Essential Utilities Inc (WTRG) 2010 Q1 法說會逐字稿

Good day and welcome to tha Aqua America Inc, first quarter 2010 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.

Thank you, Anna.

Good morning, everyone.

Thank you for joining us for Aqua America's first quarter 2010 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 website.

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 on the Investor Relations section of the Company's website.

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

Thank you, Brian.

Good morning, everyone.

I'm pleased to talk this morning about what I consider a solid foundation building quarter that I'd like to go into.

Many of you have followed us for quite a while, and I think this is the quarter were I can say we are back to being the Company that you remember over the last 10 to 15 years.

One with no surprises, we'll be on our way this year, we believe, to our 11th straight year of record net income and the EBITDA growth will continue as it has over the past decade, at a clip of a CAGR of about 10%.

So we're very solid.

I didn't, probably, feel a little brighter because of the bright weather and the springtime.

Back in February when our world famous groundhog, Phil, came out in Pennsylvania, the -- I didn't feel as good because the economy, I don't think, had really started to take its turn.

But we've emerged from winter, I think, stronger than ever.

I don't feel the same risks in the credit market.

We are starting to see housing stabilizing, it's starting to return.

The effect of the foreclosures of the last year, year and a half, but I think have peaked now in the first quarter.

We are actually starting to see usage start coming back, especially in the commercial and industrial sector, which is a good, good tenor for the economic areas -- the economics in the areas we serve.

Unlike New York, I can argue -- I can announce that all our computers are working fine.

These are the other things, I think they're small things, but it gives you the tenor of why our confidence -- we have no stocks or accounting issues.

Our bad debt because of our collection processes is well less than 1%.

I'm not sure many utilities can say that.

We're reading 99.6% of our meters mostly automatically, and yes, that leaves very few that are estimated, which is a big performance issue with most -- most utilities.

We had no charges for the healthcare reform bill like some companies did.

And that's because we took some steps in prior years that avoided the OPEB problem that many companies are looking at now.

Healthcare, although its up over the last three years, our CAGR is only 5%, so you can see we are taking the steps needed to control costs beyond looking for laws to do it for us.

We are sitting with no major environmental NODs that aren't being addressed, and therefore most of our capital, which I mentioned in the release, is now being directed to more -- I'll call it, discretionary, but needed infrastructure.

For pipe, tanks, fire hydrants, things of that sort, most of which is surcharge eligible in most of the states where it's being done.

We start the summer with reservoirs 100% full, so I'd love to say that the weather is on our side, but we ended up the wettest ever, mainly because of snow, especially around Groundhog Day when I started this in the - most of our Midwest and Northeast areas.

On the other hand, we are hoping that the second quarter, third quarter weather improves over last year's very, very wet and not very hot years.

That would be -- bode well for comparisons and also bode well for sales and revenues.

And as I mentioned, the housing comparisons are starting to show a little life.

I'm not going to estimate anywhere close to where we were back in the -- 2006 and 2007 when it started tailing off era, but we are starting to see it stabilize and the foreclosures slowing, which actually were negative net gain in housing, and we're starting to see a few developers coming to us now and say they are ready to start building again, versus selling off the homes they've already built.

So I'm a little more optimistic than I've been.

Our sales for the quarter were off 1.1%.

Revenues were up 4%, so obviously rates were a big part of it.

And most of the sales drop is in the residential side, and that's the side that's most subject to volatility, especially with the weather.

So we're hoping that comes back this year with the weather, this quarter -- these next two quarters -- I'm sorry -- with the weather.

I'm very proud of what we were able to do in our O&M to revenue, we call it our efficiency ratio, but it's really O&M costs, and we're showing very strong quarter over quarter 2009 versus 2010.

We dropped 100 basis points 43.4 to -- over 100 basis points to 42.1.

Last year as you remember for the full year 2009, we dropped 150 basis points from a very disappointing 2008.

And in 2010 we're looking at holding to that 50 to 100, probably towards the top end of that basis points improvement in efficiency.

And I think this tells you we're getting a handle and continue to improve on the systems we put in to really grow from a one state Company to a 13 state Company.

So I think no surprises there.

And I think what I gave you with the year end earnings call, up 50 to 100, we're actually moving towards the 100 basis point improvement.

Depreciation is slowing down now to a manageable pace.

It looks like you can project, although the first quarter is not as heavy -- I don't want you to extrapolate and think were not outgrowing depreciation, that was because of an anomaly last year, higher depreciation than normal.

But we look at -- if you want to look at the full year, I think you want to look around a 6% growth overall in depreciation, even accommodating the no growth in the first year.

Interest, the movement in the interest column, although its manageable, last year we weren't up at all in interest because of the drop in shorts -- short-term rates, which is now stabilized.

We're now quarter to quarter comparisons.

But I think you want to take a look at the combined line of interest in AFUDC.

The movement there, and why AFUDC is up, is we capitalize interest on capital projects so that we can recover it in rates versus expensing it immediately.

And it does then earn in our rate base.

And the difference, the increase between 2009 and 2010 there, is basically we're sitting now with about $80 million some of tax-free issues that we haven't drawn down as yet as we get into the heavy season.

Last year we did a lot of borrowing because of interest rates.

And continue to do so using our A+ rating and credit rating to get phenomenally I think, long-term rates that will bode well for our customers for the next 30 years.

Our embedded costs of debt, dropped again, to 5.44 on the trailing twelve months.

We're actually borrowing on the open market at less than that and we have some refinancings coming up over the next couple of years, which are, of course at higher rates than that because they were taken out fifteen, twenty years ago.

So the AFUDC is really the interest on the capitalized amount on these projects that we're doing.

So if you want to net the two, rather than going, being up 10% in interest, which is the top line on the balance -- on the income statement, the net is up about 5%.

And I think for the year, we're projecting that to go up a little bit as the building season comes in and more of the projects are drawn down on that tax freeze.

But I think you can look at maybe a 7% net of the interest less the AFUDC line.

If you just want to look at the interest line, I think 10% is probably where we are at now, is probably going to be where it stays.

The financings, we are continuing in the market.

We see the market as a positive interest rate at this point and we are going to make sure as we look at our five-year capital plan that we have enough debt at these low rates to -- so we're not borrowing four -- three, four years of from now at a higher rate.

The use of tax-freeze has really allowed us to do that, because you have three years to pull the money down after you lock in the price.

So it's been a very positive thing for us.

Capital, we spent about $68 million in Q1, even though we had the disruption of the snow in many of our areas.

We still are on track to spend over $300 million for the year.

We have spent about $1.3 billion over the last five years, and I think the most relevant part there is, as we look at first quarter and this year's projections, less than 10% of it is going to be spent on what I call compliance issues that you must handle with the, with the environmental agencies.

And therefore, almost 90% to 95% is going to be spent on what I call improvements to the system.

Things that the customers care about.

Better pressures, better fire protection, the new pipe to get rid of any discoloration in the water, things of that sort.

But, things that aren't necessarily tracked by the EPA, but are very important to our customers.

And the good news there is that most of these expenditures will be in the older states, which all now have adopted except for one, New Jersey, a surcharge mechanism which is unique to the water industry.

It's called the DISC in Pennsylvania, the SIC in Ohio, the QUIPS in Illinois.

But, it's all different names, but it basically, it's all very much basically the same, which is a recovery in between rate cases of a certain percentage of your revenues to pay for the pipe.

So it's a way of reducing the regulatory lag if you're doing short, short projects to build but long-term in benefits like pipe and fire hydrants.

I'd like to comment also on our corporate development program.

We're starting to see some life.

Last year both natural growth and acquisitions slowed.

Last year total 2009 we netted only about 0.8% to 0.9%.

Now, some companies would be very happy with that growth last year.

Most electric utilities were actually down.

But it's nowhere near where we had been, which is in the 3% to 4% range.

back in the mid 2005 and 2006.

Actually we were growing much more rapidly because of the acquisitions in 2004, 2005, and 2006.

In 2008, we grew about 2% and we dropped below 1% last year.

Were hoping that 2010 shows a turnaround on that.

We start moving back between the 1% and 2% range, which is starting to see the turnaround.

We're starting to see very small organic growth, I mentioned that earlier, with the builders.

So we think the worst is over and most of the foreclosures, those houses have now been resold and people are buying those first with the Home Tax Credits, which means the next step is to build some houses.

Acquisitions, we're seeing a lot more activity in the acquisition front than we saw last year when I think the whole economy froze.

Last year we only did -- well, most companies would be happy with it -- last year we did about 18.

This year we're looking at getting back into our normal mode of 25 to 30.

Now, necessarily, with 50,000 small water companies, most of them are small, but they're all over their states, so we're seeing activity everywhere, not just in one or two key states.

And the organic growth that we're seeing is coming back mainly in the south first, which is what you'd expect.

But the core area of Southeastern Pennsylvania really never went down that much.

It was not as hit as much by the foreclosures, and we're starting to see a little uptick in, not only existing housing sales, but new homes being contemplated and built in the southeast area.

So I think we're very pleased with the outcome, obviously, 17% increase of net income.

The -- I do want to mention, I mentioned the AFUDC which I think is positive, and that gets into our credit.

Part of the $0.16 was an investment and when you net that out, it's probably between $0.005 and $0.0075 growth.

So, it's still a good quarter even with that.

But -- and it's real money.

As we've done in the past from time to time, in 2009, we took a position in a publicly traded utility company whose share price had declined in value.

This is something we do -- have done over the past four years in three other occasions.

In conjunction with action, we spent over $500,000 assessing the entity to evaluate whether any further action was appropriate.

In the end the share price of the stock rebounded quite a bit.

And our decision was to sell the shares, and that resulted in the after-tax gain on the sale, about the 1.3 which is what you see in your -- in the, in the net income statement.

But the expenses incurred were all in the O&M expense column.

Which even makes our only growth of 1% look even better.

I do want to comment on the O&M growth.

We anticipate -- we're not going to be able to hold the 1% O&M growth with salaries.

But we did not have any layoffs, and we gave people raises.

And health care is still going up, even though I gave you the three year average of 5%, it's still up, not down.

We do have a good story to tell on the pensions.

I think, if you compare our numbers to any of the other electric, or water companies, you're going to see our pension expense as a percentage of operating income is probably one of the lowest of the utilities, and our unfunded liability for outstanding shares you're going to see is very low, too.

Now, in our business we hope to get pension expense back anyhow, but you -- it's still something you don't want too much of an unfunded liability, or the pressure on regulators to give you too much in the way of rates for your pension, when many private companies have done steps to eliminate the pensions, like we did back in 2003.

So, we're pleased.

We think we're in a good position there of reducing the threat from pensions in the future if the market doesn't act like it has in the last year.

And then last but not least, labor is an important part of our business, especially when your building $300 million worth of capital.

We have settlements with seven of our nine Unions.

We have two to go.

The average settlement is 2.5% to 3%.

We have the concessions we needed.

No new -- no employees, new employees as we hired new employees since 2003 are not eligible for a defined benefit pension, or a retiree health-care.

That's why our long-term actuarial costs are not as high as other companies.

And the other issue is that we do have a contributory part to our health care program, which puts the employee as a consumer, and therefore cares about the ultimate premium price in healthcare, which helps management as we negotiate with the large healthcare providers.

So pretty detailed, but I wanted to give you some direction as two some of the key elements in our, in our future three quarters.

Thank you very much.

I'll answer any questions.

Thank you.

(Operator Instructions) And we will take our first question from Ryan Connors with Janney Montgomery Scott

Hi Nick, how are you?

Good morning, Ryan.

A couple of questions.

First off, just in terms of the general trends you see out there and the rate case environment, you have as good a handle on that as anyone in the industry.

What's your feeling on the trends out there in terms of returns on equity that are being awarded and the percentage of things being filed for, that are being granted?

Are things trending in a direction that make you confident about the things you have outstanding?

And especially in kind of the states where you are awaiting things like Pennsylvania, Virginia, and New Jersey?

Yes, I probably should have that that a little bit in the presentation.

Thank you.

First of all, I'm going to draw a line -- as you know, I'm active in the electric industry somewhat, being on the Board of a large electric, and the PUC's handle everything electric has.

And water.

I think there's a very clear line between water and the other utilities mainly because of the variability of price.

Obviously the water bill is a lot lower than the other bills.

We don't have the mechanics of the generating companies versus distribution companies, federal regulation, FERC, and all that, and so on.

And the regulators have come to understand that we are the most capital intensive, and unless -- if we don't get a fair return on investor dollars, we're not going to be able to keep our A+ ratings, which is really helping the consumer in the long-run by allowing us to borrow at rates that are probably 100 basis points less than an electric, who's sitting with a BBB.

So, we have not seen a diminishment of the ROEs.

Now there's a couple of states, which we're not in, who have had some erratic regulatory, and I think the companies in those states have been able to win it back.

I'll use California as the key example.

It was probably the worst state to be in five years ago because of some of the policies.

But under John [Burman], the new water person in California, it's come back quite a bit, and they're getting reasonable returns, 10.2 and so on.

We're seeing I'd say, around 10.5 if you want to average it.

Some states better, some states slightly less.

And we are seeing very little challenge, rightfully so, on the prudency of any of our investments, whereas I think that's the biggest issue that's going to hit the electrics as they walk into a huge capital need program, not only with wires, but also with carbon control and new coal plants and those of those -- those that are not deregulated.

And is just a much more complicated business.

Lower ratings going into it.

And probably more of their earnings go on to dividends now than they used to be.

And something's got to give if you're going to spend a lot of money and you don't have as much access to the markets.

So I think we're going to be fine.

I would say that most of the attention, which is the basis of your question, how do you see commissions, probably will be spent on the electric side.

Our two biggest cases -- I'll give you an example.

We settled -- we did not settle, we got a litigated case who went through a lot of hearings and a lot of different people -- had a U.S.

Senator come to one of our meetings and complain, thought the water rates should stay the same because of the economy, no rationale on the litigated side of the substance.

And the commission upheld the judge's ruling and said this is what they deserve.

This is what they're going to get.

And I think that is the best example I can use of the commissions feel.

They're going to stand up for what they think is right and they are insulated somewhat from politics.

In Pennsylvania and New Jersey, we are doing very well with our hearing process of our negotiations with the consumer advocates and the PUC's staff.

I'm optimistic we may be able to settle both of those cases, which would be in place earlier than the normal October or December timeframe.

We would have anticipated through a litigated.

And I think that's good for everybody.

The customers, you obviously have to negotiate a price that's pleasing for both sides, you don't have a settlement.

But the, the -- that means you're not into an expensive great process, plus if you get it early, and it's a better than what you would've expected summary, you get the extra benefit of a couple of extra months of it.

So, that very seldom happens in an electric case, where they are big and they'll only come in with huge amounts and only a couple of times in a decade.

Ours are more routine, I guess you could argue.

And of course you know that DISC is really the key item and a lot more of our revenue enhancement over the next five years is going to come from the DISC than from litigating cases.

Okay.

And just kind of a follow-on to that, Nick, I mean, in terms of deploying capital, it's more of a -- kind of a thematic issue for you and the rest of your peers.

This whole issue of dividend taxation next year that if we go back.

you know if the '03 Bush tax cuts expire and we go back to an ordinary income tax rate, you know, some people are talking as high as 45% on equity dividends.

I means, does that -- how would that impact your cash deployment priorities?

Would you change at all, what you're doing from a payout perspective?

And the reason for the question is if -- would it make sense for you or others to maybe get more aggressive on the acquisition front if your dividends are going to be double taxed at that kind of punitive rate?

Could that sort of accelerate the general consolidation theme for companies like you that are active there?

Well, that's a very insightful question.

First of all, obviously, the President is saying 20%.

So whether Harry Reid wins or the President wins, we'll see.

The second is I think a lot of it is discounted.

So I'm hoping a lot of it is discounted.

We'll see.

Third is, I think the waters have always been less of a yield and more of a stability product.

Most of our -- and what I mean by that is we have never yielded what the electrics have in their bad years, and usually in the good years, the electrics play around with the dividend somewhat.

But I think the reason their yielding 6%, 7%, is their stocks are down of the growth prospects.

And then what happens is there's the threat of cuts.

If you have capital that you have to use because of the fact of the environmental role, you don't have the depression, I think what I was saying is our capital, first of all, is much mores discretionary.

I think the 60 to 70 range if we've been in over the years is our intent to stay in that range.

Five years ago that question is just asked, I was being asked by many of the institutional investors who didn't care as much about dividends.

They do care about dividends now, so I'm not sure where they'll be if they go to double taxation at 40% or whatever.

Most of our retail customers are long-term holders.

As you know, we did a 5% discount to people who reinvested their dividends, 20% to 30% of our shares, probably a much higher percent of our shareholders, are in the dividend reinvestment program and have been there quite a while.

And our dividend record has been a CAGR of 7% for over ten years, if not more.

And we have increased the dividend every year for seventeen years.

I would stack that up against a utility as two how much they have been able to increase the dividend before they get into trouble and start having too high a payout.

So I think we have a lot more flexibility and part of that flexibility is we do have a place to put it if we don't want to give it a dividend, that is in growth.

But we've always tried to strike that balance that we thought our long-term shareholders wanted, and the dividend has always been their number one item.

One of your predecessors at Janney, that's all he cared about, was the dividend.

Yes.

Right?

Now, on the other hand, the institutionals were 100% the other way, and now they have drifted back towards having at least a bass dividend to depend on, as long as it's affordable.

So that's the other part of the question that was insightful.

Affordability.

And I think you have to look at the Company's five-year plans, the capital plan, the growth plan, and cash generation, which we're doing pretty well on.

Probably supporting most of our capital budget right from the internally generated cash is really going to be the key.

Okay.

That's great perspective as usual.

Thanks, Nick.

Our next question comes from Jim Lykins with Hilliard Lance.

Good morning, everybody.

Morning, Jim.

First a question about acquisitions.

You guys are at eight year-to-date, and I wonder if this is more a function of being more aggressive or if it's the environment ?

And maybe just general comments you can make regarding what you're seeing out there, if you're still (inaudible) being a little bit more picky, if you got lots of municipalities out there still waiting for free money?

Just what -- I know you can't be specific, but just what can you tell us in general about what you're seeing right

More activity, and some of it may be self-generated by our contention now as we fixed up the states, put new management in, they now have more time and have more money, basically, to go out and really hustle for acquisitions.

There are a lot of small ones, and the small ones are not probably as optimistic as I am about their growth prospects or their access to credit prospects, are even there outside of the EPA's grab prospects in the sense of they may be facing some major capital because of some violations.

By the way, the EPA, Jim, is not getting -- never got weaker, even under the Bush administration, although you'd have people tell you that.

And actually, enforcement was at its peak in 2008.

2009 it was down a little bit, '10 its coming back, which I think is important to get some of the se wayward souls into to the acquisition mode.

And I think you're seeing now the Obama administration concentrating much more on new regulations, which will mean this trend will continue well into the future of stronger regulations and hopefully even enforcement.

And if that's the case, there are very few buyers, and probably going to be about more sellers.

I'm just giving you a macro look as I have seen it over the last 20 years.

Regarding municipalities, there's a different function that's at play.

And that is the fact they -- you can only defer maintenance for so long.

And you can only hope for manna from heaven for so long.

And that's what's happening.

Every municipality is is saying, let the next Mayor handle it, and I shouldn't be so general.

Not every municipality.

There are some who are doing a great job.

Atlanta is raising their rates every year and putting in new sewer system under the consent decree and so on.

But many are just hoping that, that there won't be a break on their watch, four year Mayor's term, or that somehow Congress is going to pass a massive infrastructure bill that gives free money to all cities.

Obviously, we are opposed to that.

We don't think it's the right thing for the country are for the private sector.

You wouldn't do that in electric or cable or gas companies.

Why would you do it in another utility, which is water and wastewater?

The ERA funds that were issued, which were about $18 billion of the seven of $87 billion in 2008, have not all been deployed yet.

We got some of those funds.

$3 million of our $300 million last year was ERA funds, grants.

I have to tell you the red tape involved almost made the project more expensive than taking the free money.

If it was a low-interest loan program you wouldn't do it because you're spending more on the extra tracking and extra things you have to do to get the grant -- I'm sorry -- low-interest loan, than it's worth.

So we're avoiding it.

Because if we can borrow it at less than 5% on our own, why go through the aggravation?

But anyhow that's my own personal opinion.

I think the affordability of a huge grant program is going to be the end result of saying we're not going to have another one.

But until the administration says that, or says you're only going to depend on low-interest loans like we have for the past 20 years, and by the way, here's all the new red tape attached to it, it it'll clean out the guessing that many municipalities are doing, and they will be able to figure out if they want to do their own bond deal and not go through all the aggravation or, or go through it.

Now having said that, if you think you're going to get free money and can blame you're inaction on that waiting for free money, it gives you a political escape.

Mm-hmm.

But I think that's going to end, hopefully, in '10 if not early '11.

So we're starting to see some more progressive municipalities saying, why are we in the water business?

And then that starts the one or two year emotional gestation period that you have to go through so that everybody has their say.

You've seen what happened in Trenton with American.

I mean, there's no easy municipal acquisition.

But eventually, I think the logic prevails and I think you're going to see a lot of us buying municipal systems and trying to run them over the next five years.

Okay.

That's very helpful.

What about the $20 million you plan to file for in 2010?

Can you break any of that out and when you anticipate any of those filings?

Yes we can.

Let me grab that sheet of paper.

The $20 million will be, let's see that's Florida, there we go.

We have a case in Ohio.

Which is a case that we haven't been in for five years.

That should be an acceptable case.

And we have, in our south, now that we have consolidated rates, be a case probably in Florida.

We have North Carolina ready to reinitiate.

Virginia, we have phase two of one of the consolidation programs.

And possibly a case in Texas in addition to a number of surcharges that will be filed.

We are sitting now with the two big cases, which we hope to get the settlement, would be Pennsylvania -- of that $65 million that I mentioned in the release, the bulk of that is Pennsylvania and New Jersey, which both are in settlement discussions.

We are in much earlier stages in a couple other large ones, Lake County, which is up near Cleveland and Lake in Ohio.

Fort Wayne, Indiana, which we filed, Kankakee, Illinois, where we filed, and a small facility in [Majory], Ohio.

We have a large case in Maine, that we're involved with now.

And of course we have a large consolidated case in Virginia, which is in it's final settlement stages.

And it should be done by the end of the summer.

And we have an ongoing case and our largest subsidiary in Florida, Sarasota, which regulates -- the county regulates versus the PUC in Florida in that situation.

So you can see there is a constant flow of rates.

We have done very well.

We just settled Missouri, and that's being initiated.

New York, we got almost everything that the -- we and the judge agreed on.

That's the one I was mentioning the Commission stood tall against a lot of political issues.

But just basically, when I say political, I don't mean they came in with charts to show why we were spending too much or too little, they just said now is not the time to raise rates.

Don't let them have a rate increase, which is more emotional.

And there was one other and I just can't remember, that we got in the first part of the year.

But their holding up in the mid-10 range.

Prudency has not been an issue.

I think the fact that we go in with the lowest O&M to revenue ratio of any utility, not just water utility, and I think the fact that we go in with our pension and our health care costs under control give us a little bit better chance of getting a good settlement then if you go in with those two areas out of whack.

I know it might be a little bit earlier and now, but of that $20 million for the five states you mentioned, are there any where you can give us an idea of how much are going to file for, and if so, when, so we can start working that into our 2011 estimates?

I think probably that will be evenly distributed over the third and fourth quarter.

Fouth will have more of the DISC in it.

We'll get back to you after the fall with that much DISC we'll [file].

Because that's pretty much 100%.

I mean, there's very little debate on the amount you can apply for and the amount you will get.

The others, obviously, there are some assumptions put in and you don't always get what you ask for with the Commission's.

And I think hopefully, we'll be able to, by or June or early July be able to tell you what we're doing in Pennsylvania and New Jersey.

At which point, that will really set the tone for Q3 and Q4.

Okay.

One last thing and I'll let someone else ask a question.

And I apologize, but I missed the very beginning of what you said about the DISC in New Jersey.

What's the status of that?

Well, it does not appear -- all of us have tried to get it in our individual cases, and in any settlement discussion, it's off the table with the staff.

There's a new set of Commissioners, and the new Governor.

The transition report for the Governor for the PUC did say, recommend, I don't want to say as strong as recommend, but mentioned one of the key policy issues that New Jersey should look at is the DISC.

But, I think there may be some new thinking with the administration change.

I'm not sure if that's translated to the staff of the PUC yet.

But at this point it will be part of our case.

Okay.

However, there's an active, separate ruling needed for American, which we are at (inaudible).

That would mean if American is granted the DISC that United, ourselves, and Middlesex would hopefully join in without a separate filing.

But we're all working with American to try and justify a DISC in New Jersey.

The last state in the mid Atlantic and Midwest that doesn't have it.

And pipe is no younger in New Jersey than it is in other states.

Okay.

All right.

Thanks, Nick.

(Operator Instructions) Our next question comes from Jonathan Reeder with Wells Fargo.

Good morning, Nick.

Good morning, Jonathan.

Pretty straight forward quarter.

I was just wondering if you could give some clarity around previous comments made on your net income guidance for the year.

Your talking 5% to 7%% first half growth.

And then 7% to 10% second half.

I know just looking at the first quarter, seemed to be a little ahead of that pace.

And it's relatively a small quarter.

But, you know, where do you stand on the overall thoughts on that net income guidance?

I think if you net-net, it probably looks like 10% or 11% percent net income growth if you take expenses and gains and all that out of it.

You could argue maybe one time.

Right.

But the core, core earnings are right back where -- I think we're always projecting, you were always expecting.

The weather will be such a determinant in two, and we don't have much in the way of rates year-over-year other than the little bit in the beginning of the first quarter in New York and others.

Unless the rates come in Pennsylvania and New Jersey before the end of June, which would be a push.

But it could happen.

Or unless we have a return to normal summer.

Which is what we're hoping to get.

When Dave put that guidance out in New York, it was basically trying to explain that the second half of the year is going to be better than the first half.

Because the third quarter, you have the weather and the rates should be in place..

And if they do settle in New Jersey and Pennsylvania, they should be in place by July, which would give you an extra two months or so of higher rates plus hopefully, return to normal weather.

The acquisitions, will add enough -- it takes a while to get them in, settled, and in, but -- and last year's acquisitions were less than 1%.

So we're not going to see major growth from that 1%.

This year, hopefully, it will be 1.5% to 2%, which will help '11.

So a lot of this is really still looking at '11.

Especially the cases I mentioned in Kankakee and Fort Wayne and Sarasota, and then ones we file later this year won't even happen until late '11.

So we're starting to see a nice blend of steady rate increases along -- supplemented by the surcharge to keep the top line growing, especially if can we kick it a little bit with the acquisitions.

With the -- the big question, weather, as it always is.

So I think that's why we, we're sort of cautious in the second quarter of 5% to 7%.

Okay.

And those growth rates, I'm assuming they don't assume settlements in the New Jersey or Pennsylvania case?

That would be kind of be a bonus?

Yes.

I think , the best case on the settlements would be June sometime, because you have to get around a Commission meeting.

So the best would be a month.

See what I'm saying?

In other words, but it's better than holding 'til

Right.

I mean for Pennsylvania, if it's fully litigated, is it sometime in mid-September that the rates come in?

And New Jersey is around December?

Pennsylvania is 11 months we filed, November, early November.

So it would be sometime in mid-September to October 1.

Okay.

And last question, can you just make some comments around what you're thinking regarding external financing needs?

In particular, equity to this year, based on where you're consolidated ratio is?

Spending the $1.5 billion over the next five years that we are looking at, short of a major acquisition, consolidating small ones like we're looking at now, $25 million to $30 million a year, we still don't see any dilution beyond 1% per year, which is what we have modeled and have you modeling.

It might be an extra million here if you need it just to fine tune the debt to equity ratio for S&P.

But we just got reiterated with the A+ strong financials.

Were generating more cash than we ever have.

Because our expenses have gone down so much.

So, we don't -- we're definitely going to access the capital markets for debt because we have some refinancings at 7%, 8%, 9% that we're going to go after, and we also want to maybe go with another tax-free, just so we have it on the shelf.

It's almost like a shelf financing because you have three years to pull it down knowing we're going to spend a lot of money in Pennsylvania.

Were sitting with about $40 million or so of low interest loans still outstanding even if we don't apply for another one in Pennsylvania.

So it's another access to markets that is on basically [call] shelf.

And -- but overall equity, were not looking at anything major, 1 million, 1.5 million shares, it would still be less than 1%.

Okay, so there's the potential for another forward sale or some kind of aggregate secondary offering in addition to the drip in order to keep your equity ratio and the, call it 43% to 45% range?

Yes, it's very small, and maybe not this year.

Okay.

All right.

Thanks, Nick.

Okay.

Our next question comes from Garik Shmois with Longbow Research.

Hi, thank you.

I just have a question on the cost side as follow up.

You mentioned in your prepared remarks O&M was up about 1% I think on a prior call you mentioned that you would expect it to be up about 3% or 5% for the full year.

Is that still a pretty good number to use?

(Inaudible) We were just talking that.

I think that's -- where -- what happens is in Q2, Q3, if we return to normal weather, which obviously we're hoping to, is, to answer Jonathan's question prior on the, what do we think Q2, Q3 will be, that we'll bump up electric and chemical costs over last year, where they were depressed.

We haven't had any major layoffs or anything of that sort, so was just holding labor along with, I mentioned, 2.5% to 3% salary increases.

So I would say 3% -- 3% to 5% is a good range going through the rest of the year.

We had a pretty phenomenal first quarter going up 1%.

And just my last question is on the commercial industrial demand here.

Were starting to see some I guess, improvement there.

Any sense on how sustainable that is?

Well, let me qualify that two thirds of all our revenues come from residential.

So, and when you take the commercial, which I think is probably the biggest chunk of the remaining and public, which is fire hydrants, pretty stable.

And that's the part -- commercial are starting to come back little bit.

Industrial on our whole system is probably less than 5%.

The South has very little, so that's why the weather and the housing growth is important to us in the South.

So I would say, the fact that it's not going down and is starting to pick up, would be the big, bigger users like Boeing and some of the electric companies, and so on, which is a good sign because I think that says that at least the job creation market is stabilized.

It's not going down anymore, and it stabilized and hopefully goes up from here.

Okay, great.

Thanks for your help.

Okay.

(Operator Instructions) And it appears there are not further questions at this time.

I would like to turn the conference back over to Mr.

Nick DeBenedictis.

Okay, I thank you for your time this morning and have a good weekend.

That does conclude today's conference.

We thank you for your participation.