Essential Utilities Inc (WTRG) 2009 Q3 法說會逐字稿

Good day and welcome to the Aqua America Incorporated third quarter 2009 earnings conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Mr.

Brian Dingerdissen, Director of Investor Relations.

Please go ahead, sir.

Thank you, Michelle.

Good morning everyone, thank you for joining us for Aqua America's third 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 Martino 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 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 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.

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.

Thanks, Brian.

Thank you everyone for joining us this morning.

I think today's quarterly results announcement will reaffirm the soundness of our basic business model and also reaffirm that the Company is executing well on that model.

And although we are pleased that we hit first call at $0.25, this would have been a much better quarter by probably at least $0.03 had it not been for very adverse weather.

It turns out that this was the eighth wettest year in Southeastern Pennsylvania, which affects our New Jersey operations also, in the 137 years of record-keeping of the weather service.

And that really is the story of the quarter or what could have been, I guess, the basic model has taken us right up to first call, but the consumption actually was down almost 11% between New Jersey and Pennsylvania when we blend our Mid-Atlantic division, up a little bit in the South, so it shows diversity helps, and down about 3% in the Midwest.

So when you put it all together, the consumption, I'd have to say it's 90% weather-related.

Basically wiped out the growth we had from the other factor that usually influences our revenue stream, which is the year-over-year rate differentials, which this year would have been about 7% over the quarter -- preceding quarter last year.

We're also this quarter, and I'd like to say it's getting better, but those of you who have watched the World Series game see that it continues to rain in the Northeast.

October was not a great month; it was adversely affected by the rain, down another 5% or 6%.

So we're hoping now that we'd get into the non-planting, non-watering season, that we'll see more levelization versus year-over-year in the sales.

This quarter also had an anomaly.

We were up against a very successful system sale under our pruning policy, last year's quarter which generated in excess of $0.02 to earnings.

And that's booked under the rules, under decrease in expenses.

So it actually artificially made the O&M, the revenue ratio, look a little better.

And obviously the $0.02 helped the bottom line.

And if you want to take a look back just trend lines, in '06 we earned about $0.20 in this quarter; '07, $0.22; '08, if you want to adjust for the $0.02 I just mentioned, it wouldn't have been $0.26, it would have been $0.24.

So you can see '09, without the weather, would have been -- made this a pretty good quarter, and that I think is because of the fact that our -- we're catching up on some of the ROE problems we had in the South and the fact that -- so we're cutting back on our regulatory lag, and the fact that we have upped our capital budgets considerably which is where you get your investible dollars, and we're borrowing at all-time historic record low rates.

So that's why I opened the comments with the fact that the basic business model is working well, and if we get a little help from sales, i.e.

weather or just no opposition from the weather, I think we'll see a little bit more in earnings potential from the company.

We're still generating a lot of cash.

This by the way, in the fourth quarter, we -- will be the first time we exceed $100 million profit in any one year in our 125-year history.

And that's because of the phenomenal growth we've had over the past 10 years in adding states and assets to the portfolio, and running the company efficiently under the rules that the regulators allow us.

We're still a predominantly regulated company.

This year we'll be on track to once again grow EBITDA in excess of our long-term 10-year CAGR which is 10.6%.

We expect to beat that in '09 over '08.

We're efficiently reinvesting that -- those dollars right back in the business in infrastructure investments which is what the public policy I think from Washington on down to each state is asking for, to start fixing the infrastructure in our country, and with a D-minus rating by the Civil Engineering Society, I think the prudency of those investments is obvious.

And we're having more earnings to dedicate obviously to the dividend because the investors are the ones giving us this money to do these investments for our customers.

And on 12/1, that will be the payable date.

The record date will be in November -- Brian, you have to help me.

Is it November 16th record date for the dividend?

That'll be our 18th increase in 17 years.

The dividend will go up 7.4% and will be on an annualized basis $0.58, while we'll still maintain our payout ratio at 70% or below, which has been our tradition over the past decade.

So we're saving money for the business, reinvesting that, reinvesting our cash and we're also borrowing money at record low rates.

We just this year have borrowed -- in June we did $58 million.

We put that money out at a little over 5%.

I think the effective yield was 5.2%, 30-year money.

And by the end of the year or early January, we will have spent down all that bonds and have it invested with the infrastructure program we're doing.

And on October 20th, we closed on another $75 million of low -- of tax-free debt.

That came in under 5%.

We're very proud; I think we hit the market pretty good in the timing.

And that money will be used probably to the tune of about $10 million a month.

And that'll all completely be drawn down -- when I say drawn down, effectively in debt, right now it's in a holding account till you spend the money, that's the way the rules go -- and so by midyear next year we'll -- so we have enough debt already issued to carry us through midyear next year.

And I think that's the luxury you have with the programs that have been set up by many of our states who have promoted the investment in infrastructure by giving us these surcharge programs called different names in each state but the DISC is the one that probably you've heard the most of.

And Pennsylvania actually approved a 7.5% DISC which is allowing us to do more pipe -- needed pipe work and so on, and it's been a very, very successful program and it's become a national model that other states like New Jersey are now looking at following.

Our capital program this year again will be -- we will be in excess of the $300 million.

That's up from an average of $250 million a year average for the prior three years.

So you see we're at a new plateau.

We think we'll stay at that $300 million, $310 million level, and we'll fund it mainly with hopefully low interest debt going forward and utilizing our A-plus, AA-minus for dedicated debt rate, which gives us a little bit of an edge in the borrowing market.

It gives our customers and our regulators a real edge because that means lower costs for 30 years.

And we did an estimate of how much we've saved just by doing these tax-frees over the years, and it's -- our customers have saved in excess -- Dave, do you remember, that was $20-some million I think.

Yes, was the long-term reduction in the weighted cost of long-term debt over that period.

Right.

And it's $22 million a year.

$22 million a year that our customers will be paying if we just went out with normal, without going with tax-free and just going out with normal debt.

And that's not even counting the fact that -- the fact that we're an A-plus.

If we were triple-B-plus, you could add probably another $20 million, $30 million to that number because of the spreads are almost 150 basis points down.

So anyhow, the capital program is in great shape in the sense that it's -- I don't want to call it discretionary, it's investment capital, it's not driven by environmental consent decrees and so on.

That piece of our capital program is well below 10% now, so almost 90% is strictly the infrastructure rehab, which the country needs.

And that's also, you'll see with expenses, interest is actually flat even though we're up $60 million this year in borrowings.

And that's because of the refinancings we've been doing and the use of short-term debt which is still coming in just slightly over 1% for us in our notes.

The only thing hurting earnings is depreciation.

The more we invest in new material, obviously the -- even though our depreciation rates are very low, a little over 1% for pipe and maybe 3%, 4% for plant, blended is probably 2%, 2.5%, very low.

When you add that to completely depreciated property that we're replacing, your actual depreciation expense rises rapidly, and you can see that's probably the biggest increase in our expense side on the budget -- I'm sorry, on the P&L, it's up over 15%.

So you could argue it's hurting earnings but helping cash, and that's why I bring up the EBITDA -- EBITDA number.

We -- O&M is one of the bright spots, although it looks like on the GAAP earnings we're up 2.6%, which is still a good number.

If we take away the aberration of the fact that last year's O&M was positively affected by the profit from the pruning of the Woodhaven system and you give us a non-GAAP comparison, actually O&M was actually down year-over-year.

So we're seeing reductions in chemicals, we're seeing reductions in everything but benefits.

That's the only thing that really is still rising in the budgets, and of course we've always had a tight control on employee levels, complement count, and that's -- so it's not hurting us as much as some companies who are more heavily labor-oriented.

But it's still -- healthcare and pensions are still two areas that we watch very carefully.

Bad debt, which I think is every utility's concern, we've done pretty well in that we're still under 1% through the nine months.

That includes the reserves and write-offs.

So that's a fully loaded number.

We did go up in '08 for the full year, over 1%, we were at 1.09% or 1.1%.

Normally we run in the 0.8%, 0.9% range over the past five, six years.

And I'm going to forecast this year we'll be slightly over 1% but not much over flat 1%, which I still think is pretty good for most utilities serving.

Some electric company -- companies, I know that they're having an equally difficult time because of -- but since their rates are higher, they have more out and exposed.

Our rates aren't that high.

So -- and a lot of people pay their water bill first, which we like to hear.

And of course we have had an aggressive shutoff program which the regulators allow, because that 1% is paid by everybody else, so keeping that low keeps your rates low.

And I think it's a fairness issue.

So we -- we're pretty aggressive on shutoffs when people don't pay their bill after -- they get their water for free for a month, then we give them another month to pay it, so they've already had the use of the product for two months before we even ask them for payment.

So we feel comfortable being aggressive in that area.

Growth is still a disappointment.

Organic growth is up, which is good news, but a lot of it is being aided by the -- by some small acquisitions we've been able to accomplish.

We've done 15 this year, mostly in Pennsylvania, one in Texas, a couple in New Jersey.

And we anticipate doing another 10 or so small ones by the end of the year.

Overall, however, we're looking at just over 1.5% growth, which is okay, that's normal for any utility, but we like to see higher, as you know.

So that part, I would say that as the economy strengthens, which we think it will, we're in the right areas.

We think acquisitions will still be a big part of our program going forward, especially with the financial challenges some of our municipalities are facing regarding pension, under-funding and things of that sort, and the fact that we, as part of our program, and we have people lined up and working on this day in and day out.

So we see that as a positive going forward, a tailwind, let's call it, as the economy strengthens, but we can't create new housing if nobody is buying new houses obviously.

That's a -- that's what has to turn to get the organic growth going again.

And we're starting to see a little bit of it in the South, Florida is still flat.

I think they have some more inventory to use up.

Texas is growing, which is great news.

And Pennsylvania we're growing, and New Jersey, mostly through acquisitions.

Midwest is about 0.5% and it's almost all organic growth.

So we have to see a return in -- from the recession, because of the manufacturing base in the Midwest probably before we see any getting back to the 1%, 1.5% organic growth levels we had.

But we're hoping that we can open the door for some acquisitions there.

The other tailwind would be catching up on the ROE, and let me get into our rates and then open it up for questions.

In the rate program, you file a rate case, and then it actually takes you almost a year to get the award and then you have another whole year of benefits from that award.

So let me just give you macro numbers and then drill down into our rate strategy to avoid regulatory lag, and then the detail of our filings for this year and where we're planning.

If you look at our site goals, and base this by the way on a $650 million, $700 million revenue stream, to get a feel for the size of the rate request to revenue.

If you look at our model saying we like to get 3% to 4%, you can see we were out of whack and that's why we had to file a little bit heavier regarding the catch-up on the AquaSource states, New York water, and so on.

From '04 to '07, we basically grew the company 25%, invested almost as much as we paid for those acquisitions, and didn't go in for rates.

So the catch-up was '07, '08 and '09.

In '07 we filed over $75 million in requests.

Now they would have come in, in '08 and affected a lot of '08 and a little bit of '09 in the effect on revenue stream.

In '08 we filed $35 million in rates and those affected '09 and a little bit of '10 they will affect.

In '09 we filed $75 million in rates, or will have filed by the end of the year, $75 million, and I'm going to drill down on that, and they will affect '10 and '11.

So you could see how, you can just take a cycle and see how that affects us.

Part of the '09 filings is to get back in the states where we're earning -- just slightly under-earning our authorized return but have made a lot of investments.

That would be in the Pennsylvania type category.

Those get filed and then you catch up on your authorized but get paid for what you just didn't (inaudible).

Regarding the other states, we've had one cycle.

The only exception being Virginia, which is now in rates, of all the states we've gone through our first round of rate cases, they're the toughest because you have to learn the rules of each state, there's some challenges to the accounting and all that and so on, and any cleanup occurs in that first round of rate cases.

And after that round, although they were successful rate cases, all except for the first one in Florida, the second one would be, they didn't achieve full authorized rates return.

So our second cycle which will be filed in '10, '09 -- mainly '10 and a little bit early '11, will be used as much for the final catch-up on authorization as much as for the new investment.

The more mature states where we have made the investments, we know the rules, and it's just timing on getting the cases in around that amount of investment, those are more routine but a couple of those states are in line now to go in for rates and get their ROEs back.

So one of the tailwinds is seeing if we can get some of the non-Mid-Atlantic states, actually non-Pennsylvania type states, the more mature, where you have a surcharge, which keeps your ROEs close to authorized, and bring them up to the authorized level that we could earn.

Because basically you put some investment in, or they were in that grouping of the 25% growth I mentioned in '04 to '07 where you couldn't just do it in one bite, you had to take two bites of the apple to get to a fair increase, which would also let us earn our rate of return.

We're looking at a half-a-dozen or so states where we're still not earning close -- what I would call close, within 100 or 200 basis points of your authorized rate of return, and they're all slated for -- they're in now or slated to go in, in '10.

And they'll affect us obviously in '10, and '11 and '12.

So that's the overall rate story.

Rather than give you too much detail, I'll just give you a macro feel on where we are in '09.

We've already been awarded -- $12 million, Brian?

We had these all listed here.

Twenty --

22 -- how much?

29.3.

29.3 is already awarded this year, so of course they'll affect '10 and '11 -- I'm sorry, all of '10 too since they've already been awarded in '09.

Mostly in '10.

We have in progress as we speak another 12, and they've been through hearings and four are ready to go to hearings.

So these are within probably four months, five months in the process.

Usually these take nine to 12 months.

And they're in states like New York, Missouri, Indiana, North Carolina.

And then we have filings slated before the end of the year in two of our bigger states, and also small ones for individual systems in Florida, Virginia and Texas and Indiana and Ohio.

So, almost every state, but New Jersey and Pennsylvania are the bulk of it.

When you add up those 10 filings all prepared and ready to go by the end of the year, that's another $57 million.

And that number will -- these will be litigated, discussed, over the next nine months or so, so probably figure award sometime starting next summer through fall, and therefore the next 12 months is where the benefit will come in for the revenue stream on the Company.

So that would be late '10 through let's say the first six to nine months of '11.

And of course then we start the cycle all over again with filings next year, which will probably be in that mid-30s range.

And that's to -- mostly will be for catch-up and surcharges.

Catch-up meaning the states that we know -- even though we settled cases, that we could never earn our full -- our authorized rate of return because of the settlement, that they would be to go in and ask for the fair return on what we've already invested and any new and minor investments we've made since the last rate case.

So, pretty detailed, but I wanted to get granular on the rates since that's the -- was most of our story this quarter and will continue to be a crucial part of the story going forward, but we're still hoping that we get some sunshine, and we also hope that the country's economic recession ends and we start seeing some growth.

Answer any questions you may have.

(Operator Instructions)

We'll take our first question from Jim Lykins with Hilliard Lyons.

Good morning everybody.

Hi, Jim.

First, a question about the usage numbers.

I got the 3% down for the Midwest, and the 11%, what was that?

Was that overall or was that PA and New Jersey?

It's -- we call it Mid-Atlantic but it's New York, which wasn't too bad.

New Jersey was the worst, down almost 15%, 18%, and Pennsylvania was down close to 9%.

So when you blend the three together, it became 11%.

But New Jersey was the worst.

And that's because of the sandy soil, and people water a lot more in New Jersey, but if it rains everyday, you don't water your lawn.

Okay.

And the press release talked about O&M improvement and I know last quarter you were kind of thinking in terms of maybe as much of 150 basis points of improvement there.

Do you still think you could get that much or are you willing to kind of go out and see what you think you might end up with on the O&M improvement?

Well, if you want to do year-end, last year our O&M to revenue positively affected by that $4 million pre-tax gain on the Woodhaven sale, so if you want to adjust for that.

Without adjusting for that, our O&M was 41.8, very comfortable with 100 basis points off that for the total year, even with the reduced revenues based on the lack of water sales.

If you want to adjust that 41.8, Jim, for the accounting method on how you handle a system sale, probably could hit your number.

Okay.

Regarding EBITDA to revenue, probably you can look for 100 basis points improvement over last year.

Last year was 51.3 or 51.4.

So the cash generation is going up.

Okay.

Got an acquisition strategy question.

Do you guys think in terms of going into areas where you think there could be high growth, lots of new construction starts, or are you looking at just getting connections, or is it all the above?

All the above, and in fact, Chris Luning, our -- who you met in New York, is in one of the Southern states as we speak, talking -- we're not there yet -- talking around a faster-growing area, just what you're talking about.

It's -- they're plotting out for when things are ready and the recession ends, they're looking at what I would call one of our counties out here for the analysts who are familiar with Philadelphia, or Chester County 20 years ago was horse country, now it's suburban.

And that's the areas we're looking at in these states that are growing faster.

Okay, so we shouldn't expect more with the tuck-ins in the North versus -- larger acquisitions in the South then?

The tuck-ins are bread and butter and they're so obvious because the regulators want us to do it.

They're in states where we have -- usually have consolidated rate structures set up.

We're doing those in each of our Southern states now, and it just makes it very easy because everybody pays the same rate structure and you can analyze the cost of the system.

And you don't have separate accounting systems for 80 systems like we had in Florida.

It's -- you cut down your overhead.

So the tuck-ins are just an obvious part of doing business and every reasonable size water company should be doing it in the states that they're operating in.

Regarding the venture, what I'll call venture, that's a different story in the sense that you have to put up-front capital and do a little bit of the venture capital, if you want to call it, because the customers aren't there until the pipes are in and the demographics have to be very well-studied.

So they're a little bit more risky.

But if you look at this as a 50, 100-year business, it's not risky because they'll all pay themselves off over time, it's just that they won't have the immediate effect, especially if you don't have any assets in that state to merge it in with.

The municipal is really the area that I think is the growth area, that's a possibility.

And whether the companies that you follow look at O&M as being the growth part of it or actual sale, where we look at it by looking at smaller municipalities.

We think asset ownership is the better way to go versus the bigger cities.

It becomes more challenging because of the size of the purchase price, and the politics, to be very honest.

So I think that is just inevitable because of the fact that there's only about three or four of us who can do them.

That includes the two large French companies who are involved in this.

And I don't think 85% market share is feasible going forward looking at the challenges many of our municipal governments have to continue to be in the water business and look at the immense capital they're going to have to invest.

I mean it's the same dollars for them whether it's capital needed for this or money needed for the pension plan, or for the new city hall.

Okay.

And one last one, and I'll let someone else ask a question, but, I know it may be a little bit early, but with Chris Christie getting elected last night in New Jersey, do you have any thoughts on how that could potentially impact the commission?

Well, I would expect him to -- has to make a lot of changes only because it's a change in party, but he's talking about a change in philosophy in government, drastically cutting and so on.

So I would imagine a lot of the policy positions would get changed out.

We've had very good relationships through the Christine Todd Whitman administration and then the --

Corzine.

Yes.

McGreevey for a while, and now Corzine.

It's a professional staff in New Jersey.

I think there is a philosophy against -- some of the staff are not for the surcharge, and it's one of the few remaining big states -- it affects American and United much more than we are, because we're not as big in New Jersey, but it's the right thing to do and we're all trying to encourage them to get a standardized format versus every company itself.

And I'm hoping that -- now, whether it would have been Corzine or Christie (sic), I think an election was needed to get the ball rolling, if you know what I'm saying, because everything freezes during an election period.

So I'm hopeful that the philosophy that a new administration will follow will be infrastructure -- letting the private sector do infrastructure I think is the philosophy that Christie would follow.

That's my opinion.

But I think there's enough momentum among the existing regulators, both appointed and the staff, that it could happen tomorrow.

It's just a matter of getting over some philosophical issues that some of the staff have.

So, a long-winded answer to say I'm more optimistic probably now that the election is over.

And I would tend to say that Christie would a net plus, but I don't know that the Corzine administration was against it either.

And the other thing we're looking at here, we're going to apply for rate cases, we'll be treated fairly under either administration because rules are the rules.

It's the new policies that are really directed.

And I think that probably now that the election is over, the commission can make a decision on the DISC.

It's been over a year of hearings and discussions.

Okay.

Thanks, Nick, and good luck with the Phillies tonight.

Yes, right, we need it, huh?

We'll take our next question from Debra Coy with Janney.

Hi, Nick; hi, Dave.

Hi.

Just following up on the weather impact, it certainly has been significant not just this year but it seems like over the last couple.

Just to back up so I understand what you had said about the quarter, we did $180 million in revenues and a 2% increase.

You said it would have been a 7% increase, you believe, x weather?

No.

If you -- it was a actual 7% blended consumption drop --

Right.

-- year-over-year mainly because of the Mid-Atlantic.

That's the 11.

But if you take -- if you want to blend the 7% over the $180 tax-effected and take 30%, 40% out for cost, you'll see it's in excess of $0.03.

Okay.

To the bottom line.

So if you take my non-GAAP, non-accounting discussion, it would have been a nice quarter, probably 28-plus.

And can you off the top of your head say what you think the weather impact has been year-to-date?

I don't recall that we had put it into --

Yes, we had a lousy --

-- per share --

-- second quarter too.

I think it was $0.02 in the second, at least, Bob, right?

Bob's doing it --

$0.01 to $0.02.

$0.01 to $0.02?

Yes.

First quarter we got affected by a penny but not -- actually it was the weather, Debra, it was a record number of breaks.

Of main breaks, right.

We had 700 main breaks or something, and usually we get that in a year, and we had it in two months.

So this has been -- I'm not a proponent of climate change, but maybe I should reconsider, right?

This was really a mess this year.

Now let's hope it straightens out next year, and will be nice comparison if it just goes to normal.

For the quarter we're down from last year by nearly 2 billion gallons.

Wow.

For the year-to-date, it's just over 4 billion gallons.

So that's a good way of --

It's probably a $0.05 or $0.06 impact.

And that's from '08, that's not from budget.

Right.

Right.

Because we had budgeted an increase, because of our growth.

Because of customer growth.

So it's down even more than that versus budget --

In other words, if you take another percent, let's say growth hasn't been phenomenal but has been 1%, 1.5%, that's in the '09 figures and they weren't in '08.

So it's really been -- but usually what I look at, Debra, is that your normalized growth, 1%, 2%, is what you have to use to beat your inflation on your expenses.

Right.

And that's a very slow decrease in every house's consumption, because they have their toilet breaks and the plumber says, "I can't give you the old style anymore, you have to get the new 1-1/2 gallon flush." And that slowly over 20 years works its way into the system.

We've always thought that was worth about a half a percent of usage drop each year, year in, year out.

And that's what you need that 1-1/2 growth to make up for that and some inflation hedge on your expenses.

And if you keep your expenses at 40% or below, which we've been able to do, that means that that will carry a lot of it.

Yes.

Because, you know, keep expenses at three and it's 40%, you only need, what, a percent in the -- percent -- 1.2% to make up the difference.

I mean I'm just being very macro on this, but.

And you think that it has been largely weather?

I mean you mentioned 19% down in New Jersey, that seems unprecedented to me.

I thought maybe there was a large commercial industrial customer that impacted that --

No, because Jersey is mostly for us residential and we could track it, but we actually beat last year one of the months, I can't remember if it was July.

One of the months actually we did good, because it got warmer, and then it just stopped -- started raining again, and that was it.

And Pennsylvania too, you think that was -- the 9% was heavily residential?

I think there's probably in the industrial area, a little bit of it was -- because I think our industrial in Pennsylvania is like 7% or 8%, Bob maybe will look it up for you.

But I think there could be slowdown and like if an industry runs two shifts versus three, you're going to lose water sales.

And I think some of it has to be from there, Debra.

That's why I said the economy -- we didn't lose any big company.

So like Boeing may have slowed down, Exelon may not have run their Eddystone plant around the clock because sales were down.

And that's true, electric sales have been down too.

So there could be a little of that economic-driven part of that.

But more in Pennsylvania than anywhere else.

Yes, residential in Pennsylvania is 63%.

63%, and commercial was like 25%, and then -- so a lot of the small businesses maybe are not selling as much or whatever.

Commercial is 20%, industrial is 4%.

Yes.

So.

I don't want to say that none of it is economic.

I think the economic I'd have to rank first to housing; that would help us the most if the economy returns and builders start, not using up inventory, but building new houses, that'll help --

On new volumes.

Yes, it's new lawns and everything else.

But the second piece would be the small business running around the clock versus just eight hours.

Yes, actually if you look at our top 15 customers from a gallon perspective, they're about flat with last year.

Yes.

From a dollar perspective they're up, recognizing the change in rates in the DISC.

Right.

And that's like the Rohm and Haas and --

Absolutely.

-- the Wawa's and the Villanova Universities and so on.

Right.

Yes.

So with such a poor year going into these rate case filings, I mean basically we've reduced, at least from a historical look, with -- for various reasons in different sectors, I mean different geographies, it seems like a couple of bad weather years, does that help you on your rate case filings looking ahead?

Well, yes, sometimes it helps, sometimes it hurts.

If you're -- if you assume this is the new normal, there would be no effect.

But if you think sales are coming back, the states take what is actual, because they don't want to get in to estimating, because you could estimate high or low.

So they say, "Whatever it was, that's what you're -- we're putting your revenue analysis on." So if you believe that our sales will go up 7% next year, yes, it would help, because the -- whether it's a one-year, two-year or three-year average, it's all worked in there.

I think the biggest difference, Debra, is in New Jersey and Pennsylvania.

We've already seen the, I think, most of the conservation part, so that's why I think it's more weather-oriented.

In the states where we went in for one new rate case, the first time ever, and they were using phenomenal amounts of water, and we had a large rate increase, I think the elasticity becomes an issue.

People say, "Geez, I'm not going to use as much water because it costs me more now.

So I'll keep my bill the same by cutting usage." And when you're using 8,000 gallons a month versus 4,000, you have a lot more to cut, if you know what I'm saying?

Right.

And that's what we saw, and Chris has brought that out up in New York regarding the usage factors in North Carolina dropping and I guess it was in Florida dropping.

And therefore if you based your revenue analysis on x, 8,000, and people start using 6,000 --

Right.

-- even though it's not weather-related, you're not going to earn your keep.

That's why we have to have that second round of cases.

Okay, that's helpful.

I mean it does seem like it's a work in progress in terms of trying to sort out how much is demand elasticity.

We've always assumed that given that rates were so low, that higher prices wouldn't have that much impact on demand, maybe that's starting to change, so that ends up having to get built in going forward, and then trying to separate out the weather and economy stuff --

Yes.

-- and that makes it difficult to assess.

And I guess what I'm trying to understand is how well we understand the trends so that we know how to think about rate case benefits going forward.

The rate case will levelize, if you can guess right on usage --

Yes.

-- it'll levelize everything back to the investment.

But that's the risk.

If you have a high usage state, and I think this is what was facing the California companies until they got the, whatever they call it, [RAC] or whatever --

Yes, the adjustment [of cost].

-- the [RAM].

Yes.

Until they got that, they were very vulnerable because their usage was double what it was in the East.

And now that -- whether it's the weather or conservation effort, it's dropping, as you know, precipitously.

Yes.

And that means it was discretionary use.

I'm not sure we have as much discretionary use in our totals in the Northeast as there was in the Southwest and West.

So I think we have less risk of that.

On the other hand, it will levelize itself if you go in for rates every two, three years, you'll be able to levelize it and then it will all come back to your capital investment, which is why that's our basic business model.

Right.

Okay, thanks, Nick, appreciate it.

Okay.

(Operator Instructions)

We'll take our next question from Garik Schmois with Longbow Research.

Hi, thanks for taking my questions today.

Just wanted to drill in a little bit on O&M expenses.

You're doing a good job controlling costs.

But can you talk a little bit more about what buckets contributed to, I guess if you exclude the gain, the year-over-year decline and maybe specifically how much of that was gasoline, diesel and natural gas?

Yes, that's flat and then that was very high comparison '08 to '09.

So that was one -- I think Bob will help us, our Controller.

Transportation was one of the areas.

Chemicals have flattened.

They were going up 20%, 25% a year; they flattened.

There we go.

Water production costs, chemicals, down.

Power is getting ready to go up but we've been able to hold it flat by various contracts.

We're one of the bidders, as a larger company, we go on the competitive market, in some of our states, we did okay there.

I think that's going to probably stay flat or go up.

We are announcing soon with the governor a major solar project at one of our plants in Pennsylvania, which will actually save us electric because we'll run that plant off the solar panels and the grants we got with all these subsidies, it's almost you couldn't not do it, so we'll earn on the capital and save on the O&M.

So that's going to be a real win.

Pension is the biggest upper, pension expense.

It affects us in the FAS 87 states but not in our biggest states, New York, Pennsylvania and so on where it's more -- I don't know what the term is, but it's regulated -- it's a regulatory asset in those states.

So that'll go up and down.

And this year of course, because of the '08 market, it went down -- it went up rather.

As the market went down, our expense went up.

And Bob, is there anything else that really other than transportation and chemicals maybe that -- I don't see them going up, I think it's --

Power has declined.

Power decline --

In relation to production.

That probably won't stay.

I think we're modeling, what, 3% in our plan.

3%, 4%.

3% or 4%.

And expenses, that could be carried if we get back in to normal growth.

If you don't get to normal growth, I don't think you're going to get the escalation in chemicals and salary and all we're estimating either, so.

Complement has held steady and we have one of the highest customers per employee ratios in the country anyhow and we're holding that and actually going up on that as we trim in the South.

But I think O&M is pretty stable short of maybe some benefit programs, health and pension, and that's what we're attacking.

We just changed our whole health program to an HMO, countrywide and higher deductibles and all our employees now pay 20% towards their healthcare, and it's amazing how the union members want to know what we can do to save on the premium because now they're paying 20% of it.

So it does work when people have skin in the game.

Okay.

And that 3% to 4% real quick that you mentioned, is that for '09 or is that for '10?

That'd be '09 to '10.

'09 to '10, okay.

Yes.

I can get you, if you want to call back, we can get you what we think forecast total '08 to '09 will be, I just don't have the fourth quarter numbers in front of me.

Okay, great.

Thank you very much.

(Operator Instructions)

And at this time, gentlemen -- oh, we do have Richard Verdi with Sturdivant and Company.

Good morning, fellows, thank you for taking my call, I appreciate it.

Hi, Richard.

Hey, Nick, I'm sorry, I'm going to ask you to repeat yourself, I had missed what you had said about Chester County, and if I had heard it correctly, am I to understand that you guys are going to look for areas, enter areas that are -- would reflect the growth of Chester County, is that right?

Or could you just say that over again?

Yes, I was using -- you're from that area, Richard, so, I was using that as an example in some of the states, like let's take Georgia, for example.

In the 20 miles out from Atlanta, it's going to be the next ring of growth.

And I used Chester County 20 years ago as that example.

So 20 years ago when I started and when I was at PECO, Chester County was very rural, it had a couple of population centers that were close in to the main line.

Yes.

But when you got in to East Brandywine and Valley and all those townships, they were all still farms.

Right.

And today that's where the Pulte 600 home developments are and we've been putting water infrastructure out there and tanks and everything else.

And what I'm saying is that's one of the areas to look for when growth occurs.

Obviously you have to study the demographics.

Not every place will grow like that.

But if you're there, you benefit for the next 100 years.

Right.

Now, I'm just looking back, I mean like you said, I -- growing up there, I can remember in the '80s, like you said, the late '80s, it wasn't -- there weren't a whole lot of homes, and through the end of the '90s, there were homes all over the place, so now -- so with that being said, if I'm thinking about the areas you're looking to expand your geographic footprint, in a perfect world, could I just think to myself that Aqua America is going to try to mirror the growth that was in Chester County?

Well, we won't.

What we'll do is say where will it be growing and try and become the water provider in that area and put the up-front capital, pipes, plants, so they grow into it.

Okay.

We would -- I don't want to give you the impression we're going to -- yes, we're not going to get into the development business, I don't want to give you that impression.

Right.

No, no, I know.

Right, right.

Okay.

Yes, okay.

All right, that's great.

The rest of my questions have been answered.

Thanks a lot, Nick.

Thanks, Richard.

And at this time there are no further questions.

I'd like to turn the call back over to our speakers.

Thank you very much for all your time.

And if anybody has any questions that were unanswered, feel free to call Dave, myself, Bob or Brian, we'll be here all day.

Thanks.

That does conclude our presentation.

Thank you for your participation.