Essential Utilities Inc (WTRG) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Aqua America, Inc.

fourth-quarter 2009 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions I'd like to turn the conference to Brian Dingerdissen.

Please go ahead, sir.

Thank you, Augusta.

Good morning, everyone.

Thank you for joining us for Aqua America's fourth quarter and year-end 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 www.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 maybe 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'd like to turn the call over to Nick for his formal remarks after which we will open the call up for questions.

Thanks, Brian.

Good morning, everyone.

This is Nicholas DeBenedictis.

We're housed in the epicenter of global cooling, Bryn Mawr, Pennsylvania.

We're seeing another foot of snow today, which will set an all-time record for our area after the third wettest and coolest year, 2009, on record, so we're waiting for this global warming to help our long-term sales.

It hasn't happened yet.

We report this morning solid quarter, 20 versus 19 last year, up about 5%.

Revenue was up 5% despite a 3% to 5% reduction in send out across the board because of the economy and, again, the weather, although the weather does not affect the fourth quarter as much as it does the two summer quarters, so it should be the second and third.

Good news, O&M was flat.

Our O&M revenue ratio dropped below 40%, which is first time in a while that's occurred and we're very pleased with that., keeps our rank as the most efficient utility in the country.

For the year, solid growth in revenues, which most companies did not see, 7%.

It's the first year in the 125-year history of the Company that we actually surpassed $100 million in net income.

Our EBITDA grew as usual, about 9.4%, and we see that continuing well into the future.

Our EBITDA number this year was $356 million.

We held O&M to a 3% growth and lowered our O&M to revenue ratio from 41.8% to 40.3%, which is 150-basis points even though revenues were lighter than we had predicted because of lack of weather-related sales and we predict we could see another 50 to 100-basis points drop in 2010 with any reasonable semblance return of normal sales.

The 3% growth included two, what I'll call anomalies.

One is a comparison to 2008.

The way accounting is done, under GAAP, when you sell a system and book a gain it actually doesn't show on the revenue line, it shows on a reduction in the expense line.

And if you discount that, we had a sale at 2008 at Woodhaven system and no comparable size sale in 2009.

And then we also had a second quarter, I believe it was, write-down based on the first full blown rate case in North Carolina where they adjusted back for rate base of all of the companies that we had purchased.

It was our first consolidated case, which is the way -- the best way to do rates in any state where you have a lot of systems and that forced a write-off of about $0.01 but that meant an addition to O&M.

If you take those two anomalies out, we were pretty flat, about 1% tops up in O&M so you could see we are truly controlling costs.

So I'd say that we continue to execute our business model.

Many companies in 2009 at the end of 2008 with the financial crisis changed their business models, they turned to a preservation of cash and financial viability and so on.

We actually went the opposite way.

We believed in our model, we actually increased capital spending 10%.

I don't think you'll see many balance sheets or companies report an increase in their capital spend and that was despite knowing the economy was not going to bounce back, especially homebuilding, which affects us the most.

We did not predict the bad weather, how can you, but even with those two we were able to do a 10% increase in capital to about $284 million up from $267 million, we're predicting in excess of $300 million in 2010.

So I would argue that -- I'll manipulate [from] Charles Dickens great quote best of times, worst of types and reverse it and say, this may be the worst of times for the US economy and utility industry related but I think it's the best of times for a well-healed Company who will have a great financial foundation and have a business model that's been in practice for over a decade that they don't divert from.

Let's talk about the cash.

We generated almost 90% of this increased capital spend internally.

We did use bonus depreciation.

You'll see that is running rate now about $40-some plus million and we used low interest loans that were made available under the economic stimulus plan.

We used about $10 million of the economic stimulus plan.

Unlike many municipalities our money is all in, in place and the projects are already built.

We did that mainly -- not with the stimulus but mainly because we have our own access to the Markets.

We have an AA- rating for our mortgage debt in Pennsylvania where most of the debt is going, an A+ overall rating, and Dave and I and our treasurer -- our new treasurer, Diana Moy Kelly, visited S&P in early January and their first report that came out made no change to our rating.

It puts us -- they rank them, I think there's a rationale to how they put the companies in order and although most utilities -- larger electric utilities in some of the larger water are in the B's, most of the water remain in the A's but our -- I don't know what it's called but I guess what I call it is that you'll pay your money back -- is one of the highest ratings of all of the water companies and the water is the highest of most of the other companies.

So good news in the sense of our liquidity and our access to the Markets to continue with a crucial part of our business model, which is capitalization and fixing pipes and fixing environmental problems.

The other part of our model is acquisitions.

We had 18.

They were small this year but we did produce 1% growth of new customers and I think -- I have not checked because everybody hasn't reported yet for the year, but I would imagine that you won't see many utilities talking about -- on the electric side or in the water side growing revenues and growing customer base.

So even in a horrendous year where housing basically just stopped we're showing a 1% growth through acquisitions and some small organic growth.

Hopefully, this turns around next year, as the economy turns around.

And I think we're better situated.

The municipal governments, of course, are not in the acquisition market and they are 85% of the total base, but the private companies who you would argue would be in the acquisition market, I really do think there's an economy of scale and there's a size where it makes sense and we and a couple of the other private publicly-traded water companies are the only ones with that economy of scale that can capitalize on this.

Rates were our big story.

If you take a look at -- probably rates were compensated for -- the 4% or 5% that sales were down, the rates more than made up for it and the 1% growth is how you get to the 7% top line.

So you can see rates were crucial and a lot of that -- a lot of those seeds were laid in 2008 where we had a very aggressive rates program in our first round of rates in the South and we experienced the Pennsylvania award in mid -- which is our biggest state -- and New Jersey awards in mid 2008 so they flowed through for the first two quarters in 2009.

During 2009, however, we filed 37 -- we received $37 million.

That includes surcharges of new rates, so therefore some of that came through in 2009 but some will spill over -- not much -- into the 2010 numbers.

We also have, in just the first two months of this year, received $6 million annualized in rate awards and we have in progress -- we hope all will be resolved this year, most of them this summer -- $65 million in current cases.

And between now and the end of the year, including surcharges, we plan to file another $25 million to $30 million in cases.

So you can see part of this is to help pay for the massive capital program we're investing and I would argue that's in the New Jersey and Pennsylvania areas.

We're still doing, I'll call catch up cases in many of the states where we invested huge amounts of money with no rates for three to four years, went in and got initial awards, trued up the books and that's getting the rate base lined up with how those regulators liked it, but significantly got a consolidated rate mechanism, which makes us a viable Company in those states for future growth.

The states that we have achieved consolidated -- regional consolidation in Texas, consolidation from 80 to eight rate basis in Florida, and we think we would like to consolidate further.

We think it's more efficient for both the regulator of the customer and the Company.

North Carolina consolidated completely between the water and wastewater -- separate obviously -- and one larger area, Fayetteville, continues separate rates.

And we are in hearings right now in Virginia looking at consolidation.

That would leave only Illinois and Indiana where we have two or three large systems so consolidation has not been as crucial, but we're looking -- I'm sorry, and Ohio, where it really has not been an issue, but we're looking at consolidation in those rates, if it makes sense and the regulators think it makes sense, over the next three to five years.

Looking forward, we don't expect any slowdown in capital.

We're, matter of fact, budgeting $300+ million in the way of mostly pipe because most of our big heavy capital work on environmental matters is now behind us and think that takes a lot of risk out of our -- in investment in our Company in the sense of environmental risk.

Obviously you always have capital risk and execution risk, but we faced a lot of must-do environmental expenditures three, four years ago and one by one, with the support of the regulators, we have gotten those all fixed up and believe we're now state-of-the-art in some of those treatment processes.

Ultraviolet light, we have a couple reverse osmosis plants, the solar farm we just built in Pennsylvania, so we're very proud of the engineering talent that we've -- and the capital that we've invested in our states.

We believe the cost containment.

We have not laid off people, we do it through attrition and so on, but we think that we'll continue to be the most efficient company, both from a standpoint of overhead and direct cost and in our customer service centers, and that's being recognized by the regulators in some of the awards we're getting because I think that's the reason we are being treated very fairly from a standpoint of return on the capital we're investing because we're not using it all up on expenses.

And we're seeing in some of these cases still mid tens, upper tens in ROEs, and we think the regulators are going to reward and keep the regulatory compact unless expenses go arie and that's why we're watching that very, very carefully.

I think quarter one and quarter two, realistically with no major rate cases coming through in the bigger scheme of things -- the bulk of things come through in Q3, summertime -- but we still think because of the cost containment and just some slight return to normalcy in the organic growth and the weather that we can see a 5% to 7% increase in net income in those quarters, and then the net income growth should accelerate in 3Q.

So we're hopeful.

What we need is the economy to keep going upward.

We're starting to see some turns in that, so a little bit of new housing starts, and we hope that the weather cooperates.

It's hard to be worse than last year but never say never, right?

And this quarter does not really count as much in the weather.

It's the second and third that make or break revenues so we'll see how it turns out.

But one piece of good news is every one of our reservoirs is 100% full so we have plenty of water to sell if and when it becomes a hot, dry summer.

I think I've covered most so maybe we open it up for questions.

(Operator Instructions).

Our first question will come from Jim Lykins with Hilliard, Lyons.

everybody.

Good morning, everybody.

Morning, Jim.

First thing I wanted to ask you about is your latest foray into Georgia.

I'm wondering if this is a one-off thing or what kind of opportunities you might see in that state?

Well, very few private companies in Georgia.

Georgia is probably one of the most attractive states from economic development and growth, mainly because of the outgrowth from the Atlanta hub, and we've always been viewing Georgia but we've never been able to get the price that we would be willing to pay.

There are a couple private companies, not big, not publicly traded, but they basically have a higher valuations on their property than we're willing to pay.

This one worked out very well.

It gives us the base we need.

It's in the second ring outside of Georgia.

The inner suburbs would be the first wing, I think that's called Cobb County.

This is the next County out.

Okay.

So we're excited about it and we put one of our better employees from Florida up there to oversee it and try to expand it.

I don't want to overstate at this point but it gives us a good foothold in a great state.

Okay.

What about -- Nick you mentioned about $25 million to $30 million planned rate cases this year, can you break that out by state and amount?

Sure.

Now you're talking about -- not the ones that are in progress but the ones we plan to file?

Yes.

Yes.

The biggest ones will be in Ohio and Indiana, two states where we've been there for a while and I think have a good reputation for the capital work we've been doing.

We have a large surcharge towards the end of the year in Ohio, [late] condition, and also Pennsylvania.

Probably by the fourth quarter we'll be back in the disc business because you remember in Pennsylvania last year, probably the most significant regulatory action we had in 2009 was mid year when our disc in Pennsylvania was moved from five to 7.5.

We also plan to go back in because we did not get full recovery of our rate basis even though we got consolidation in Florida and North Carolina.

So obviously we have to make sure we can warrant this but we think that the -- looking at the current earnings levels, the fact that we now have expenses, customer service, all of the metrics are where the regulators in those states had recommended strongly we get to, and our expenses are actually showing less as a percentage of revenue than they were prior.

And we have a couple less to dos in each state in the sense of environmental; some radium issues in North Carolina and some organic -- it's called trihalomethane issues in Florida, obviously we're going to fix those and at that point towards the end of the year we feel like we would be eligible to go back in.

You mentioned the disc, do you think that we will -- or you will get that in New Jersey, as well?

Wow, that's a million dollar question.

The former chairman of [Neirut], who was a New Jersey commissioner, was our -- was a large supporter of disc, but with all of the change in government, it's still being reviewed.

It's been over a year in a case that American Water put it in.

We supported that case, but the Commission never ruled on it.

Now there's new commissioners.

I can tell you this, the -- Governor Christy's transition report recommends a disc, so that's a positive , but as usual it's the staff or the Commission is -- are usually the ones who sometimes make final decisions and we want to make sure that they're comfortable, so we've been working at the staff level to show the merits of the disc.

And that's -- in New Jersey we have really fixed most environmental issues so we're going to be doing a lot of pipe work in New Jersey so it's crucial -- if we are going to continue to invest in New Jersey it's a crucial factor to have a disc and I believe United and American and Middlesex are in the same boat.

We've all been diligently fixing the plants and the big transmission lines and the meters and the tanks and so on, and now we're all ready to face the pipes and Pennsylvania has probably a five to ten-year lead on infrastructure redevelopment versus New Jersey because of the

Okay.

And lastly, and I'll let someone else ask a question, but could you just give us a feel for what you've seen thus far into Q1 with your main breaks?

Main breaks have not been -- we're back to normal.

Actually the snow helped the main breaks, that's the theory at least, but now we have a lot of snow removal expenses.

I haven't tallied it up yet but this is absolutely an abnormal winter.

But having said that, we're not seeing as many main breaks as we had last year.

We had a rash of them in February and so far through February we're pretty normal.

Okay.

That's why I was saying I think we can be a little more optimistic in growing earnings in the first quarter, even without a lot of rate cases.

Okay, that's good to hear.

Well, thanks, Nick and it's good to hear you'll be around for another three years.

Well, thank you.

Our next question will come from Garik Schmois with Longbow Research.

Hi, thanks for taking my question this morning.

Just wanted to be clear, first of on your comments, that send out was down 3% to 5%.

Was that for the quarter or for the year?

That was for the first quarter.

There has been some companies saying that they're off much more but I think they're more conservation related.

They are the California companies and so on.

I think there's another company on the call list today, you'll probably hear that or you can ask that question from them.

Last year, I believe we were off 4% to 5% for the year, but we'll check that for you, but I think it was in the low single digits to mid single digits is what rev -- what we call send out.

That's the amount of water that leaves the plant and that's what we measure and that's the part that was off from [the plants].

And are you seeing most of that coming through on residential or commercial/industrial, is it possible to break it out?

Yes, it is.

Much -- the commercial/industrial was heavier but that's economics whereas the residential was off slightly less but still off.

What we're starting to see, and it's a true-up mechanism because some states are trying to get it done sooner rather than later and they're forcing conservation and then they're -- this is California's example.

They give a reconciliation mechanism that says if we can drive sales down 30% we'll give you an automatic 30% increase in your pricing so that you're even at the end of the year.

And that's good because you're made whole.

It's trued up all during the year, there's no risk to your balance -- your earnings statement, but eventually you have to ask the people for the extra money.

This doesn't come up.

The government doesn't give it to you -- well maybe in California, no, I shouldn't say that.

So what happens then you go in for your next case, if you start with a base of your old case, you're asking for a huge rate increase unless you're allowed to say that new pricing that we had in because of the reduction is X -- in my example you charged $1 a gallon, sales went down 30%, you're allowed to collect $0.30 across your customer base at the end of the year to make up for that drop and your new rate now is $1.30 if you went in for rates.

If you then need a 10% rate case you're getting $1.43 but if you take your old base, it's a 43% rate increase on a dollar and I think that's going to be the test of how accepting the public is to the reconciliations.

In our case, we go in for rates, we'd like to stay out longer but it's been on a pattern of about two years and part of the reason for that is because there's been a slight 0.5%, this year or a little bit faster, deterioration in average sales per house.

And the reason is -- and this is in our K, we try and explain it very well -- if you do a remodeling of your bathroom and have a six-gallon toilet, you can't buy a six-gallon toilet in many areas any more so you have to buy the 1.6 or two gallon per flush, so that means every time somebody is using the bathroom facilities you're getting less water used and it just slowly works its way into the system.

Now if you're going in for rates every year or two, part of the need for rates is that half or 1% that you need.

plus inflation on your cost just to breakeven.

And so far, the regulators have been very fair with that.

readjusting the average usage flow so that it's worked in the rates and obviously the expenses.

But that's why we've concentrated for ten years now on the expense side saying if we can hold the expense side down, the regulators will be more likely to give us the return on both the capital we spent with a fair ROE, and be -- acknowledge the fact that we're selling less of our product and let us raise the price on what we are selling.

So I think the actual true-up -- now if you're an electric company and stay out for ten years you can't do that because the catch up will be too great and it'll cause political backlash but I think in a one-and-a-half, two-and-a-half year cycle it doesn't overwhelm it unless there's some new state policies that force the conservation that you can make it up.

A good example is New York where we got a 11% rate increase this -- just February 6th but if you had to count the RAC, they call it reconciliation, RAC, it would have been in the 20s because over the five-year period since the last rate case, the sales had gone down but they were added back every year through a surcharge.

So some people say we got a 20% rate increase but others said no, no, we've been paying X and it was a 10% rate increase so you can see the variation there.

Sorry for being so long winded in the answer but it's important.

No, and that leads into my next question -- my last question.

On the guidance for the potential 50 to 100-basis point reduction in the O&M ratio, would it be fair to assume that that's primarily top-line driven and that you'll be able to -- that we should forecast a relatively flattish cost environment right now?

Yes.

Sorry, I didn't mean to imply we were cutting our O&M expenses 100-basis points, we're cutting the ratio and part of that is because we're expecting these rates to come through without a complimentary increase in expenses.

For your modeling, I think a 3% to 5% increase in O&M would be right in the sweet spot.

Great.

Thank you so much.

By the way I want to clarify what I said about New York.

New York gave us the 11% but they gave it to us 6% over three years so the first year is 6% or 7% and then it comes in with the next two years.

They have a very sophisticated rate making program in New York where they really know to the penny where you're going to be each year, so -- but they treat us fairly and that's what counts in getting all of the return on our investment.

Our next question will come from Debra Coy with Janney.

Yes, good morning, Nick, good morning, Dave.

Good morning.

A couple of additional follow-up questions.

One just to continue a little bit that discussion on consumption, two questions related to that.

One, it sounds like you are looking so far in what you see that consumption is a little bit normal trending so far.

We've heard from some other companies that consumption is still down year over year in the first few weeks of the first quarter.

It sounds like across your territory it's trending toward [normalish]?

In New Jersey -- I can give you a break down.

Pennsylvania pretty flat, maybe off a little bit, but hard to say with only one month in.

New Jersey down again, so -- but New Jersey's usage is much higher, probably the same for the other companies in New Jersey.

To give you an example, Debra, the usage in New Jersey for a quarter is 5,600 gallons, that's at least our usage, and dropping, used to be over 6,000.

In Pennsylvania, it's 4,200 so I think it relates to the sandy soil and maybe just outside watering habits.

So it doesn't -- it's hard to drop from 4,200, that's 120-gallons a day, not a lot of water.

Now in North Carolina it was in the 7,000 range and it's dropped precipitously as soon as the rates and as soon as the drought occurred last year.

I believe it's down in the 5,300, 5,400.

I can get you all these numbers as to what our average usage was last year and show you some trend lines and you'll that see none of them are going up.

So my response to Longbow is absolutely accurate, I think across all Company lines, but when you talk the Cal Water later today on that call, California whether -- it's weather or whatever is really experiencing a lot more rapid declines.

Yes, that's right, but they have decoupling.

Yes, they have decoupling so they're comfortable with it but sooner or later you have to collect on the new price.

And that actually leads to my second question.

You have your Pennsylvania case pending.

Have you built lower consumption, lower usage into the Pennsylvania case that's pending?

Well, yes.

The answer to that is it's lower this case than it was the last case but the regulators won't let you say, well, we think it might go down another 10% so give us a hypothetical 10% increase in price, it's just not going to work.

So what it forces everybody to do, unless there's a RAC, and I'm nervous if you have a RAC, if you wait too long that that -- like the example I gave in New York, it starts galloping, if the deterioration in sales is great.

So in Pennsylvania we're on a two year cycle.

Now if for some reason it would reverse and go up from 4,200 to 4,400, we'd probably would stay out of rates an extra year.

Yes, not too likely.

But we're waiting for that great summer.

Yes, no kidding.

One small question and then a broader one.

The small one, you mentioned a trihalomethane, use in Florida.

That was new to us.

Is that a round of additional compliance spending that you're going to have to do down there?

Is that why you're talking about coming back in in Florida?

No, no, this is the one that we removed from the last cause because of the controversy.

It's called [truliota] I think is how they pronounce it, and so our consolidated case in Florida included everything except Sarasota, which regulates us separately and we're in for a case there as we speak, and truliota, which they said you have to fix completely before you come back in, so we're spending about $1.5 million fixing that.

TTHMs are trihalomethanes, which is the organic material, and if you think of Florida as -- basically it could have been at one-time a swamp, you can imagine that the groundwater, which is predominant, has a lot of organic material, leaves, weeds, whatever in it, and when you hit it with chlorine, it forms these trihalomethanes.

Right.

So what you have to do is use Chloramination, which we were using, and that's an ammonia base and that takes away the formation of the chlorine atom on the benzene ring.

That's what the trihalomethane is, it's just natural material, and what it does is -- we're doing a different type treatment now, actually invented in Florida by the professor at FSU, so I think it's very much accepted by the Florida DEP.

We're probably the second system in the state doing it and it not only takes the organics out but it takes some of the hydrogen sulfide out and if any of you have ever had water in Florida, you know sometimes it has that yellowish look.

Well that's the high sulfur content that's also in the groundwater so --

Which also smells.

Yes.

Again, whether this makes the people happy there or not I can't say but we're doing everything that we were told to do.

So you'll roll that investment into a separate small case?

Yes, I believe so, or part of the bigger case, whichever the Florida PSC wants us to do.

Okay, understood.

And then my other question -- actually I'm sorry, I have two more questions.

One is on the balance sheet.

You talked about additional CapEx in the $300+ million range this year, up from $283 million .

Your operating cash flow you said was 90% so that implies about $250 million in operating cash flow this year.

That's a nice increase year over

Yes, and part of that is from the deferred bonus depreciation.

But yes, I think that's -- it was $104 million and $140 million deferred and so on.

Well, Bob will get that for you.

And we think even if deferred taxes -- sorry, the bonus depreciation, we're not sure if it's going to be in the job spill or not this year.

If it is not --

So you may or may not get that in 2010?

Yes, we're not -- if we don't get it we're okay.

We're still around 85%, and that's with just a normal year.

Boy, I'll tell you what, if we had a hot, dry summer then it all falls to the bottom line and that's great for your balance sheet, too, because it's all equity.

So what I'm -- in terms of how you're thinking about it for this year then, I'd say $300 million or $310 million or whatever it is in CapEx, 85% of that covered by cash flow, your debt-to-cap ratio has been creeping up, you're around 57% now.

It sounds like you're looking at a potential equity raise this year?

Very small, probably to -- just to fine tune the balance sheet, because some of that net income ends up in your retained earnings, which is equity.

Looking at our model on a conservative basis we might have to -- obviously you'll redo debt that's coming due so we'll take that out of it.

We're looking, I think, David needing maybe $30 million to $40 million in debt going forward year in year out, so that wouldn't deteriorate, but I think we're looking at maybe a million, million and a half shares, some time in 2010, early 2011.

Okay, got it, and then my final question --

And then just to put that in perspective it's less than 1% of our float.

Right.

Yes, it's interesting.

As the CapEx continues to grow that you're still covering most of it.

Yes.

That's nice.

Not too much dilution.

My final question is one that we've talked about a few times before, just looking for an update on how conversations are going with various municipalities that you're talking to that might be willing to outsource, sell, partner, whatever, what's the tone and trend on some of those potential transactions?

Well, there are a couple of municipalities in Pennsylvania who are publicly talking about it now.

In New Jersey, we have the approval for Bloomsbury, which concludes at the end of the year, Lawrenceville was last year, so you're starting to see the smaller ones, Debra, are less controversial.

Once you get to the bigger ones, you can see what's happening with Trenton.

It's now two years, everybody wants to do it and there's still -- there's always somebody against everything, right?

Yes.

And you run the court and install it and time is on the side of the opponents, not because the thing has to get done because usually there's a budget crisis.

But there are three givens that are happening and this isn't anybody's fault on the municipal side and there's no less professionalism on the side of the water operator in the city of X than there is here.

The difference is the cities continue to pull money out of their enterprise funds to put it in for police, fire, social welfare programs, so what we're calling our cash and retained earnings they're calling support for the city budget.

The second is -- and I think this is proven by your other clients -- or your other people that you follow who are doing infrastructure work and the vendors -- the cities are not spending, they're deferring, which means that the situation on the environmental side and the structural side just gets worse, year in year out.

The third is bonding authority, once it gets started, will they spend and the answer is will they be able to bond, and I think what's happening is the realization that these pensions are coming home to roost is causing the Markets to get a little bit squeamish about lending.

So we have our capital city in Harrisburg talking about possible Chapter 9 -- they call it in the business lingo.

The Governor Christy has revealed how big a hole the pension is in New Jersey.

So I think those three items -- you can have all of the stimulus money you want, it's not going to bail out those three items and I think the stimulus money with all of the buy America provisions and everything else did nothing but stall some construction.

That's my own personal opinion.

I think it's going to happen but it hasn't happened soon because everybody's trying to get the free money and then they're also trying to fill all of the requirements out to be accepted and it's slowed things down.

So at the end of the day --

It's inevitable is what I'm saying.

Right.

But no change still takes time so your outlook would be maybe an additional handful of small systems that might be on your radar screen for the next, call it 12-18 months?

And I think realistically you're not going to have mega mergers between municipalities, so it's really the two or three companies that have economy of scale will be in the game and with our model being a little bit more oriented to acquisition and the other two big companies being a little bit more into O&M.

Okay.

Thanks, Nick.

But I'll tell you what, this is the biggest -- one of the reasons of the three-year extension was to -- who would have thought we'd be earning $100 million and have a $300 million capital budget.

When you started following us our capital budget was $30 million.

Now the question is -- and to have the high rating and a lot of money in the sense of to do the right things for the environment and everything else, what my goal is where does this Company go with the strong financial foundation and knowing they're not making anymore.

We tried that years ago with Enron forming its own water company in Ducane and all that.

I really think it's a couple horse field and it's up to America and ourselves and maybe the French companies, United and Violia, to really make a difference in the water side, at least in the US, because there's nobody else out there.

Right.

Thanks, Nick.

I appreciate it.

Okay.

(Operator instructions).

We'll move next to Jonathan Reeder of Wells Fargo.

Good morning, Nick.

Just have a couple more follow ons.

One on the equity side you mentioned one to 1.5 million shares, I assume that's in addition to the drip, which is, what, around a million shares per year?

Yes, the drip is about steady.

Brian, is it -- it's not a million, probably700,000?

Yes, about 700,000, Jonathan.

But the one to 1.5 was in addition to the drip?

Oh, yes, and that would be stretched over a number of year -- I don't want to say stretched over a number of years.

It would be what's needed and we could do it in ten, 11, I don't think we could wait until 12.

Okay.

And is the target consolidated equity ratio still about 44%?

No, actually I think we may be looking at 45% (inaudible).

It's in that range.

Yes.

Okay, and then--

Jonathan, what you just gave, I think S&P accepts 43% as the line where they'd like to see us.

Okay.

We don't have much goodwill accounting towards equity in our balance sheet.

A very small amount of goodwill, none of it's in our -- would any of that be in the equity line, the goodwill?

Well, you could argue that some of it was funded with equity.

Yes, okay, but it's very, very small.

Okay.

And then in your ten forecast you're talking that you expect a little economic improvement in the first half.

What kind of customer growth are you targeting for the full year, and if you could break that down between organic and through M&A, that'd be great?

I'm going to have to get that for you.

[Chris Luney's our corporate developer] I don't think we figured the 4% we used to, just because we wanted to make sure we had something on the table and saw some housing come back, and it's starting to look a little brighter.

Permits were up a little bit but it actually shut down in the second and third quarter of 2009.

We laid very little pipe and they were just selling the houses that were already built basically, but we're starting to see new permits.

I'll get back to you on that.

Okay, but definitely less than your target 4%?

Right.

Okay, and then I guess the last question, is it safe to assume, then, with so much internally-generated cash, your interest expense provided rates stay in the neighborhood where they are, we can expect that to be fairly flat, just modest growth going forward?

Well, the only qualification -- let me give you that because that's important for everybody in the sense of -- first of all, we reuped our line at 125 over LIBOR.

That is pretty good and that's, what, 185, Dave total line or is it more?

The short-term lines between Aqua and the --

Yes, it's over $100 million.

Over $100 million.

And we're borrowing at 25 on the LIBOR side, so that's about a point and a half on our short term.

We budgeted higher because we thought interest rates would go up.

They haven't yet, so we might get a little pick up in the first quarter or second quarter from interest.

The other was the tax freeze we issued last year in Pennsylvania that we're drawing down now, that was 58 mid year, which we guide around five,and 75 in November or December, which we brought in under five.

Now, those, when we pulled them down and start spending money on them, have to come in and the interest is paid on it without the UAF FUDC offsetting.

So we're looking -- let's see, I wrote that down last night.

-- interest this year was up very small, it was up flat, 0.5%, we think in 2010, we're budgeting at least, interest to be up 7% year over year based on the new interest coming in and the short term going up.

Okay, that's helpful.

And then we might be able to beat that if interest rates stay down.

The other thing that's very significant when you look -- if you look at our earnings this year, 77 versus 73, the 77 with weather and everything else could have been $0.01 or so higher, at least, but the 73 was really -- it had $0.02 of it in that sale of the Woodhaven system and so on, so we had a pretty good year despite the weather and growth.

Now I'm not arguing we shouldn't have been higher than the 71 because we had those three years in a row where we were flat, but you're starting to see the turnaround and that's with -- this year D&A was up 22%.

Well that's all cash generation but it hurts earnings and we're looking at D&A next year, probably going up 7% to 8%, so it won't have that big jump again because it's starting to get more moderated.

So that'll still generate plenty of cash at 1.07 of what we generated this year but it also means it's a little less hit on earnings.

Okay.

And so then from a consumption standpoint you said 4% to 5% was the decline across the board in 2009, would you attribute 3% to 4% of that just strictly to weather or would it be the entire amount?

Well our budget estimates coming back 80%, yes, so you're right on target.

Okay.

80%.

We don't know that it's all going to come back.

We haven't had a really hot summer since 2005 so maybe it's never going to get hot again, I don't know.

(LAUGHTER) Kind of goes to your first line that you opened up with, the global cooling, but -- and then lastly, do you know when you guys will file the K?

Yes, Bob?

Tomorrow or Monday.

Okay.

All right, great.

I appreciate the time today.

Thanks, Jonathan.

(Operator Instructions).

We'll move next to Tim Winter with Gabelli & Company.

Good morning, Nick.

Hi, Tim.

I just want to follow-up on the weather impact again.

So 80% of the 4% to 5% decline was due to weather.

Can you quantify that into an earnings number or at least ballpark what you would consider non-recurring?

Not non-recurring but I mean normalized -- weather normalized?

$0.03 I think.

$0.03?

Yes.

Okay.

And then the 18 acquisitions, how many customers was that?

It was about -- of the 10,000, about 6,000 was actual customers acquired and the rest was small organic growth.

Okay.

The New Jersey/Pennsylvania rate cases, can you remind me when the expected decision dates are and what the possibility are of settlements in either case?

The Pennsylvania case was filed in November.

By statute in Pennsylvania, they do it in 11 months so that would be September, is that right?

August.

August, late August.

We believe there's very few major contested -- we had two hearings already and only about 20 people came and some of them actually said night things so it's not a very controversial case.

On the other hand it's a case of size, $45 million, and we are asking for ROE of 11.75% and we are asking for 11% rate increase.

But I think there's no reason it couldn't be settled, let me put it that way and that would mean earlier than the August.

Obviously, when you settle you don't get what you ask for because the other side is asking for some kind of reduction.

On the New Jersey case we just started getting interrogatories.

They've picked the judge.

Our case is a little heavier but it's all capital driven.

I think it's a 20-some percent rate increase.

To date very little controversy and we have settled I think our last two or three cases in New Jersey, so I'd argue that unless the new commissioners have a different philosophy that we probably could settle that before the one-year limit in New Jersey, which would put it into December.

And that's why I said earlier, I would argue maybe third quarter we'll start seeing some effect of those two big cases.

Okay, and then one final question.

The Southern states, the acquisitions from Florida Water Service and (inaudible) in North Carolina and Florida, can you ballpark what the earned ROE was in those states for 2009 and how long do you think we get that up to normal?

Well, that's why we're having to go back in and maybe as early as late this year in Florida and North Carolina.

Dave, I'm going to say we're full earnings as you get the full impact of the cases.

Now the cases didn't happen until mid year in 2009, Tim, so the full impact you won't see in 2009 but we're closing in on like six and seven now?

Well, Texas is the State where we're earning the best.

Right.

But we'll be closing in better in 2010 as (inaudible).

We were losing money, Tim, in 2006, 2007 and 2008 in Florida.

Actually losing money.

2009, we turn that around and made a little bit so I would say our ROE is miniscule in Florida, since it's a catch up, and part of that catch up, about a third of the State is Sarasota and we're in a case right now in Sarasota and we're asking for full recovery and that would get us to 10% plus in Sarasota.

So a third of the state we could by 2011, because it won't be decided until late 2010, be earning full keep.

I don't know about Florida.

We wouldn't be going in until late 2010 so I would argue it probably would be 2011, 2012 before we get to the full earnings.

So you can see even though we're doing a lot better and we're getting rate cases and we're getting consolidated rates it all hasn't kicked in yet.

Now North Carolina's a little different, I think we are earning 4% or 5% there now.

Yes, North Carolina has -- starts to return really next year with the cases that we've concluded now but then hits a reasonable ROE in 2011.

Okay, so two more years.

So you can see why this next case -- first case was true-up rate base, take the write-downs, hopefully no more write-downs in the next -- every case and get the expense lined up where they like to see the accounting and get consolidated rates so that you're not defending 1,000 small little cases.

And now the next one is to go in and final consolidation in the states that left it with seven or eight divisions and try and get full recovery.

The one thing I can tell you in North Carolina, I think expenses went down in 2009 over 2008, so that gives you an idea we're really attacking the expense side so that when we go in for the cases it's all capital.

Okay.

So it sounds like the business model is set up for 8% to 10% earnings growth once we have a normal economy and normal weather?

Yes, absolutely.

My goal for the three years is what are we going to do with the solid balance sheet we have and the cash that we're going to be generating to expand basically our net because you want to have more customers out there to spread the overhead over, right, so that everybody -- you're not just putting it -- all of the time you're fixing the pipe you aren't putting it only on your existing customers.

Okay.

And we have no other questions at this time.

I'd like to turn it back to our presenters for any additional or closing remarks.

Nothing from me.

I appreciate everybody's time, sorry it took so long.

Thanks.

That does conclude today's conference.

Thank you all for your participation.