Essential Utilities Inc (WTRG) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Aqua America second-quarter earnings conference call.

Today's call is being recorded.

For opening remarks and introduction, I would like to turn the call over to Kevin Brophy, Director of Investor Relations.

Please go ahead, sir.

Thank you, Jerry.

Good morning, everyone, and welcome Aqua America's third-quarter 2007 earnings conference call.

If you did not receive a copy of the press release, you can find it by visiting the investor relations section of our website at www.aquaamerica.com.

There is also a live webcast of this event available on the site.

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 non certain GAAP financial measures.

Reconciliation (technical difficulty) 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 up the call for questions.

Okay, thank you, Kevin.

Good morning, everyone.

We put out a very detailed release this morning.

So I will use my remarks to put just a little color on the quarter.

I will broadly characterize it as a good quarter.

It could have been a great quarter, if it didn't have the two exceptions that I mentioned in the release.

For the quarter, with everything included, net income was up 8%.

Revenues up about 13%.

We continued our acquisition program during the quarter, which I will get into later.

If we had not had the Florida situation, where we actually withdrew a rate case, and therefore had to write-off all the expenses that are normally amortized, and also had to return revenues that had already been collected pre-Q3 -- obviously we didn't get any booking in Q3 -- and had terrible weather in Texas, just 35% off as we mentioned in the release, net income would have been up almost 17%.

It would have been a blockbuster quarter, and revenues would have been up maybe another percent, up to 14% if you add back the Texas revenue.

But anyhow, what could have been isn't; and we're still proud of an 8% net income up.

The good news is, except for the weather in Texas, and the continual grinding out we're doing in our Southern operations, the 80% of the Company's revenues in the mid-Atlantic, Pennsylvania, and our new operations in New York and the Midwest are coming along.

The South is our challenge.

It has been our challenge, and we're getting towards the end of it.

I'm starting to see some light at the end of the tunnel.

Just to give you an idea, through nine months less than 20% of our revenues; it will be our fastest-growing segment; it represents only 4% of the net income.

Our current ROE, if you account for the Florida writedown, which obviously we have to because it is on GAAP, our current ROE run rate is only 3%.

Obviously, not what we would like to be earning.

4% if you don't -- if you take out the onetime issue with Florida's writedown.

Obviously, we would like to see that number get closer to the 10%, 11% we earn in every other state.

There is no reason to believe we can't get there, it is just getting in the rates, getting those rates in place.

Unfortunately, you had to fix the systems before you got them in rate.

So I can tell you now that our systems are all in place, our accounting systems under loss, and our new customer service system with the centralized call centers are all in place.

99% of all the environmental investments have already been completed or are in motion.

There are some capital additions in the South because of growth.

But that is good news, because the new growth helps pay for it.

But we basically have to get these cases in the rates, and there are a lot of individual systems that have to be put into the rate process.

That is really one of the problems was with the Florida situation.

If we take a look at it, we are now managing probably under the EPA criteria as many as 1,000 small systems.

When we group them for accounting purposes and for rates purposes, it is probably closer to 150.

Almost half of those are individually accounted for in Florida.

So you can see why it's such an important issue for us to make sure that the commissioners understood that consolidated rates -- one or regional rates -- is so crucial in order to run an efficient ship for both the customer -- you are not spending on money on lawyers and accountants as much as on new pipes and new plants.

I think that was very successfully accomplished when we had our workshop with the commissioners after we withdrew the case.

We were able to talk to them without being ex parte.

I think you will see us be filing a much different case, probably for, obviously, the same amount of money, in the 7, $8 million range, but very early next year in Florida.

We also have the Texas situation.

We are now in our fourth year of our rate proceeding, although we do collect the money in advance.

We had another very positive note, the Administrative Law Judge's decision, final decision came down in late October.

It reaffirmed the initial decision, and he didn't make any changes or many changes from all the interrogatories and rebuttals that were put in by all the opposing parties.

So we are feeling that everything is on track, but it still has to be approved by the commissioners.

I think one of the thoughts is they are waiting for the third commissioner to be named so they will have three people to vote on it, versus two that are sitting now.

So we're very hopeful that can get moved along.

In Indiana we have filed a large case, which is being (inaudible) by the city of Fort Wayne.

Not coincidentally, the city of Fort Wayne is also trying to condemn our properties, and we are fighting that on a parallel track.

In Virginia we filed a number of small cases.

We are doing well.

The Virginia commission has treated us fairly, letting us get returns on our investment.

Even to the point where we just received a rate increase in one of the divisions for 113%.

I will get much more into detail if you want as to all the various rate cases that we will be filing.

A decade ago we were a one-state Company with a lot of economy of scale.

As I mentioned, today we're in 13 states; we manage over 1,000 systems and about 150 rate divisions.

We are now moving to consolidate that back to look for a more efficient process for accounting and for rates.

Also in some cases, if we don't see future potential or a just impossible situation on some of these systems, we plan to, what I call, prune them.

Basically not spend 80% of your time on 20% of your assets.

That is what we are starting to do.

The first one will happen in the fourth quarter, and that is mentioned in the release.

That is being sold well above book value.

So it will be a gain.

Obviously, we're not going to sell these unless we can make money on them.

I am very pleased with the cost controls that are coming about.

Part of our program, of course, is making sure the South is as efficient as it could be.

It is nowhere near as efficient because of its demographics, i.e., a lot of small systems far apart versus one centralized system.

But we're putting in different operations.

We have changed the President.

We have changed one of the State Presidents.

We have three new engineers.

We're basically changing the organizational structure.

Dave and I are working with Chris Franklin, our new President there, to micromanage this situation, both the regulatory relationship and also some of the expense controls.

We are starting to see that starting to kick in.

To give you a true-up on the expense controls, I think it's mentioned in the release, 15%.

That includes taxes.

Unfortunately, that is skewed by New York Water where 25% of their revenue base is paid out in property taxes.

They were basically a tax collector in New York.

If you take a look at the entire Company, it is less than 4%.

You can see New York is an anomaly.

If we take the taxes out and just do the traditional O&M expenses, which is what I usually give you, that is basically 13.4%.

If we true it up for acquisitions, New York Water, the additional people cost of running that system and the other 15 we have done; and we true up the onetime Florida write-offs -- which actually went against expenses and about $0.5 million went against revenue, reduced revenue $0.5 million, increased expenses almost two point -- over $2 million with the write-off of the legal fees -- that comes to about 3.5%.

So if you are looking at 13.4% in O&M without the other taxes, take about 7.4% off for the acquisitions, 3.5% for Florida, you are really down to a same-store sales of 2.5% year-over-year expense.

I think that is as -- [about] inflation, we're going to look to even do better.

But we're very pleased with that.

If we look at the O&M-to-revenue ratio which many of you track, and we look at the nine months, which is probably better to look at -- three months looks even better.

But the nine months is about 41.8; and on paper we are at 42.1 now.

So it looks like we're going the wrong way.

If you take the 50 basis points off for Florida, and 70 basis points off for the New York, for the acquisitions, same-store sales again, we would be about 40.9.

So you can see we are on target with what I promised, which was to try and reduce O&M-to-revenue, get more efficient by 50 to 100 basis points a year.

That is something we can do.

That is what management can do.

It means tough decisions.

But we can't control interest rates, we can't control chemical prices, things of that sort.

But we can work to make it more efficient.

Most of it is in [complement] control and pension benefits and things of that sort.

We have really been taking some tough stands, and we will have less people working here next year than we would this year, and vice versa.

We continue to find ways of trimming our labor overhead.

For the fourth quarter, first of all, our acquisition program is intact.

This year we won't have a blockbuster acquisition like we did last year when we grew 8%.

But we're hopeful that we can still go between 3% and 4%.

The reason I am giving you a range there is because we have seen the organic growth slow down considerably.

That should be no surprise, because the housing market has slowed down considerably.

The inventory is being consumed, but new housing starts are not occurring.

So usually we look at 1%, 1.5% as what we call organic growth.

This year through we're probably not going to see that much, so that is why I'm lower end of the range between 3% and 4%.

Having said that, it is still a healthy growth rate for any utility, just on the unit side.

Of course the rate side is the other part of our story.

We're still trying to keep our expenses on interest as minimal as possible.

But when you are growing, you're borrowing money, and even -- so your interest is always going up.

Hopefully, we can lower the pace that it has been going up, because short-term rates are starting to come down.

That is where a lot of our problems occurred, when interest rates went up so rapidly.

They are now coming down.

But just to give you an idea of the kind of hustle we're doing, we're looking at two tax-frees which will come in well under 5%, which will continue to lower our embedded long-term debt cost, which is now about 5.6% on about $1 billion.

We're eligible for a $50 million deal in Pennsylvania which we plan to float in December; we hope to get well below 5% on that.

We are -- also been approved for a $17 million deal in Illinois which would be the same type scenario; it will be under 5%.

So this helps rates in the long term, also in between rate cases it should be able to help us control interest rates.

Fourth quarter, South implementation is the heaviest focus and rate cases in the South, which I will get into in a little detail if you would like.

We are also going to be busy filing major rate cases in Pennsylvania, New Jersey, and Illinois, which will be major effect on our '08 numbers.

We are going to look and continue to evaluate properties which won't be handled in 4Q but will end up sometime through '08 as to this pruning program that I mentioned in the release.

Just as a reminder for the fourth quarter, the last year, I want to give you the two anomalies that we did mention on the call, just to remind you.

Because I am not sure all the estimates have accounted for what the base number was in Q4.

That is one of the reasons you (technical difficulty) [balance] your numbers off of.

Last year, we showed $0.19 in the fourth quarter but it included two onetime issues, both about a penny.

One was we had some major claims that were reversed and therefore taken out of reserves that added to earnings, on insurance, and that was about a penny.

And last year at this time we had just received an initial Administrative Law Judge ruling in Texas which gave our accounting auditors the assurance that we were probably going to do better in the rate cases than we had originally estimated.

(technical difficulty) We reversed the reserve we had been taking on the interim rates to assume that we would get the full interim rates.

That affected revenues by a penny.

So your base in core operating, pre New York Water, pre a lot of other things, was about $0.17, taking those two onetime items out.

The dividend was raised by our Board.

I think that shows now -- it's not the second dividend increase; it's the one we announced in August, but it is payable September, we pay -- payable again.

I think that shows the confidence in the Company's growth projections, an ability to get these rates through, and the fact that we are doing very well with cash generation.

Take a look at EBITDA in the fourth -- excuse me in the third, it's up over 11%.

We are getting much more internal cash to fund some of these capital improvements that are needed and also help build shareholder value.

[So] we won't be using the external markets for equity as much as using our own retained earnings now, because of our cash generation.

You can see that in the shares outstanding, which this quarter grew almost negligibly versus the usually 1%, 2% that we used to be growing each year.

I think you can see that trend continuing.

We still have forward (inaudible).

I say the forward.

The forward equity that we did about two years or a year ago, yes, where we are still sitting with 3 million?

3.5 million.

3.5 million shares that you could call just-in-time equity; whenever we need it we can pull it down.

But at this point we're actually earning money on the cash that was generated from that.

We don't need it to do our programs, and we will pull it down as we need it.

That is a thumbnail sketch of a lot of information.

I will open it up for questions.

At this time, we would like to open up the event for questions.

(OPERATOR INSTRUCTIONS) Ryan Connors.

Morning, guys.

I had a few questions.

Number one, on this pruning program, does this mean just conceptually that you will have to accelerate what you are doing on the acquisition front in order to sustain the growth that you have been getting from acquisitions?

In other words you acquired 11,000 connections in the first nine months this year.

If you were to do the same next year, would that be offset to some extent by some of this program?

Or are these so small that it really doesn't even move the needle?

Some are small.

I will give you an example.

The one that I mentioned in the release are 16 small systems in Virginia.

We're not making any money on them right now.

Matter of fact we're losing money.

There is no growth and there's 1,300 connections.

We would have to plow millions in capital in it to get them up to the standards.

They are being negotiated to be sold to the local county, which has its own system, so we couldn't grow in that county anyhow.

About $1.5 million which is a multiple of book.

Now that is a no-brainer.

Now, if you take the 1,300, yes, we have to grow.

If we are going to hit the 4% based on a year-end number, we would have to grow faster.

But I don't think our shareholders care how many customers we grow.

I think they are more concerned about growing net income.

I think that is where I'm going to be concentrating on.

If something isn't making money or has no growth, then it is growing for growth's sake, unit growth's sake, doesn't make sense.

But I don't want to imply in any way that we are not going to do our 15 to 20 next year and bring in another 30,000 or whatever it is 4% would be -- 35,000 customers.

That is not going to be -- that is our number-one focus.

We have a whole department in each state set up for that.

But I don't think we will not sell something because it would make that number look bad, if it improved net income.

Got it.

Thank you.

The second question was just from the regulatory standpoint, can you talk about some of the -- any major developments on the horizon in any of your major states of operations?

I mean, obviously the developments in Florida are well documented.

But I know that generally the regulators are trying to sort of adopt each other's best practices.

I wondered if you could talk about anything that is happening, good or bad, I guess, on that front in terms of DISCs and unified rates and so forth, especially in your larger states.

Right, I am very encouraged -- Dave is here; he can comment because he went to the meeting; I'm going to meet with some of the commissioners in Florida at the upcoming conference -- that they now understand small water systems and so on, and the need for a more efficient rate mechanism.

And the fact that we're willing to invest, unlike a lot of small companies who are undercapitalized and just let them deteriorate.

You don't raise rates, but you don't have any service.

It was very clear to them, and people came out and said they wanted better service.

So that is why we are putting the $10 million in, in Florida.

I think I'm speaking to the commissioners this week, next week coming up, at their national conference.

What I'm going to stress is we are not as big as electric companies.

Electric companies are now starting to rebuild their capital base.

They are going to see a whole stream of rates coming in from the electric side.

If they allow us to do the DISC, which is allowable now in four or five states, that will keep us intact of only earning what they want us to earn, which is what we think is fair, in the 10 to 11 range.

And we will do the pipe up to that level of the 1% and take that off their agenda basically.

That the mechanism, since we are now concentrating on pipe, would be very favorable.

The second is crucial.

If states want us to be involved in fixing their small systems problems, which every state has, they have to adopt the kind of practices that Pennsylvania has adopted and a couple of the other states, where they reward you, not penalize you, for doing what the environmental and the policy people want you to do.

If you have to file 80 separate rate cases every time -- and then if you buy another small system it makes it 81 -- and have a separate accounting for each one of those, it just isn't efficient.

And I think that is getting through.

If we could get those two, I believe we are somewhat of a rate machine in the sense of our normal states -- Pennsylvania, New Jersey, Illinois, Ohio.

People know us.

Our service is good.

Basically, we usually [look] for more routine type rate increases.

You know, ask for 10% to 15% and usually get an award of 80% of that or 75% of that; sometimes 90%.

In the South and in Indiana, all the AquaSource, they basically [align with] it being a lot of work, and there is very little attention to accounting or environmental cleanups when their previous owner had them.

We are going in for 100% rate increases.

I would not have imagined five years ago that was doable.

And we are getting them because we deserve it, and the regulators are standing up.

Now, will they give you extra bonus points when you're asking for a 100% increase like you can get in Pennsylvania and Illinois for picking up small companies with being a superior performer?

Probably not, because they are already giving you the rate.

So this is a workout over a number of years in the South, but we're getting there.

I'm encouraged by the fact that in Virginia, in Missouri, the regulators in our first round of cases -- even though we are not anywhere near earning what we think we should, in the 10 to 11 range -- stood up and were counted and gave us a pretty big size rate increase of 60%, 70%, 80%.

That's great color as usual.

Thanks, a lot, Nick.

(multiple speakers) regulatory.

I think it is an education process; and unfortunately, we are in our infancy in the South versus adolescence and maturity in the mid-Atlantic and the North.

Great, thanks again.

Debra Coy.

Yes, good morning, Nick.

Good morning, Dave.

Nick, I would like to get the quick update on the rate cases.

What I recall from 2Q is that you had closed eight cases year to date at that point, generating $14 million in revenues.

Can you update us where you are now?

I think there was another 60, $70 million pending.

Kind of just the quick summary of where we currently stand as you planned ahead for the coming year.

Let me give you the bigger ones.

In Q4, we will be filing over $50 million worth of requests for two big states, Pennsylvania and New Jersey.

(inaudible)

In New York, we will have -- we just filed what they call a Revenue Adjustment Clause, which was not major; but we're looking at '08, '09, whether we're going to file a case or just stay with the RAC.

In Illinois in the next month we're going to file five cases.

Two smaller systems, but we will be asking for almost $0.75 million.

Then a larger case in our Danville area, which is one of our bigger divisions in Illinois.

You will have to get me that number, Dave.

How much are requests?

(inaudible)

We have two cases in Florida, excuse me, in Ohio that will -- one is already filed; we expect to get a ruling soon, that is Lake.

Stark, where we are negotiating now with the new mayor; we had wanted to wait till after the election, obviously, of yesterday.

In the South, we have a 100% rate increase request.

Brookwood, LaGrange, which we go to hearings next month on.

So far so good.

That is what state?

That is North Carolina.

Okay.

Danville, maybe you can find that number for me, what we asked for.

$2.6 million.

$2.6 million we asked for; it represents about 100%.

We're debating now on the ROE, Debra, what we deserve, the well in excess of 11%.

They're arguing a little bit on that.

So we probably won't get 100%, but I think we're going to be close.

Sarasota, we're in for a 30% rate increase which represents $2.2 million.

They have accepted the case.

That is complete; and now we're negotiating that and ready to go to the couple-month process of legalisms and hearings and so on.

We intend to early in '08 refile Florida, which would be $7 million.

We have just completed two more small wastewater cases in Pennsylvania, which was (technical difficulty) the judge this week.

It's not big dollars, $75,000, $100,000, but a 45% rate increase if we get them up to the 10% earnings level.

Of course, Texas, I will let Dave give you an update on Texas, but that is some positive developments there.

But it's not a process you rush in Texas.

It sounds like that one is finally almost done.

Well, Rick is telling us it could be before the next hearing, next judge is appointed -- the next commissioner is actually another quarter.

But at this point, we put in the Q how much we booked assuming we're going to get it; that is obviously the risk.

But at this point, all the judges and all the staff have all implied that that is the right number, so.

Indiana, we have just completed another small sewer case.

We got a 55% rate increase.

About $200,000 of revenues are coming in from the three small ones we have in Indiana, which are now earning their keep.

Except for Fort Wayne, which is not making any money, very little money.

It's because we spent so much money and we have waited for the rate case feeling that maybe we could resolve this condemnation proceeding.

We made the decision not to wait any longer; filed 100% water, 100% wastewater case.

Represents, let's see, $10 million.

We will not be overearning, believe me, if we got the whole $10 million based on all the capital we have done.

Fort Wayne had a mayor's election yesterday.

We will see who the new mayor and what their philosophy is.

But we are ready to fight, keep this franchise.

In the meantime, we decided to go ahead with the rate case, even though we know that the city probably will appeal it.

But we think we deserve it.

So you can see this is a real rates year coming up in '08.

Some of them may be late in '08, some may be early in '09.

But if we can get them all, we will be back to pretty much of a standardized process of full earning on our ROEs on all our assets.

Right, and that is helpful to get the rundown and does lead me to my follow-up question, which is it's -- you know, it is frankly a little shocking to hear Aqua America have to acknowledge getting a 4% ROE in one of their operating territories.

It looks like we are probably going to see you end up this year earning across your whole business a tad under 10%.

Do you think that we can get caught up back to the, call it, back toward 10.5% by the time we complete '08?

Or do you think it is longer?

I think it has been one of the critical issues that everyone is trying to figure out.

I think absolutely by the end of '08.

Because we have Pennsylvania, which if we can settle will be the summertime; if we don't settle it will be August, early summer.

Last time we settled in June.

I understand in Pennsylvania American is settling their case.

So I think that sets a good precedent.

New Jersey, where last case was held up 13 months because of the PSE&G-Exelon merger, which had stymied everything in Jersey.

But we think this time around, we will get faster action, and hopefully sometime in summertime next year, as late as September, have that major case.

So I think when you throw those into the third, fourth quarter next year on the same store, you'll see a nice bump.

Okay, thank you.

I don't think, in fairness, I don't think the South --.

Is going to get there?

Yes, because we should have Sarasota in place early, sometime spring to summer.

We should have the Virginia case, the bigger Virginia case, [landor] in sometime that time frame.

Brookwood, LaGrange should be decided about that time.

So they will help, but the big case in North Carolina and Florida, which could amount to well in excess of, Florida alone, $7 million, probably [over] $15 million.

I don't know [where] Carolina is at this point.

But they don't get filed early in the year, and unless we settle they really won't kick in till '09.

So I guess, the net conclusion on the South is that it is taking longer; it has been a more frustrating process getting these new territories caught up; but you haven't changed your overall view on it being an attractive operating area for you going forward.

No, they're growing faster than before.

I think what I underestimated was the lack of understanding of the regulators about the water business in the South.

They are getting it because they come to NARUC now; they understand that if you want a larger company in you can't have them file 80 cases.

In Texas they understood it; they gave us three regions, 170 cases under AquaSource.

But these are big political decisions and when people -- when you do those in line with 100% rate increase, sometimes the noise overcomes the substance.

Once we get by that piece, which is the first, second case, then it will be more routine.

They will grow.

They allow tap fees in the South, so then we don't have to spend as much of our capital for the new growth; and therefore rates don't get hurt.

No, I haven't changed my mind.

We paid a very good price for these.

Now, this is ROE on rate base, (inaudible), not on equity?

It is the equity portion of the rate base.

The equity portion of the rate base?

The other is the growth is still there.

Now it slowed down in the South, like everywhere else, but it is still triple what it is in the North even under the slowdown.

So, no.

And we don't have as much competition in the South.

So no, I haven't changed my mind.

I changed my mind on some of the management and that is why we changed it.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Selman Akyol.

Thank you very much.

Good morning.

A couple quick questions.

First of all, in the $0.02 on the case withdrawal, was that all recognized in the third quarter or would there be more to be coming in the fourth quarter?

No, it's everything.

First of all, let me explain how the expenses work.

When you are doing a rate case you're running up legal expenses, accounting expenses, outside consultants.

You -- I don't want to call it defer, Dave.

Yes, that's the right word.

(multiple speakers) You defer it because you usually get that back in a rate case.

If you don't get it all back, you write it off as you get the rate case.

But if you get it back, it is usually then amortized over the space of the rate case, which is usually two years, three years.

Therefore, it is a nonevent in the whole scheme of things, because you get the revenue in the rate case to pay for your expenses you incurred to get the rate case.

In this case, when we withdrew the case, we couldn't legally under accounting rules say that we could ever recover this.

We may have some position when we go back into the rate case.

But we basically don't have a rate case anymore, there was nothing to amortize it against, so it was completely written off.

$2.3 million of incurred expenses through June 30.

And then we started expensing in the third quarter another, what, $300,000, Bob, to close to case down?

So if you want to look at what hit the third quarter, it was almost $2.6 million of expenses that normally we wouldn't have had.

Let alone the $571,000 which was in the Q, in the last Q, that we had already collected and booked through June 30, we had to return that, reverse it and return it.

Then there was another $0.5 million that we never booked, because we collected it.

That gets you up to the $1.1 million that we're returning as we speak.

But we knew we weren't going to get it, so we didn't book it, obviously, in the third quarter and then reverse it.

But that you could argue is a hit to revenue in the third quarter.

Having said that, there is no revenue that is going to come in from rates in the fourth quarter in Florida till we refile.

So if you have had that worked in your model, you have to look at that.

There is no -- I mean, we can't go in till early '08.

Okay, so just -- did you recognize that all through the O&M line?

Where did you--?

Revenue was reduced by $571,000.

We also did not book another $500,000 in revenue that we had already collected because we knew we had to give it back.

We recognized $2.6 million pretax, is that right, Bob?

Actually, it's $2.3 million, and that was recognized through the O&M expense line.

So that is on the rate case expense side, legal and accounting.

Okay.

Then as you anticipate refiling this in '08, would your expenses then be a lot less than $2.6 million there, or $2.3 million, since you have already done this once?

I hope so.

Yes.

What our former rates person did was decide that we were going to file 80 cases and then try and merge it at one time.

I think we are going in with a different approach this time, Dave.

We are looking at a lot of different strategies.

That is one.

But we're looking at ways to mitigate the cost by, for example, inviting the Florida Commission to audit portions of our costs in advance, which they have done in other situations.

And other avenues that we hope will streamline the case and keep cost to a minimum.

Okay.

Then, Nick, in your comments you made a couple comments looking back into the third quarter of '06, saying you had some one-time gains that amounted to a penny here and a penny there.

No, fourth quarter.

Fourth quarter?

I was giving you what you should look at as the base (multiple speakers).

I got you, okay, and then --.

4Q '06, if you look at those two one-timers, and we had 19, I would say you should adjust [the] 19 last year, if that is what you're using your base as, to what was more realistic ongoing operating (inaudible).

I got you, appreciate that.

Then, lastly, just any comments in terms of the drought in the Southeast and impact on you?

Oh, yes.

Well of course, there was no drought in Texas; that is the 35% less sales.

That was all rain.

But in North Carolina, we are in mandatory bans of -- we didn't run out of any water, which is the good news.

But we have -- it has been very, very dry.

We have had bans on in North Carolina, which of course affects your sales.

But it's more important that you have the water to serve people for what their needs are.

It has had a little bit of (inaudible) they declared the official drought it started to rain a little bit in the Southeast, but they have a long way to go.

Florida is not as affected, believe it or not, at least in the areas we are in.

North Carolina was.

Virginia was dry, but not terribly dry.

Got you.

Then go-forward basis, does this do anything to further discussions on decoupling?

Decoupling?

Oh, decoupling, yes.

Well, we do decouple now; that is the New York model.

It is fine.

As long as we know what the rules are, we can do very well and be treated fairly.

But some states just don't like the idea of having a true-up, because it takes all the risk out of your revenue side, I guess.

Whichever the states want we will do it.

We are not against it, we are not pushing it.

I think American probably is going to make more of a policy issue of it than we will.

We will support it if that is what the regulators want.

I think gas is really trying for that because they have such broad springs -- broad swings (inaudible).

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) It looks like that was the last question.

So I will turn call back over to you, sir.

Okay, thank you, everybody, for your time.

If you have any more specific questions, Dave, myself, Kevin will be available at your convenience.

Thank you.

This concludes today's teleconference.

You may disconnect at any time.

Thank you and have a great day.