Essential Utilities Inc (WTRG) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Aqua America Incorporated First Quarter 2009 Earnings Conference Call.

Today's conference is being recorded.

At this time, I will turn the conference over to your host, Mr.

Brian Dingerdissen.

Please go ahead, sir.

Thank you, Darrell.

Good morning, everyone.

Thank you for joining us for Aqua America's First Quarter 2009 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 aquaamerica.com, or call Fred Mortino at 610-645-1196.

There will also be a webcast of this event available on our site.

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with Dave 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, references may be made to certain non-GAAP financial measures.

Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the Company's website.

Nick?

Thank you, Brian, and thank you, everyone, for joining us this morning.

I'm pleased to report higher first quarter results, a great start to fiscal 2009, which I think should be our tenth straight year of year-over-year net income increases.

And I think it's a consistent record that I believe very few of today's companies in today's business environment can claim.

Revenues were up a strong 11% due chiefly to rate increases.

However, I'd like to note that unlike many utilities and industries, our sales are still up.

Customer growth has slowed considerably due to the housing slowdown and the fact that we sold two franchises last year at Woodhaven, Illinois and Fort Wayne North Division in Indiana, and that represented almost 2% drop in our customer base '08 to '09.

But year-over-year our customer count is still up slightly, and that's why we're still not seeing a downturn on the sales side.

That customer growth helped offset slight volume drops in our commercial industrial sales, which obviously are geared right to the economy.

However, commercial industrial is only 17% of our total sales volume, so it was a bigger drop on a small piece of our sales.

We're hopeful that we've seen the worst in the housing downturn, and therefore lack of builder organic growth, which is non-acquisition, just it happens because the builders build in our existing franchises.

To give you a comparison, in '09 Q1, only 500 new homes were added and in a normal year it would be 2,000 to 2,500.

You can see how far down housing has dropped.

In looking at the building permit starts, which is the best indicator, the run rate in April of '04, '05 and '06 was at 2 million.

It dropped to $1.5 million in '07, and in '08, this time last year, it was still running 800,000, 900,000, which people thought was probably the bottom.

This April the drop was now to 500,000, which is clearly less than what you need just to house the continued demographic (inaudible) of the country.

So, I'm hopeful that we're seeing a bottoming out now and we should start seeing it on the uptick.

We're pleased that we're still seeing our normal flow of acquisitions.

We did five small ones to date, and we have another six in the pipeline that we expect to announce by the summer.

And our phone is ringing and our balance sheet is as strong as it's ever been, so I'm very optimistic on the acquisition front going forward.

Looking at the cost side of the net income statement, O&M expenses were up 4.2% versus the revenues being up 11%, and that's allowed our efficiency ratio, something we track very carefully here, O&M to revenue, to drop to 43.4 in Q1 for the three months, from last year's 46.2.

So, a precipitous drop.

If you want to take a trialing 12, which is probably more realistic because our revenue are not consistent each quarter.

Trailing 12 basis, the efficiency ratio is 41.2 in Q1, and for the 12 months ending Q1 '09 versus 42.5 for all this time in '08.

So, again, a nice drop.

And for all of '08, the ratio was 41.8.

So, if you're going to look at your '09 model, if you take the sale of Woodhaven, which under accounting rules the gain was attributed to a reduction in expenses, because that's the way it's done.

If you want to add that back and say what the true run rate may have been, it would have been 42% O&M to revenue.

And for the end of this year without any anomalies that we're aware of, we expect that to be at least 150 basis point improvement just because of the ongoing revenue increases we're seeing and the control of expenses that we have.

Now, that assumes we have a regular summer, have a great summer, it would be lower, a rainy summer would be a little less, and that fuel prices stay fairly reasonable and don't surge like they did last year, doubling in two quarters.

But so far so good.

I'm very pleased with the continued cost-cutting controls that we've had in place for years here, so we didn't have to take any draconian measures, which usually hurts the structure of your company.

Of the 4.2% increase, to give you an idea in O&M, and this is included in the efficiency ratios I just gave you, about a third of that increase, well over a million, was one-time, non-cash charges as a result of finalizing the rate cases that we just did, especially the one in North Carolina.

To give you an idea, we had to write it off, it's non-cash, it's already been expensed, but they disallowed a portion of our rate case expenses.

We had lawyers and people that we had to hire, and they just allowed a certain set amount, which was less than what we had expended.

And they also imposed a more stringent capitalization policy versus expense.

In other words, we had capitalized on things that the thought should be expensed, which means that we had to take the one-time non-cash write-off.

And those issues were things like, I don't know if (inaudible), but a little bit of labor, but grinder pumps, which are pumps that grind up waste as it comes out of a house before it goes into small pressure lines.

We definitely thought that was a capital investment, but because they break so often, I guess they felt they would have to be expenses for maintenance.

And something called jetting, which is needed every 5, 10 years, we actually cleanse the lines with a heavy pressure contractor that comes in with this big truck, jetting truck, and we thought that was a capital expense.

They disagreed and said it was a regular expense.

So, of course, now we're doing it the way they want us to do it.

But if you take those one timers out, our core expenses therefore up were about two-thirds of this 4.2% that was the GAAP reporting.

You can do the math to see what the quarter increases were, and they were generally due to water production costs.

That's electricity, which is still going up; chemicals, which has been stubbornly up.

I think we're going to have to start seeing them come down later in the year with the economy, but they haven't yet.

Purchased water, which in many cases it's more practical for our rate payers for us to buy water from a municipality or another water company than build the plant ourselves.

And unfortunately everybody's rates went up last year, so we had to pay more.

And then just normal wage increases.

Now, on the other side of the coin, we were helped by the falling fuel costs, which hopefully they'll stay down to the $2.20, $2.30 level that we're seeing today per gallon.

And very pleasantly we saw a drop in bad debt expenses, validating our heightened collection processes that we put into place mid-year last year, recognizing the recession could hurt us.

If you look at our bad debt to revenue, 1.3% of sales in Q1 '08, it's dropped to 1% in Q1 '09, and we think for the full year we'll be below the 1%, which is pretty good, even in good times, for most utilities.

But this is really only because of the current recession (inaudible).

I'd like to go over three major issues that I think are important to emphasize on this call.

First of all, you'll note in our release that we expanded our capital investment program to a record $300 million, or put in perspective almost 50% of our revenues for the year, and three times our depreciation.

So, a very, very intense capital investment program.

And we're able to support -- I'll get into details on that -- we were able to support this program to the Company's strong financial position, our access to capital markets and recently our especially low interest loans, which keep rates down.

And increasing operating cash generation that we've experienced in the Company, which will almost completely cover our capital costs.

Therefore, even with this increased investment program, we see very little equity dilution going forward in '09 and even into the future.

We're seeing steady progress -- the third item is steady progress on rate relief to support the needed investment in our country's infrastructure as Aqua continually addresses the regulatory lag that effectively -- that adversely affected us, excuse me, in earnings from mid '06 through mid '08.

Now, in the quarter we spent $62 million on improvements.

That's a record.

Obviously, you spend more in the next two quarters, because that's the warm months in the Northeast, when you do more of your construction.

We're addressing the few remaining environmentally driven investments that we have to do to get the Aqua source states in full compliance.

I think by the end of '09, all those will be accomplished.

There has been a huge amount of investment.

We've upgraded our major water and wastewater plants throughout the country for two things -- future growth, so that we have the capacity needed just to go forward and grow; and we're also addressing at the same time the new, more stringent regulatory requirements that were initiated probably six years ago but aren't really due to be done.

So, a lot of our cities are still working on these.

We'll be, actually, in full compliance probably before the end of this decade, and they're not really due until early into the next decade.

And, of course, we're making major efforts to address our aging infrastructure, which is DISC eligible, that's the surcharge eligible in the rate regulatory scheme.

And that will probably be the major portion of our spending going forward as we clean up all the old environmental problems and establish our plants to meet all the new standards.

So, a little altruistic, but Aqua is very proud of our major capital investment program, and actually being counter-cyclical to most companies in doing our part to restore the country's economic momentum.

And it's really been made possible because of the Company's strong financial situation as we entered this recession.

And that allows us remarkably good access to the credit markets.

Actually, lower financing rates than we've ever been able to get, yet our product is in demand even in a recession.

So, there is very little risk of our revenue stream not being there to support it.

Financially, we are accessing Federally supported low interest loans using State Industrial Development Bonds.

We just received an allocation to do $58 million more in Pennsylvania on top of the $22 million we did well into last year.

And we think we'll probably go out this summer on that and probably we're looking low fives as an interest rate, assuming today's market.

And, once again S&P has reaffirmed our A+ rating on our largest subsidiary, Pennsylvania, which, of course, will be issuing these bonds.

We also have a lot of room left in our lines, $74 million of unused line capacity, and we're borrowing at less than 2% for our short line.

And that's what carries us forward in the major capital program, and then we capitalize it with retained earnings and/or new debt that we might have to issue.

I truly believe that now is the time for strong financial utility companies to invest in America.

We're going to be around for hopefully a hundred years.

The pipes are going to be around for a hundred years, and there's no better time with cost of capital for strong financial companies to invest.

I mean, interest rates are down.

We find that for A+ rated companies, all capital that we need is available.

On the other side, we're getting more stretch for our dollar spent because the costs for these projects are coming in well below estimates.

And therefore we're being able to do even more with the same amount of dollars.

Now, Wall Street has truly recognized Aqua for increasing internal cash generation.

Just to give you some numbers on that, if you take our $62 million we spent in the first quarter, we actually -- our EBITDA was over 76, and if you want to take net income, depreciation, amortization and the deferred tax, to look at a different operating cash flow perspective, we actually had all of that covered.

We covered the whole $62 million just with our operating cash flow.

For the year, as I mentioned, as it accelerates, we'll probably spend $300 million this year, but with the increasing cash flows we're seeing, we'll probably get 85% to 95% of that covered strictly with our operating cash flow.

So, we're very pleased that we're able to do more with less, less in interest rates and less equity dilution and still get our job done on this needed investment for our system and hopefully helping with the counter-cyclical investment in our recession.

Now, positive regulatory treatment is the other reason that we're being well received by Wall Street and therefore obtaining our lower cost of capital.

Our results show that regulators understand the need for continued spending on infrastructure improvements even in difficult times.

There was a fear of many analysts that the formula would get changed or something of that sort.

I think the pressure will be on any utility that goes in with imprudent investments or high operating costs.

But, as you know, we're probably one of the most efficient utilities in that sense in the country, and almost all of our requests are for the capital we're putting in, which we're finding utility regulators still recognizing have to be done.

In that line, we received approvals just recently in North Carolina and Florida on our rate filings.

This was our first complete experience before the North Carolina and Florida regulators, and I think it's fair to say we now know what their rules and priorities are, and hopefully will be even better prepared for future actions before them.

In North Carolina and Florida, we did receive two-thirds of our requests, and the -- I think we more importantly built some important new relationships with these regulators and understand how they like the books to be kept and what the rules are so that we won't have these kind of write-offs that we had to take this time next time.

So, in summary, even with a record number of main breaks, which was an ironically very cold three or four weeks this winter, where main breaks just went off the chart; some unplanned noncash charges due to the finalization of the rate cases I just mentioned, and experiencing the continued negative effect of the economy in the first quarter, i.e., lack of new homebuilding and the industrial slowdown, which is causing some volume sales in that sector, I have to tell you, Aqua management is very pleased with our financial results, and we're actually looking optimistically at the rest of 2009.

Open it up for any questions.

Thank you, sir.

(Operator Instructions) We have Jim Lykins with Hilliard-Lyons.

Please go ahead.

Good morning, everyone, and congrats on the quarter.

A couple of regulatory questions first.

You mentioned that you have the consolidation of some rate structures in Florida and North Carolina, and I'm wondering in those states if you now have the single tariff pricing or if there is still a little bit of work to be done there?

Not yet, but getting closer.

In North Carolina, there were one or two outliers whose rates were so low they felt to put it into a consolidated rate just wasn't -- the timing wasn't right.

So, I think we went from, I don't know how many rate divisions, to four, I think now, of which one -- maybe five -- one big -- two big ones, which are statewide water and statewide wastewater.

And then we have Fayetteville, which is our Brookwood Division, which we went from two to one, and that's only water, and that's on a separate rate structure.

And then there are two, either they're water or wastewater divisions on the coast, which have the seasonal aspect to them.

They wanted to keep those as separate, but didn't say we couldn't try in our next filing to put it all together.

Okay.

Florida, we started with 80 divisions, and I think we ended up with seven or eight.

Oh, wow.

I mean, big steps.

And I think regulators understand both for workload.

I mean, you have to have different accountants for each of these divisions.

The smallness of our industry, which means you're overwhelming the need to have separate divisions with administrative costs which don't help anybody, the company or the customers.

The best is, if the US Postal Service tried to say how much it would cost to deliver a piece of mail from New York to Philadelphia versus New York to Frankfurt, Kentucky, the price would definitely be different.

You have different rate structures and different (inaudible), and it just doesn't work that way.

So, it's -- a consolidated tariff is the common theme for electric companies, both service, and I think we're getting there in all our states.

Were there any others that are next on the docket to try and get the single tier pricing?

We still have Virginia.

These are all the states that AquaSource was in.

They have 21.

We're going to be filing a case this year where we hope to get it as low as two, one water and one wastewater.

We'll see.

And Missouri still has separate rate structure.

Not a big state for us, but we tried to consolidate that last time and they denied it, so we got a reasonable rate case, but all different rate structures.

And Maine does not consolidate rates.

But most of the rest are moving toward single tariff pricing.

Okay, that's good news.

You also mentioned that the regulators recognize the need for continued spending on infrastructure despite the economy.

What I'm wondering is if you think that they're still being fair and if you may even have changed, or thought about changing the timing for filing any of your rate circumstances?

I think if you try and time the economy or regulatory philosophies, you're in trouble.

We run this company as we know what we have to do.

Most of our rate cases are driven by capital needs.

We're doing it based on what the EPA wants, so it's prudent.

And when it's time and our lag starts occurring, I mean, this didn't happen in the south because we had to fix everything before we could go in.

But I think regulators appreciate it a lot more when you're in on a more normalized time period and your requests are single digit than when you have to ask for 70% rate increases, 100% rate increases, which makes it very difficult politically.

So, our strategy would be to not time it around what we think is a new philosophy, but really around need of the capital.

Okay.

And a couple of questions about acquisitions.

I'm wondering if you can just make an -- and I know you can't comment specifically, but maybe if you can make some general comments about what you're seeing out there right now with the acquisition landscape, what kind of opportunities.

And also you said there are six in the pipeline right now.

I'm wondering if those are six more tuck-ins or if there might be one that's a little more sizable, and also what the timing might be for when you'll make an announcement with any of this?

The six-year tuck-in, because in our corporate development department, we have one person in each state.

Their job is to get as many of these small private or public into our system where we have economy of scale.

And, as you know, there are very few "big ones," because there are only 11 of us left, 12 of us left who are publicly traded.

But I'll answer it this way.

I think municipal governments have not yet really addressed the real core deficit some of them are facing.

There's a lot of states now which are cutting, and therefore they're going to cut aid to some of the (inaudible) towns and cities so they can live within their means.

Those cities are using economic stimulus funds to get by on the current budget.

They're asking for pension deferrals, which is another way of saying can we stretch out our ERISA requirement a little bit and inevitably they're going to come up with the money.

All those kind of things are happening in the '09-'10 fiscal year budgets that I see occurring.

And I think it's going to come home to roost in may one year, maybe two years, maybe three years, at which point they'll either have to raise taxes considerably, cut costs considerably, or look at asset sales or different ways of privatization to take some of their unneeded governmental services off their balance sheet.

And I think there will be opportunities for all the larger water companies in that sense.

As you know, we're not big into O&M, but if the right opportunity comes across, we will do it.

But we think that the smaller towns will even be more affected percentage-wise by some things like pensions and expenses of their labor versus revenues from growth, or lack of.

And I think that's the target market where I think maybe privatization in that area would be better for the town to just get out of the business versus staying with the assets and let somebody else run it.

In the meantime, we're also seeing -- I'm sorry for being so long-winded.

In the meantime we're seeing some of the smaller companies who are private who years ago wouldn't even talk to us when we go in with are normally, I call it prudent, they called it cheap, offers, are now revisiting some of those offers saying maybe that we weren't unfair to them.

And we're starting to see some of that come back.

That's good to hear.

All right.

Thanks, Nick.

We take a question from Ryan Connors with Boenning & Scattergood.

Please go ahead.

Good morning.

Nick, remarks have been very detailed.

I don't have a whole lot more, but I wonder if we could just continue on the issue of municipalities and the fiscal duress, and whether or not that creates opportunities, and to what extent you're going to participate in those things?

You mentioned the O&M, I guess what we would call the contract operation side.

It does seem to me that that's a way that many of the municipalities appear to be going as opposed to outright asset sale.

And you mentioned there that that's not something you traditionally been real into, I think, were your words.

And obviously you've got the technical capability to participate there.

You've got a great brand name behind you.

What is your strategic thinking behind why that's not an area where you're real interested in growing?

Well, two things.

Margins in that business are very low, a lot more risk from a standpoint of you don't have the contracts.

You bid for it in some cases every 30 days.

On the other hand -- and in the case where your capital is stressed, which it was 10 years ago, let's say.

All of us were trying to look at EPA rules and pipe needs that we couldn't imagine where we would get the money and the capital to fix it.

As I mentioned earlier, and we'd be glad to give you much more detail on this, Dave and I and Brian.

We're seeing internal cash generation we would have salivated over five years ago, which means that we have a little bit more chance to still do what we have to do for the regulated side, and have a little more opportunity to put some more capital in other areas that maybe are not our highest margin, but aren't using cash up, either.

So, one would be whether analysts still give us what they consider the right premium for a regulated company when your O&M to revenue ratio is more like 80%, right?

You don't make anything more than 20% margins on a company like that.

You don't make the kind of margins we're seeing, where it's a capital intensive business.

So, I think that's one of the decisions we have to make.

There was no decision when you only had $1.00 to invest where we were going to invest it, and that was in the regulated side, because that's our core business.

But now that we're seeing that we're getting ahead of the curve, we're in more states, I think you're exactly right, municipalities are going to look at privatization, but many will not take the ultimate step, which is why are we even in this business?

Everything else, telephone, electric, gas is private, why is water not?

But with continual federal supports and all that, it tends to want to keep it in the municipal realm.

So, looking at O&M is something that we would absolutely do.

I don't want to imply to you we're going to be going into it 50% of our revenue stream or anything.

Sure, and just from my perspective, you mentioned the analysts' perception.

I mean, even if it gets a lower multiple in theory, if it's accretive to earnings, then it adds shareholder value.

So, I guess that's the other side of it.

I do want to talk, also, about cash deployment priorities.

You mentioned the very robust capital spending program in your prepared remarks there, but you also had a very nice increase in the dividend just a couple of weeks ago there.

So, that's something that the dividend has been growing nicely over time.

The fact that you're gearing up CapEx here, is that going to impact the payout on the dividend or the increase rate in that over the next few quarters, years, etc.?

I don't think so.

We've always paid, I think 18 years in a row we've raised the dividend, pretty healthily, too.

I think if CAGR is probably 7%, which is pretty healthy CAGR, we're still a retail stock, 60-some percent of our stock is owned by retail investors, who are very much buy and hold, including my aunts and uncles and everybody else, so I'd have to hear it at the kitchen table, (inaudible), because that's what they want.

Institutional investors have been very interesting.

They weren't as much into the dividend, but recently they're supportive of a reasonable payout ratio.

So, it's always a struggle because some board members feel like if you can get 10% on your money, why are you giving it away?

On the other hand, we think there is some reason for shareholders to get some return annually on their investment versus just look if this is a growth stock.

So, that's our new motto.

We're not a traditional utility, where you buy it as an enhanced bond, and we do have growth potential, but we have to come up with a good balance.

So, I would think that our board will probably lean towards keeping our dividend policy fiscal.

Okay, well, great.

Thanks for your time and congrats to you and your staff on the solid results.

We'll take our next question from Heike Doerr with Janney.

Please go ahead.

Good morning.

Nick, with North Carolina and Florida rate cases completed, where do you think we end 2009 as far as the ROE on the southern states?

I believe it was 35% in 2008.

Yes, I'll do it individually for you, Heike, because I think they're all -- it's hard to group them all together.

Indiana is doing pretty good, but that was an AquaSource state, but we put that in the north.

Texas is, even though it took us four years' delay, we're finally getting the rate relief, and we're seeing probably in the 7% range of ROE And that should improve as we get some enhanced revenues coming in.

South Carolina, it's very small, but we're in the final stages of getting our rate there, and that should get it to almost full earnings.

In Virginia, we've always had earnings, but with so many rate divisions, as one goes up, another one goes down.

We've put a lot of capital, four or five times depreciation in Virginia, so it's hard to stay on top of it.

We continue to put money in.

But if we are successful in this rate case that we're going to be going in for this year, I think we'll move up from the mid single digits.

We're somewhere around 5 now, and we'll get closer to the 8, 9.

There will be some lag because we're still doing more construction going forward.

But sooner or later that will peak.

Just like Texas now, we're spending just a little bit more in depreciation.

The biggest disappointment, as you can imagine, has been Florida.

We needed a rate case.

There hadn't been a rate case there for 15 years in some of these divisions, and we had the false start in '06.

So, we actually lost money.

I mean, I think probably I'll give you the numbers, it's easier.

I think in '08, we lost $3 million, '07 we lost $2 million.

That was all the lost write-offs because of the failed rate case, and the fact that we didn't earn on any -- all the major investments we're doing in Florida.

So, that's now going to turn around because of the rate case, and I think this year we'll turn that loss into a slight profit.

So, I wouldn't brag about ROE, because we're worried about not losing money.

So, it goes from a negative at least a positive.

And therefore we're going to need more growth for continued relief to get up close to the mid single digits probably in '10.

In North Carolina, because of the write-offs in the case, it's probably not -- if I gave you a number it wouldn't be as true a number.

We've had two negatives in North Carolina.

One is they have had a drought and sales were way down.

But I think if we look at -- let's take '09, we have a case that just occurred.

We didn't get what we thought -- that we asked for, but we got two-thirds of it for half a year.

So, when you look at it that way, I think the end of the year we'll be looking at maybe 3%.

But then when we get the next half of next year, that will help, and we're going to probably be going in for filing on the Fayetteville area, where the water rates are still very low and we're not hitting our earnings.

So, I think we'll build it up in '10 and '11.

Great.

That added level of clarity was helpful.

And you mentioned the consumption patterns of the C&I customers.

What are you seeing on the residential side?

About the same.

We're seeing -- we've always seen maybe 0.5% a year of consumption decay, and that's because of smaller families, low flow toilets being installed, and whenever your plumber redoes your bathroom, even in an older house, all the new houses use less water.

And that re-ratcheting you can do two ways -- go in for consistent timely rate cases, which means you know you're going to have a lower volume, so therefore you need a higher price to keep your revenue requirement, or you can do it like they're doing in California and trying to push it all at one time with -- they call it a RAM, a Revenue Adjustment -- what do they call it, a RAM?

Yes, Revenue Adjustment Mechanism, okay, that's what it was.

I mean, that's another way of doing it.

But if you want to take a look at our numbers, I think this is relevant.

I think in California, two big California companies, the average usage is somewhere around 8,000, 9,000 gallons a month.

In Pennsylvania, our biggest subsidiary, and if you want to take Ohio or Indiana, or any of them, it's all in the low fours, 4,300 to maybe 4,800.

The South being a little higher.

So, our risk of less usage because of this constant 0.5% a year is probably very close to what would be the acetope?

for what the last you can use.

Now, you could argue don't take a shower every day, never water your lawn, and you could drop it probably to 2,500 gallons a month.

But I think reasonable lifestyles in the Northeast, 4,000, 4,200 is probably as low as it's going to get.

You haven't seen a current economic decline in residential consumption besides the historical trend?

No.

Okay, thanks.

Don't forget, that's offset because we've had more customers.

If we were a city that was losing population, then that would be elevated.

If there is that 0.5%, it's masked by the fact that we add customers.

Right.

I think that's really I think Ryan's question, or Jim's was about the municipalities.

They have three things going against them.

Many times municipal wastewater and water systems have revenue streams coming in from builders because they charge builders what they call a CAP fee and count it as revenue, incoming revenue.

We count it as [contributing] property.

But that helps subsidize the system.

And then, of course, growth means more customers at more rate.

If you stop growing then you don't have the CAP fees, and in some cities we're starting to see a decline in population, which means you actually have to raise prices just to make up for the people who have left.

And I think at that point it becomes a vicious cycle that the economy of scale need to spread out the places that are growing, and that's why I think this is not a one-year trend; this is a 10-year trend.

But it's inevitable.

Great.

Thanks, Nick.

(Operator Instructions) We have a question from Jonathan Reeder with Wachovia.

Please go ahead.

Hi, Jonathan.

I wanted to get a quick clarification on the $2.4 million depreciating amortization rate case adjustment charge.

Was that one time or is that due to like a change in the depreciation rates in North Carolina?

Both.

It was one time, however, and we had to make it all up at one time.

I'll let Dave explain the intricacies of it, but that 20-whatever percent, 22%, 23% increase in the quarter-over-quarter depreciation is probably -- don't model that in for the year.

I just got that sheet.

I think depreciation looks like high teens, 15%, 16% for the year, even with this one-time anomaly, but then it will start going back down to the 10%, 12% range it was before.

But, Dave, do you want to explain that?

Sure, John.

It was primarily two things.

It was, number one, the Commission imposing a different deprecation methodology on the Company, different than the one that the Company had utilized during those early years largely because they felt the projects weren't being closed on as timely a basis as necessary.

And so of the $2.4 million, that was about $1.6 million, and it's just a one-time catch-up from years ago up through the current period.

The remainder was again in the deprecation area due to an incorrect amortization rate of the Company's contribution in aid of construction account.

So, that had been amortizing too quickly.

And, of course, it's contra-depreciation.

So, to reinstate that on the books, once again, the other part of that one-time expense.

Okay.

And that part would kind of be on a going forward basis as well, that pickup?

Exactly.

We'll get that back going forward.

We now know in North Carolina what the rules are, and accounting will follow them and we shouldn't have [any debt].

Okay.

So, between the nonrecurring, the catch-up portion as well as that other O&M, the $1 million write-off is kind of like one penny, I guess, total kind of nonrecurring items in the quarter?

Penny and a half.

I'd say a penny and a half.

Okay.

And then if you could, Nick, could you give us a little more clarity.

I guess the $8.2 million in pending cases, is that just one case that's out there, or --

There are a number of them.

The ones we have in the queue as we speak, we have a county in Florida which regulates itself through the Commission.

That's Sarasota?

No, Citrus this case.

Sarasota will be later this year.

Darlington Hills, Indiana, a huge rate case -- a huge rate increase but not a huge rate case.

We had to double the investment to the community so they could get fire protection and reliable service, and now they're paying -- they will be awarded new rates.

Fort Wayne, we have our second phase coming in in June of our rate case that was allowed last year in two phases.

Pennsylvania wastewater, we have 11 cases in that we're trying to consolidate.

We expect some kind of ruling this summer on that.

South Carolina, which is our first case in South Carolina.

We had our hearings and we're expecting some action on that this summer.

And then our first case with New York Water Service, which is a 12% request in New York and we've put a lot of capital into New York for service.

So, they're the ones that are moving as we speak.

And then, of course, we have 60 million more we're going to be filing towards the end of the year with the big one being -- big ones, I should say, being Pennsylvania, New Jersey -- I'm missing one -- Ohio.

Okay.

On the 8.2 pending, are those kind of first half timing or how should we be thinking of when those incremental revenues might be coming in?

I would gauge some of them for 4Q.

Fort Wayne you can gauge and we'll give you specifics on the numbers.

Q3, Q4, because that will start in June.

Citrus is very small.

Darlington will probably start in Q3.

The wastewater we hope in Q3, but maybe Q4 to be conservative.

South Carolina, Q3, and New York Water Service probably not until next year, because there is a set time in New York that they take.

Okay.

And then one other comment that kind of caught my attention in your release.

You mentioned about the long-term growth rate and return to the historical earnings growth.

I know 2009 is somewhat of a catch-up year, but what is the new annual target for 2010 and beyond?

Are we still looking at 10% EPS?

I know it's getting tougher off the larger base.

Yes.

A lot of it will depend on ROEs, granted.

We have the catch-up, it probably won't be done just in '09, as I mentioned to Heike, regarding the -- there's a little bit of catch-up just to get full earnings on the capital we've already spent [south].

Jonathan, we were just talking about what we tried to imply in the release.

Obviously, weather is still dependent, regulatory release in the sense of what ROEs will be going forward.

But I think the fact that most of our expending going forward will be surcharge dependent will help, and a lot of it is going to be what those surcharges are granted at, obviously, you know, 10, 11, whatever.

And the low cost of capital and not diluting earnings.

If you remember back, we used to grow net income 13%, 14% and have 3%, 4% dilution, too.

And we don't see any of that need at this point unless we do a larger acquisition, where we're going to have to really expand our shares more than the 1%, or less than the 1% we've been seeing in the last couple of quarters.

Right.

So, I guess give --

Yes.

I mean, I can't predict.

We don't give forward guidance, I don't want to imply that.

But I think we're out of the lag, I guess.

That's what I was trying to say.

Mr.

Reeder, any other comment or question, please?

No, thank you very much.

We do have another question from Michael Gaugler with Brean Murray, Carret.

Please go ahead.

Morning, everyone.

Nick, I've been looking back for the last couple of quarters at your interest expense line and it's staying fairly constant.

As we look forward, should we be thinking that that's going to maintain?

The interest will stay right around 10% of revenue.

That's a drop, because it was always closer to 11%.

It's now getting closer to 10%.

And the reason is we're borrowing our imputed cost of $1.2 billion of cost we borrowed is lowered now to 5.4%, and even though we're borrowing more, keep borrowing, it keeps coming in at a lower rate.

We have little refi that we're going to be able to do next year, which should take some 7%, 8% debt out, assuming the debt stays down.

And to give you an example, this is phenomenal.

Because we're eligible for the economic stimulus plan, New Jersey, we're in for about $5 million worth of loans, which will be at less than -- half of it will be at zero and the other half will be at market rate, so let's put 2.5%, 3% there.

Pennsylvania, we just got another $3 million out of PENNVEST.

We still have $30 million in the queue, which is somewhere between $1.5 million and $3.5 million.

And in Maine, they actually gave us $5 million of zero interest loans for 25 years.

So, it's hard to beat that rate.

So, that's helping on the interest rate front.

The tax freeze, which now are AMT eligible, and that will lower that by probably 50, 75 basis points.

So, as I said, the times are good for us to be investing.

All right.

Thanks, Nick.

That's really helpful.

Gentlemen, we have no further questions in queue at this time.

Thank you, everyone.

This does conclude today's conference.

Thank you for participating.