states.

Did you say you have filed or you're preparing to file, and what is kind of the timeline?

In North Carolina -- I will run through them for you.

Virginia we have filed for indexes, which is 2 percent or something just cost of living indexes so that there's some money coming in.

And I don't know if Kathy (ph) is with you, Dave, but I think she's planning for early this year sometime in the first quarter or second quarter to file for some of the smaller cases in Virginia.

A very, very supportive regulatory environment there.

They call it the Commerce Commission is who regulates us there.

And they want us to fix some of their small systems up and they're very pleased with what we have been doing so far to fix up a couple of the violating systems we bought when we took over AquaSource, and we've put a lot of money in.

We run a system called the -- not Monticello -- well, it's Monticello, Virginia (indiscernible) I guess maybe even called that -- but it's the Charlottesville, Virginia area.

And that is our biggest system we bought with AquaSource.

It's a nice system that needed a lot of work and it's growing very rapidly.

So (indiscernible) try to go in for a rate case there.

North Carolina -- we are in the -- almost completed the hearing -- actually completed the hearing process, almost completed the litigation process.

And we're hoping sometime this spring to get a ruling.

And that will bring Heater up to its earnings power.

And then we have one or two more cases in our old AquaSource North Carolina, and that will happen this year.

Florida -- we have 73 separate divisions that we're looking at.

We're working with the state to see if we can consolidate some of those so we're not burdening them with 73 rate cases.

But almost all of them need rates.

Florida Water didn't do much with rates over the last four or five years, and AquaSource didn't either.

And we've been putting a lot of money into fixing the system.

So we'll have the major rate cases -- or case, I guess -- in Florida sometime this year, probably midyear.

Indiana -- we're going to file.

We were holding back in Indiana mainly because of the condemnation.

We thought maybe we could get -- settle the condemnation.

It does not look like that's going to happen.

There's been a change in leadership in Indiana's regulatory commission with a new governor, which we think gives us a fresh face in the sense of going to the commission and saying they have the right to buy it but we can hold up all our regulatory matters based on the fact that they may want to buy it.

Either they buy it or don't buy it -- the courts will decide what the value is, and we've gone to the litigation mode so that we can move ahead with our business basically, which is getting some recovery on all the money we put in to fix the Fort Wayne system.

And then in Texas we are in a rate case now.

It's an interesting system.

After a certain time period they let you start collecting the rate that you asked for, which we are, and that has been occurring since last August.

The hearing then proceeds.

We've had four hearings, and they haven't been terribly controversial.

And then the litigants who come out against you on their dime -- they have to pay for their own legal fees and all that -- has to prove that you were wrong in your rate proceeding.

I'm characterizing it as a layman.

I'm sure it's a lot more judicial than that.

But we anticipate by midyear this year getting the final, and we're basically reserving a little bit in our earnings against it just in case we don't get the full award.

But we're very confident that we're doing pretty well there.

So that will complete by the midyear, hopefully, to later this year.

And what did I miss?

South Carolina is only one system at this point.

And Missouri -- a lot of small systems in Missouri, and we'll be filing for cases there this year.

And in New York which we were originally selling -- it took New York -- we applied to sell it to a company called Birmingham which is a Connecticut-based company.

It has taken so long for the process to be completed that the contract we had which was for a year and a half ran out, and basically in discussions with Birmingham we decided that maybe now, since we have done all the work, we know what we have -- maybe we'll keep it ourselves and at least get our fair value out of our investments we have made over the last year and a half.

Everything is in compliance now, and we may as well get our earnings back on it.

That gives you a complete rundown.

Debra Coy, Stanford Washington.

Just to follow up on the rate cases.

Actually from my notes, the one state that you didn't mention was Illinois.

And actually just in kind of the overall, just to touch base.

The last thing I remember is that you had about 15, 16 million in rates -- in rate cases still outstanding, primarily in Texas, Illinois and North Carolina.

And you're already collecting in Texas.

Is that about right?

In Illinois we have filed for a 2.5 percent disk in January for (indiscernible) which is just like Pennsylvania, somewhat automatic.

Obviously, they audit, but we're comfortable that we're going to do all the work that we said we would.

That is in place.

In Vermillion, which is the second-biggest division out there, we have filed for a 14 or 15 percent rate increase.

It's finalized hearings and we're awaiting the judge's opinion.

So I am going to anticipate this fall we'll hear about that.

We also filed, although small cases, pretty big cases in the sense of rate increases, over 60 percent, in three smaller divisions which we have not really filed for years.

And we were putting some capital in.

It's small customer space with lower rates.

That's why the increase sounds so much, but it gets them to their full earning power.

We filed all those late in the year, late in December, and so far have been very little controversy, but that is just starting in the process.

And we will get ready to file for our biggest division, which is Cancakey (ph), sometime either late this year or early next year.

So it's fair to add it all up and say '04 was a big rate year for you, 27 million in cases received? '05, given the timing of things in terms of new rate awards to be received is going to be a bit smaller?

A bit smaller.

And then the big one -- the big ones -- Cancakey, Pennsylvania and New Jersey will all be filed probably late this year.

And they'll affect '06 earnings.

Just to follow up on Dave's earlier question about the wastewater systems.

It certainly is an interesting area of opportunity.

I presume this is very small as a percent of revenues right now for you?

Well, it's grown to about 5 percent -- Dave -- Dave Smeltzer -- about 5 percent of our revenues now, wastewater?

It's a little higher than 5, Nick; between 5 and 10.

It's getting there.

My question on -- as you look at that business relative to your other business, these are not regulated utilities for the most part, are they?

They're simply -- so you have a -- that you own the system and that you set the rates with the city, or how do they typically --

No.

Actually, as soon as we buy them they become regulated.

So they are regulated by the PUC in the same way?

Oh yes, the same way.

What we didn't want to do is follow the model that AquaSource and some of the other companies did, which is running these nonregulated -- they're called MUDs in Texas, and associations elsewhere, and so on -- sort of in a partnership month-to-month contracts.

We just felt that we want to own the assets, control the assets, be responsible for our destiny.

We and another company, Eco (ph), which is a division of Southwest, bought all those from AquaSource.

We just have the strictly IOUs.

Now, we will run a system for somebody if it's right next door and we can make a few dollars on it, but O&M is a very small percentage of our total revenues.

And the returns on the wastewater systems are about (multiple speakers)

In the 10 to 11 range I would say is a reasonable model.

Okay.

Just looking at your new acquisitions, obviously, you have had AquaSource now for about a year and a half.

You have the new elite property.

Can you just give a little bit of color on where you are seeing the operational efficiencies better or worse amongst all of these acquisitions?

It certainly appears that given your achievements thus far, that things are working well in terms of taking costs out.

Are you running into any roadblocks in terms of local operational issues, in terms of new states, new areas?

Can you kind of give us some color on -- now that you have owned these things for a while, how you see them fitting in with your overall business?

I think our numbers would have even been better in the AquaSource states had we not had some what I will call legal nuisance, condemnation issues, whatever.

In other words, I think we would done a lot better last year in Indiana if we had made the decision probably to say -- look, we're not going to try and negotiate; we're not going to try and cooperate; let's just go for it and say that we're going to fight the condemnation.

Because we've delayed rate cases, we've delayed a sewer refund tracker they call it in Indiana, because we didn't want to put the Commission in the place of having to pick between us and the second-largest city in Indiana.

And if you look at the politics, that shifted too.

The governor and the mayor of Indiana -- Fort Wayne were the same party and all that, and the election year and everything else.

What you have to -- unfortunately it's a real world; you have to consider those kind of things.

Now we've decided -- we have been fair, we know what they want; let the court decide.

But we're now going to run it like we're keeping this business, not like we may be selling it.

In Florida, midyear buying the remnants of the old Florida Water until we got our other place in shape.

We're making management changes as we speak -- and then we have three hurricanes.

I would say Florida was not expected.

I think we would have done a lot better in Florida.

That was one of the worst-performing states we had from the standpoint of O&M to revenue.

Revenue was good, but the costs were phenomenal this year, mainly because of the hurricanes.

And I think that's going to be one of our most improving states.

Now, the reason I bring up these small details is until you get those problems fixed -- the right management in place, the legal problems, political problems out of the way -- and get your capital in, you can't get the new management focused on growing.

So I think my biggest disappointment is we haven't grown as much as we should grow, although we did pretty well -- 4 or 5 percent -- but we should be growing better in Florida, in Texas, in North Carolina.

And once we get all the -- once it becomes a well-run machine -- i.e., we're doing things right, the capital is being done right, the right accountants are in place -- then management is going to be judged strictly on how much faster growth can we do with the builders.

That does help, Nick.

Really what I'm getting at is that people tend to say roll-ups always run into trouble.

You start getting outside of the kind of scale and scope that you can manage.

The Company is a lot bigger.

It has certainly seemed that you've executed extraordinarily well.

I was just wondering whether you had run into some surprises, or whether you're really just kind of doing the basic blocking and tackling cleanup that you would expect?

I would say the surprises were things that were outside of our control -- hurricanes and so on.

Probably changing out management a little sooner in the AquaSource would have been smarter for us, but we decided let's see if it will work with current management.

Some have stayed.

Some are good people -- all the people were good, just some didn't like our culture and they moved on and we put some people in from other states that we operate there, and we've done some great outside hires.

That takes time because people have to learn the system, but I think we're up and running now.

Final question is kind of what you're seeing on the acquisition front.

It certainly doesn't appear that there are very many large properties for sale unless some of these foreign owners decide to put theirs back into the hands of U.S. owners.

Are you seeing mostly a tuck-in market for you over the coming year, as you mentioned, as you kind of get back into looking at growth mode with these new properties?

Kind of what is your view on the acquisition landscape at this point?

I think the only surprise to me is the fact that sewer is now part of the mix in a much bigger way than I would have said five years ago, four years ago.

And the 4 7 10 5 is still our model.

Probably the 5 is going to be elevated a little bit just because we're down (indiscernible) ratio is down where it is.

But I think, although we have a much bigger base to work off of now, 850, 900,000, the 4 percent becomes tougher.

But we're still seeing plenty of acquisitions out there of the small type.

And the way I view AquaSource and Heater, with 20 and then basically 10 and 11, take your 4 out of that and you're still well into the 20 percent extra range over the last two years.

I'm just looking at that as five years of growth that we did in one year, which meant we have more added headaches, more aggravation -- but it gave us a chance to get even probably quicker synergies than we would have if we had done the piecemeal.

And I'm looking at -- even without any big ones, we're going to plod along and do our 30 a year and grow now more customers, but the same 3 to 5 percent, 4 percent.

And that's all we really need to keep the model going, because we have plenty of capital; we're getting dollars in at pretty good rates on the interest rate side; and our stock is still selling well above book.

So everything in the model is still in place.

Now, if one of these big ones come up and we can absorb it -- because I don't want to take on more than we can digest -- we're one of the obvious buyers, because there's not many people out there of size anymore that can handle some of the properties that the European companies had purchased -- if that's the case.

If they're interested in selling pieces off, then we'll compete in the states that we are in.

And that's another possibility that might occur with the four or five foreign owners who took over American systems.

Stewart (indiscernible), Standard & Poor's.

I was wondering if you could talk a little about President Bush's proposed budget cuts for water projects, how that might affect you?

We don't depend on federal dollars.

The only dollars we indirectly get from the federal government is when the taxes (indiscernible) the accelerated depreciation which we use quite a bit, but that ended at the end of '04.

And the state revolving loan fund, I have not, in fairness, checked the exact dollar amount.

But I didn't think they got cut too much.

They then go to the states and complement the bonds that the states put out.

So, I don't think anything in the way of water project cuts.

I would imagine what he's cutting are the big federal projects that the Corps of Engineers and the Bureau of Land Reclamation do, that basically build these big projects that subsidize some of the western states.

I'm guessing, unless you have some more specifics.

I think (indiscernible) supposed to cut the Clean Water revolving fund by about 369 (ph) million (multiple speakers)

That is on a -- let me give you the politics on that.

We never had a clean water revolving fund; we always had a safe drinking water, which is the drinking water side.

And that usually is about 1 billion to 1.25 billion a year study.

That goes out to each state, and then the state uses that to help finance their bonds.

And then they (indiscernible) their own bonds.

And I would say they're not getting paid back.

There's a lot of money in certain states in this revolving loan.

The wastewater side -- when one of the committee chairmen became head of that -- his name was Schuster (ph) -- he developed the clean water revolving fund.

But unlike the safe drinking water revolving fund, Stewart, which went to each state and then it was done by point systems -- I think if you look at the clean water side, a great deal of those dollars are earmarked for certain projects in certain states.

And it just so happens a lot of them coincide with who the key committee chairmen are on that committee and members of that committee.

And I think probably that is what the administration is doing to try and get it more in line with just strictly by the prioritization.

We wouldn't get any of those anyhow.

Okay.

You said that you would continue at around 30 tuck-ins a year?

We're very comfortable with 30, and I guess you're looking at 30,000-some customers, or a percent of the 830,000 or so customers we have now.

And annualized revenues of about (indiscernible)

I think you will see our revenue growth -- which we have always said we're looking for the 7 percent range -- probably a little higher next year because of the fact that we have Heater for the first two quarters.

You had Heater and Florida Water comparing with nothing in the first two quarters of '04.

So that is extra.

Plus, the rate increases this year probably exceeded the normal 3 percent we see annualized, because the 27 million flowing into '04 will be a little higher than that.

So, I would say they run rate will be a little higher next year on the revenue side.

There are no further questions at this time.

I will turn the floor back over for any closing remarks you may have.

We appreciate everybody's time this morning.

If any of you have questions, feel free to call Cheryl, myself, or Dave afterwards.

Thank you.

This does conclude today's teleconference.