Essential Utilities Inc (WTRG) 2011 Q2 法說會逐字稿

Good day and welcome to the Aqua America Incorporated second quarter 2011 earnings conference call.

Today's conference is being recorded and at this time I would like to turn the conference over to Mr Brian Dingerdissen, Director of Investor Relations.

Please go ahead.

Good morning, everyone and thank you for joining us for Aqua America's second quarter 2011 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 Nicolas DeBenedictis, Chairman and President of Aqua America, along with Dave Smeltzer, the Company's Chief Financial Officer.

As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties, and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements.

Please refer to our most recent 10-Q, 10-K and other SEC filings for descriptions 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.

Thank you, Brian.

Good morning, everyone.

This was a very productive quarter for Aqua's customers and shareholders.

We've experienced a hot summer in many of our key states and our system has reliably delivered all our customers' needs and I think that can be attributed to the major infrastructure rebuilding program we've conducted over the past five years.

Also, the financial results were very rewarding.

As a management team, we feel like we're driving a race car that's hitting on all eight cylinders and have just been refueled with cash from the various low cost borrowings that we did in 2009 and '10, and now supplemented by the tax policies that reward companies who are making major capital investments like Aqua.

And the good news here for our customers is these lower interest rates, less borrowing needs because of the tax policies and the cash coming from those tax policies will all accrue back to our customers in modified rates going into the future.

So, it's a win-win.

First six months -- this is the first six month period I can remember since leading this Company that our net cash generated exceeded our capital expenditures.

The net cash generation was a record $160 million and we did spend $134 million, which we expect to increase as we approach the second half of the year to get to our budgeted about $325 million in capital spending.

Once again, EBITDA numbers were strong, up 10% year-over-year, $195 million for the first six months and we expect the EBITDA numbers to be up 10% for the year.

And there's no surprise there if you take our CAGR over the period 2000 through 2010 historical data you'll see the CAGR is 10% plus.

We continue to generate more and more EBITDA year in, year out.

The numbers speak for the themselves, although there is a GAAP, non-GAAP which we'll try and reconcile for you.

The net income was up 26%, earnings 27% on a GAAP basis, versus 22%, on 1% more shares outstanding.

Revenues were strong again in the second quarter, 5.5%, of which I'm going to give you some guidance.

About two thirds of that is rates and a third is consumption and organic growth.

And we see the 6% revenue increase quarter-over-quarter continuing in the third and fourth quarters.

There may be a little different mix between rates and consumption, but generally the same 6%.

I think our first quarter was 6.5%, this quarter 5.5% blended 6%.

So, a pretty steady 6%.

The non-GAAP numbers, which Dave will go into in a little bit more detail, is $0.25, we reconciled them in the press release versus $0.22.

This takes away the benefit of the Pennsylvania special tax advantage we're getting all four quarters this year.

And we -- so our corresponding non-GAAP numbers are 25% versus 22%.

Still a strong 14% increase year-over-year.

In light of the fact that we just yesterday had our strategic meeting with the board and looking at our outlook going forward, the board increased the dividend 6.5%.

This is the 21st dividend increase in 20 years.

And when we looked at the CAGR over those 20 years, this wasn't just a little bit each year.

It's been a CAGR of 6.4% year-over-year annualized.

And we're very proud of that record as rewarding our shareholders.

We also appointed a new board member yesterday, Wendell Holland, former Chairman of the Pennsylvania PUC and former official of the National Association of Regulatory Commissioners.

Mr Holland's experience as both a lawyer and being on other utility boards and working for a -- formerly working for a utility, we think brings a broad -- especially regulatory, but broad based experience to our board and we're very proud to have him.

To take a look at the revenue side before we go to the expense side, two factors.

First of all, we're still seeing the residential, mainly because of the good June.

It's pretty solid.

That's 80% of our revenues.

The commercial/industrial which is about 20% of our revenues still shows, I'll call it malaise.

There was no big bounce-back in the second quarter of '11 over '10, but when the economy does come back, we see that sector, that 20% sector of our revenues helping out.

On the rate side, which is the other side of our revenue growth side, we did annualize $18 million in rates in the first six months.

And that includes cases in Pennsylvania waste water, Indiana, mainly the utility center case, and Ohio in one of our three divisions in Ohio.

Roughly two thirds of the increase were [BIS], Quips, SIC; they're all called different, but they are the surcharges for infrastructure in the various states and about a third was the actual rate cases.

The Company still has $25 million of rate cases pending before seven regulatory bodies, with the big cases pending in North Carolina, Texas, and Illinois.

And hopefully all will be coming to fruition later this year, mid-year to later this year.

And we expect to file cases in seven more jurisdictions and those filings will all be done by the end of the year and we expect them to cumulatively total $45 million to $50 million additional.

You can see still a pretty heavy rate schedule to recover the major capital that we've been investing in our systems, which I think is the benefit of which is now showing forward as you see how we're handling a very hot summer with very few problems.

If I can go now to the expense side, which we're again very proud of, which is what's allowing us to be the most efficient utility in the country from the standpoint of efficiency.

We call it an O&M to revenue efficiency.

The actual numbers for the first six months is about 1% growth in O&M.

We do see that accelerating somewhat, although not dramatically in the second half because commodity pricing and other things and timing of certain contracts are coming through.

Purchase water, electric rates, things of that sort.

We still think we can hold the full year below three and that's better than our original projections because the 6% growth in revenue and the 3% growth in O&M, which is now less than 40% of our revenue stream, you can see is a very positive effect on EBITDA and future return on revenues.

Looking at that factor, because we've often talk about that, we were able to -- from -- actually, we took it down -- between '09 and '10, we took it down almost 200 basis points to 40.3% from -- I'm sorry from '08 to '09.

From '09 to '10 we brought it down another 170 basis points from 40.3% to 38.6%.

And we think this year we can bring it in under 38%, another 0.6 to 0.7 of a percent.

And we continue seeing it dropping in our planning when we looked at our long term planning to actually get into 36% to 37% range closing in on one-third of every dollar to expense two thirds to supply the need for capital for this industry.

It's a phenomenal record, I think, and we're very proud of that.

We had a very busy quarter in the area of corporate development which I think is going to strengthen the Company and strengthen our efficiency going forward.

The general theme -- a lot of transactions, but the general theme in this first six months is really to be concentrating in states where we have critical mass.

Coincidentally, our largest states now have become energy producers because of the Marcellus and Utica shale and Barnett shale gas plays in Texas, Ohio, and Pennsylvania.

And it also has with the ins and outs of the sales, we see no need for equity with the cash coming in to help support our major capital program, which will be another record this year to 325.

We see no major need for debt other than fine tuning and the planning we did in the '09, '10 time period after the '08 crunch, I think is paying itself well to our shareholders and our customers by keeping rates down and our needs for financing down.

And any kind of dilution of the shareholders stock.

Last week we announced the sale of our main subsidiary which we did a tour of the state last week with Connecticut Water and it went very well with our employees.

We can answer any questions you may have about that.

We didn't have any calls on these.

And a month ago we announced another swap with American Water where we're taking their properties in Ohio.

They're taking our properties in New York at book value, each deal.

And we've completed the swap announced six months ago of our Missouri properties for the American properties in Texas.

So, we're now down to nine regulated states plus one unregulated from 14 prior.

And we have basically the same number of customers.

These deals are not all done.

We expect them to be done late this year, early next year.

We just announced a small deal yesterday in Virginia.

We did a couple in North Carolina a couple of weeks ago.

And we continue to look for the small tuck-ins which continue to feed our need for consolidation and -- in the country, and it helps our economy scale.

And we also think we're helping society because we usually end up rebuilding these small under-capitalized systems into meaningful water purveyors for the citizens who use them.

I think I will stop there -- let me comment on the earnings and the projections and let Dave explain something.

We decided in the first quarter, because of the special Pennsylvania issue this year, which is about $0.02 a quarter.

It was $0.03 in the first quarter because of the -- we had the fourth quarter of 2010 to recapture in the first quarter when it was passed retroactively.

That $0.02 a quarter will be affected in the third quarter on the GAAP side because of all these transactions we did with Connecticut Water and with American Water.

For the quarter this quarter, our [booth] -- whether our 27 -- use our 27 or our 25 comfortably beat first call.

And I'm comfortable with the first call number that at least I know of today which is $0.33 for the third quarter.

Before -- that would be on the non-GAAP basis.

What I will call unofficially an operating basis.

But with the pluses and the minuses of the taxes coming in, it will affect our third quarter GAAP.

And I want Dave to explain that so that any projections you're making are clear.

Thanks, Nick.

You may remember from the prior call, we talked about the exact topic that Nick mentioned, the PA flow through of the 100% bonus depreciation.

And as Nick mentioned, that benefited us by $0.03 in Q1, about $0.02 in Q2, and we would expect it to benefit it similarly by $0.02 in Q3 as well.

But in addition to that, we will have a one time negative item in Q3 that we will likely also capture in our GAAP to non-GAAP reconciliation.

And that relates to held-for-sale accounting regarding our decisions to exit Maine and New York.

And you may have seen this in other companies that you follow.

But the short version is that, upon making that decision to exit those two jurisdictions, we need to record a deferred tax on our books relative to the difference between the inside and the outside basis.

So essentially, we look at the tax basis.

We look on the book basis.

And we need to record a deferred tax equivalent to that difference, which for Q3 we would expect to be in the range of $7.5 million, or perhaps in the range of $0.05 to $0.055.

So again, we expect to have a couple cent positive matter in that GAAP to non-GAAP reconciliation relative to the Pennsylvania tax flow through.

But offsetting that $0.02 could be in the $0.05 to $0.055 range negative issue regarding the held-for-sale accounting for New York and Maine.

So, unlike the first two quarters where the GAAP exceeded the non-GAAP because of the positive effect to Pennsylvania.

Because of this negative effect of the accounting rules that you have to actually show even before you sell the assets, the tax issue, and that we believe will show in the third quarter and that will be a negative.

So, we would anticipate GAAP being actually lower than non-GAAP in the third quarter and then reversing itself in the fourth quarter and coming back a couple pennies more.

Just so you can figure it out, the year end numbers.

I guess after all is said and done, Dave, you are saying basically a couple pennies lower?

Right, rather than a $0.02 positive variance by the tax that we've experienced in past quarters, it could be a $0.03 negative variance just in Q3.

$0.03 to $0.04, depending on rounding.

The good news is when we exit Maine, which let's say it's the first quarter of next year, we will be able then to book the entire gain, right, Dave?

Right.

So, this $0.035 will come back to us because we really did sell Maine for a profit, not for a loss and it will be reflected in next year's first quarter, higher than it would have been normally if we had done it the way we used to do it before this new accounting rule.

Sorry for the confusion.

I thought clarity would be helpful as we get back next year hopefully into more of a GAAP, non-GAAP, more normalized GAAP, non-GAAP numbers.

This is the first year we have ever shown the reconciliation and tried to -- I know a lot of companies do it every quarter.

We've had pretty consistent numbers year in and year out and this is the only anomaly.

And it's good.

It's all positive in the sense that we'll be showing higher GAAP than non-GAAP for the full year.

I think that's covered everything.

If we can open it up for questions?

(Operator Instructions) Our first question comes from Zoran Miling with Longbow Research.

Thank you for taking my call and congratulations on the quarter.

Just two questions if I may.

You mentioned previously that providing water for hydraulic fracking operations may add about 300 to 400 basis points to top line growth annually.

Now with your expanded presence in both Texas and Ohio, what sort of top line growth are you expecting collectively from these unregulated businesses in the years ahead?

I don't think we've ever made projections to that level on the water.

I can tell you what we're doing and then you can make your own assumptions.

We really haven't seen anything yet.

All we have is things in place.

We've set up what we're calling filling stations in Pennsylvania.

We're looking at some in Ohio now because the Utica shale has started to develop in Ohio.

Where we'll sell at an unregulated station, water that we either get from a stream with all risk being born by the corporation, not the regulated entity and/or hooked to one of our water stations and we pay the retail rate to the water station.

And this is the service, the trucks.

They are 5,000-gallon trucks.

And one well may use as many as a thousand trucks.

It's an amazing operation.

When you ride up there -- is this Garik?

This is Zoran, his associate.

Okay.

If you ride in the northwestern and northeastern part of Pennsylvania I guarantee you'll be stuck behind a truck on some highway sooner or later.

That's how many trucks are up there.

This is a way of getting the trucks more efficient by not having to go into towns to fill up, but right along a highway and get back on the highway.

Saves them time and money and saves wear and tear on the roads.

In addition to that, we are exploring some other concepts which would be more of a wholesale delivery of water directly to the users, the range resources, the Chesapeake's and so on.

Which means that we would be coordinating our activities with people in the gas business versus just truckers.

And we think there's, again, a positive for the environment and a positive for our unregulated revenues in that area.

I really don't want to -- if we do it, we're very confident.

Obviously, we wouldn't do it if we didn't think it was going to be profitable.

We think the Marcellus and now Utica are really in their infancy.

And that's why we want to get in on the ground floor.

And maybe some day your numbers will pan out.

But I don't want to over predict for '11.

Understood.

Thank you for that clarification.

Just one more question.

You guys have done a great job of controlling costs and the improvement in the O&M ratios certainly exceeded our expectations.

Understanding that there's only so much costs you can remove from your operations, how soon do you think you can get to 36% to 37% range you mentioned earlier?

And does part of that improvement come from now operating in a fewer number of regulated states?

Thank you.

Absolutely.

In fairness, American, when you hear their conference call, they'll talk about the same idea, lowering operating costs to revenues so that more can drop to the bottom line, which then we turn around and invest which is an interesting business model.

But it works.

The more customers you have in fewer states, the more efficient you're going to be.

It's just common sense.

And that was the driver behind us exiting some states where we were not doing well.

Missouri, our O&M to revenue ratio was probably in the 90% ratio.

Clearly, it was dragging us down.

We just didn't have enough critical mass.

We think because of the reshuffling of the portfolio a little bit, we'll be able to probably by '13 get to that range.

Great.

I appreciate it.

Thank you very much.

Our next question comes from Ryan Connors with Janney Montgomery.

I had a question I wanted to touch on this issue of portfolio optimization, Nick, if you could.

And you mentioned the lower operating costs as one of the drivers behind that.

But another rationale that we've heard is that the idea that a single big fish in a given state carries more weight in terms of regulatory relations and leverage than several small players.

But the counterpoint to that would be the strength in numbers argument.

That when several companies go in as a group for some sort of progressive regulatory change, whether it's a disk or whatever it is, maybe there's a benefit in terms of ability to influence the direction of regulation.

Can you talk about that, maybe whether or not it might not be an unintended consequence industry wide of everyone doubling down into fewer regulatory jurisdictions?

Well, it's a realistic argument.

But I think when your drill down beyond the surface look at it, when you have a number of small companies in the state, all who think they have an advantage, you end up with a little bit -- and I'm going to speak from my political background -- you end up with confusion.

Because everybody wants to know why does this person want that and this person want that.

And you can never get everybody on the same page.

Even in the disk in New Jersey, we've had disagreements and finally, we're now solidified.

That's a recipe for disaster if you can't come in with one unified operation and some companies like O&M, some companies like regulated.

Some companies have lower rates and therefore they get tainted with somebody who is always going in for rate cases and so on.

I think having one big player who then can really do the grassroots work in the state, win or lose based on how good you are.

But you won't be diluted by how bad somebody else is.

I don't know if that makes sense to you.

But I'm not at all worried about concentration.

Okay that's interesting.

Other issue I wanted to get your take on, Nick, was a developing story close to home here for Aqua America and ourselves as well here in Philadelphia.

And this story apparently circulating that the Philadelphia Water Department may seek to privatize in order to close the pension deficit in the city.

And just wanted to get your take on this on three different facets.

Number one, what is your view as someone well connected locally whether that has any chance of actually ultimately happening?

Number two, if it did happen, would Aqua America be interested in that asset if it did go to market?

And then number three, just more broadly speaking, do you believe we'll finally see an up tick in municipal privatization among, not only mega cities like Philadelphia, but even the small and mid-sized cities?

Maybe, yes, yes.

Can you expand on that?

As you know, I'm fairly close to the Mayor and the council.

And we have never discussed openly until [Sam Cast at PICA] floated the idea that there would be asset sales.

I think the primary discussions have really been around how to better build the city's economic development potential through the airport which could mean an authority of sale or keep it the way it is.

It's completely city owned.

There's always been discussions over the gas works.

The problem with the gas works is that there's a huge amount of debt versus the assets.

The water department has always been well run.

It actually generates free cash which sometimes the city takes.

It's always had professionals.

The newest commissioner come up through the ranks.

It's never been a political haven.

There's never been the need to look for sale versus maybe just strictly a cash generation or why are we in the water business.

Let somebody else do it or to the point of saying maybe we should privatize it for operations.

Years ago, Ryan, ourselves and American proposed to the then commissioner to actually buy a plant so that we didn't have to build plants in either the Philadelphia suburbs or New Jersey in American's case.

And that actually got some legs for a while and then died.

I think that's another aspect to it.

Would you sell a piece of your over capacity to somebody who could use it versus build another plant.

That's what I commented for and inquired the other day.

I don't think it's on the front burner.

That's why I said maybe.

The second you asked was would we be interested, obviously, we're right next door.

It's well run.

The demographics clearly are different between the Philadelphia suburbs and the city.

But we think if done properly, it would be a plus, not a negative for the regionalization, but also for our shareholders.

The third question you asked is privatization.

Am I still optimistic, and I know you have not been overly optimistic that privatization is going to occur and I think the answer is yes.

I think you're finally seeing the much touted cutbacks in local governments and this is pre-- the US deficit reduction plan this week.

You're finally starting to see real people affected by the cutback in local and state governments prompted by both tax receipt deficits, but also the fact that the Federal Government large asset is ending.

The smaller cities will be hit just as hard as the bigger ones.

As a matter of fact, percentage wise of their budgets, probably bigger.

The layoffs are occurring now.

It's not just getting rid of vacancies.

It's actually real people.

And I think that's when people start focusing on what else could we do?

I think asset sales become a piece of that.

Are they knocking our doors down?

No.

But we have more calls now than we've ever had in the past.

And you actually now have the chance for the Mayor to be willing to get out front and say we should at least look at this.

There's a couple that we just got notices on in the Midwest this week that we'll fill you in on that later that we're going to be proposals.

Any that are public, we'll let you know about obviously.

Whether they ever get to fruition because then there's always the loyal opposition who throws up the privatization isn't any good and water is liquid gold I'll give you all the colloquialisms and the anti-pleas.

I think it's a logical thing for a local government to do when faced with austerity measures that they're going to have to look at over the next three to four years.

And the advantage of tax [frees] has disappeared a little bit.

You know what tax [frees] they are trading at.

The grants are basically done, but that was another way the governments could say we'll get free grants and therefore it would be cheaper.

And I think cost of service is starting to become thought of as a logical thing in some of these governments.

That's great insight as always.

Thanks, Nick.

(Operator Instructions) We'll take our next question from the site of Michael Roomberg with Ladenburg Thalmann.

Can you break out the revenue in O&M contribution from your other segment in the quarter?

Sure, sure.

We had a good quarter.

Now, this includes two basic areas.

Our Aqua resources group, which will include the gas station -- the filling station and if we ever get into the pipelines, they'll probably be run through that.

But it also includes a lot of accounting accruals, if we sell assets we have investments from other companies that we sold a few dollars worth.

A couple years -- a year ago, '10 first quarter we sold all our interest in Southwest Water and I think we picked up a penny or two on that.

That all gets washed in there.

Let me just break out the actual numbers, what I will call the operating part of that other.

Year to date, six months we'll give you, revenues are up from -- it's very small compared to the rest of the Company.

5.4% to 6.3% or up 16%.

And the profits are up from 0.3% to 0.4% or 25%.

About a 7% margin.

The good news, however, is there's no capital in this side of the business.

These are generating, I think they threw off $1million, $1.25million a year.

That's a million and a quarter we don't have to borrow or float equity to use in the regulated side.

Okay.

And just to be clear, I think you've mentioned in the past.

These shale gas water supply stations are fully automated?

Is that correct?

Fully automated, computerized and tied directly to the SRBC and the regulatory agencies.

They don't have to worry about a trucker filling out the form or not filling out the form or making a mistake.

Okay.

And I guess the second question would be, it seems like the second quarter was a bit wetter than perhaps the average in at least some of your territories.

I'm wondering, did that have any impact on the level of construction activity in the quarter?

And do you expect that some products may have been pushed back into the third or fourth quarter or was that not a factor?

Absolutely.

First of you all, it was a very wet May and April.

June came back roaring and that's why we levelled out with a normal quarter.

Otherwise, it would have been a bad quarter.

Texas and North Carolina were extremely hot the whole three months.

And Ohio, Indiana, and Illinois were even wet in June.

Regarding the July, we've had -- almost every state has had a good July.

And we just started August.

So, the summer is always fickle.

You just never know.

I have to tell you that July, I don't know of any state that came in lower than projection.

So, almost every state hit their mark in July.

Okay.

And I guess one last bigger picture type question.

Seems like job creation and infrastructure renewal are on the tongue tips of every politician at the state, local, and federal level.

Do you get the sense that this message is trickling down in any way to your regulators to a different degree than you may have seen previously?

If so, do you see it manifesting itself through better ROEs, increasing CapEx budgets or any other way for investor owned utilities?

I didn't answer your first question completely.

The 135 for the first six months was due to cold weather obviously in the wintertime, but also the wet spring.

And that has really picked up.

At our budget meeting yesterday we basically confirmed that we're going to do 325.

That means we are going to be $200 million plus in the next six months, starting in July.

So -- and that sort of answers your second question.

We're getting positive, not negative from the both the environmental regulators who, of course, want us to fix everything.

And they just put out --EPA just put their latest report and it's up from $324 billion to $600 billion now need, so it's clearly gone up not down.

The local governments -- we've been doing some tours and announcing the big projects we are doing in Pennsylvania and Indiana and so on.

And I'll describe it this way.

The local county officials and local Mayors come out and obviously they want to take some credit for the jobs being created and the infrastructure rehabilitation in our own country and things of that sort.

But what they also are saying the we realize rates have to go higher.

You're not getting the pressure at the local level to say don't raise my rates.

We don't want you fixing this stuff.

It's turning into a positive.

And certain states who have the surcharge, I think, are confirming that the -- everybody wants work done.

They don't like higher rates because of salaries and higher electric costs and stuff like that.

But if it's for capital which is usually 75% of every one of our cases, we have never had any, I'll call it reaction, negative reaction to the surcharge from either citizens or from regulators as you put the surcharge on in between rate cases.

And so we're not seeing the negative reaction.

Whether or not somebody says the new ROE should be 11 or 10.5 or 10, a lot of that is contingent upon what they think the cost of capital is and the availability of capital and so on, as much as it is reaction to people not wanting us to put capital in.

I don't think anybody reacts to us building what's needed.

Thank you very much.

Our next question comes from the site of Stewart Scharf with Standard and Poor's Equity Group.

Please go ahead, your line is open.

Expanding a little bit on the weather.

I was just wondering how you -- when you're looking at these divestiture's and acquisitions and areas of states with critical mass, do you consider the geographic diversification?

And how that might affect the weather to offset the weather in certain states, regions?

Unlike the electric industry, or even the gas which is very, very dependent on weather because of fuel usage in the winter and the electric business, there never has been major diversity among states until deregulation occurred and a couple of companies got into that like Exelon.

Most states, most regions for diversification are not as much weather as regulatory diversification in the sense that there's always some differences of opinion in how people look at utilities in various states and how they help or hurt economic development or consumer's.

So, being in nine states gives you the opportunity to invest your capital where you think it's being appreciated.

Regarding weather, it's very difficult even in a region like the south, to project that you'll be -- have better or good weather or worse weather because it's so isolated to smaller regions.

I think in general, things average out over time.

I think being in the mid-Atlantic midwest, deep south and Texas, I don't know what Texas is southern or western or southwestern, we're very comfortable.

This is the first quarter, first month, July, where the whether has been on all 10 states the same.

All up.

Usually, we have two up big, six up a little bit.

And two down and so on.

So, it levelers your peaks and valleys.

And I think that's a positive if you're an investor.

I know you've followed us for 10 years now.

Most of the investors who want to invest in this want to know are you going to be able to raise the dividend every year?

The answer is yes.

Can you increase earnings every year.

The answer is yes for the last 13 years.

And whether it's 50 basis points better or worse isn't as important as the steady continuity of the direction.

And that's where the whether comes in.

Hope that was helpful.

Okay, yes.

Regarding the O&M ratio, are there any states that you could tell us in areas where they're excessive -- O&M ratio is not much higher -- could you break that down?

It usually follows states that have more spread out populations with smaller systems, i.e., a well that services 150 customers needs to be inspected every day and it is more costly than having a system like in Philadelphia where -- a suburb where we have pipes interconnecting everybody.

The most expensive state was Missouri.

The other states that are expensive are Maine, mainly small systems and so on.

We've been able to bring percentages down in Texas because as we grow it's coming down.

It's down in the 40s now.

It was in the 50s.

Virginia still is a small state and although it's one of the better in the south, it still has a higher O&M.

It's in the 50s.

And North Carolina only because of the number of systems.

We have a thousand wells in North Carolina.

It's in the high 50s.

So, we still have room in some of those states as we get more efficient.

And mainly as we grow.

That leaves the bigger states, Illinois, Ohio, Pennsylvania and New Jersey are very efficient because they're more concentrated.

And your time frame for the 36% to 37% range is a couple years?

Yes, in '13 I think we can hit it.

Okay.

Great.

Thanks a lot.

Thanks, Stewart.

Thank you.

And our next question comes from Cleo Zagrean with Macquarie Capital.

Good morning.

Have a couple of questions.

First related to usage trends, could you comment please on how your developing your expectations year-to-date and any notable changes in the context of economic hardship, et cetera?

I'm sorry.

I didn't get exactly what the specific was, the projections?

How you have seen usage trends year-to-date compared to expectations and if you could remind us what your expectations are?

Yes.

On the industrial commercial side, we were expecting that to grow a little bit this year because the economy was starting to come back strong in the fourth quarter of last year.

But those projections have not come through and we've actually seen a -- actually down a couple percent more than up.

That's the 20% that's commercial, small business, golf courses, hospitals, and industrial.

Yes.

The domestic is up because of weather.

Yes.

But there's an underlying 0.5% decline because as a new house or a house is remodeled, low flow toilets, low flow shower heads are put in and that's something we model in each year because we know it's going to happen.

And in essence, it's a good thing for us because it means we can spread our water resources over time longer and earn on them before we have to put in other major capital.

And it's also good for the environment.

But that's something that I think we can show you for 20 years, that's been happening.

So, it's nothing new.

It's also why water companies have to go in and re-bracket periodically, every couple years so that they pick up the lower levels of consumption in their rates.

All right.

And so have these changed related to modified expectations for the year in terms of usage or not significantly?

No, no.

As I mentioned earlier, we're very comfortable with a 6% growth in revenues.

Okay.

And in terms of clarifying for the consensus for the third quarter, are you comfortable with that in terms of GAAP or non-GAAP measures?

And for the fourth quarter, should we expect the $0.02 for bonus appreciation to continue and are there any other non-GAAP items that we need to look out for?

I think let's start with the GAAP, non-GAAP.

I am comfortable with what I think is 33 consensus on the GAAP.

The non-GAAP will actually, in the third quarter, be lower even with the $0.02 addition for Pennsylvania because of the special tax provision that Dave explained and we'll spend more time with you after the call if you want to go through the specifics.

In the fourth quarter, you can assume $0.02 on top of the non-GAAP number for the GAAP because we'll have no -- we shouldn't have, unless we do a deal in the fourth quarter, we shouldn't have any deduction from the Pennsylvania benefit which will end in the fourth quarter.

But it will add $0.02 to the GAAP number, I'm sorry, it will add $0.02 to the non-GAAP number in the GAAP.

So, in the fourth quarter, you're still benefiting from the Pennsylvania bonus appreciation?

Yes, by about $0.02.

Thank you very much.

Okay.

(Operator Instructions)There are no further questions at this time.

I'd like to turn the call back over to Nick DeBenedictis for closing remarks.

Thank you very much and hope everybody enjoys their summer.

This does conclude your teleconference.

Thank you for your participation.

You may now disconnect.

Thank you.