Essential Utilities Inc (WTRG) 2011 Q3 法說會逐字稿

Good day.

Welcome to the Aqua America, Inc.

third quarter 2011 earnings conference call.

Today's conference is being recorded.

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

Brian Dingerdissen.

Please go ahead, sir

Thank you, Alicia.

Good morning, everyone.

Thank you for joining us for Aqua America's third quarter 2011 earnings conference call.

If you did not receive a copy of the press release, you can find it by visiting the Investors Relations section of our website at AquaAmerica.com, or call Fred Martino at 610-645-1196.

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

Presenting today is Nick 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 10Q, 10K and other SEC filings for a list 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 Relation 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.

Thank you, Brian.

Good morning, everyone.

This morning I'm going to try and explain what is a complicated GAAP, non-GAAP, continuing, non-continuing, and hopefully put some clarity, Dave can help us put the numbers.

In my mind after looking at all the numbers, it was a very solid quarter and really the thing that was the biggest challenge this quarter was the most erratic weather in over a century in our area.

On continuing operations basis, net income and EPS were up 13%, $0.33 versus $0.29.

The net income from continuing operations eliminated the operations of two of our states, Maine and New York starting in the third quarter, because we announced the sale of Maine to Connecticut Water and the sale of New York to American Water early in the quarter.

So the quarter (technical difficulty) assume both the accelerated appreciation and remove their results from the continuing operations.

In addition, because of another accounting policy, we have to assume these deals will go through and assume, which you will, the one will be profitable, the Maine, the other one's being traded at book value.

But we have to declare what tax will be paid on them ahead of time, and that came to $0.05.

So there is a $0.05 deduction in the GAAP numbers, in the total GAAP numbers based on the taxes we will pay when we sell.

Now something that's very understandable, the Board is very confident in the future of the Company and the future cash flows and profitability and declared that December 1 dividend will go up 6.5%.

They did this in August, but this will be the record date for the December 1 dividend.

It will go from $0.155 to $0.165 and that's our 21st increase in 20 years.

So we are keeping our eye on shareholder value.

It was a very strong quarter for both capital spending and cash generation, and most of that was due to the bonus depreciation that is being allowed for Companies who are investing in America and Aqua is definitely doing that.

Through nine months, we spent $230 million on plants, pipes, pumps, meters and so on, and we're on our way to another record capital investment in 2011.

I anticipate we'll exceed 2010's record of $226 million by $5 million to $10 million at the pace we're going.

Now to put this in perspective, our 2010 depreciation was $108 million and our net income was $124 so we're basically spending three times depreciation and two-and-a-half times our net income as we invest in our systems and you can see we believe in the future and that's why we're investing and we're taking rightful advantage of the Federal tax and State tax policies which are rewarding companies who are willing to invest.

Now, that's why with all this spending, we're not suggesting any new equity offerings or major long-term borrowing due to the internal cash generation from the tax policies of the bonus depreciation.

Just to give you some numbers, if you take our net income depreciation plus deferred taxes, we are very close, the total of that was $260 million, then $310 million and then $330 million this year.

Next year in excess of $300 million.

So you can see we're able to basically have enough cash to handle our entire capital program, which is a real anomaly from where we were 15, 20 years ago when we said we had a lot of capital to spend but we had to borrow and float equity every year to afford that capital.

Now this is all coming in because we jump from $45 million in '09 up to $75 million in '10 in deferred taxes, and we're staying there based on the fact, and this does not include, by the way, the state tax that was a separate issue, but next year, you should anticipate in your modeling that we go back to a normalized number which is in the $30 million, $35 million range.

Unless the federal tax is extended and then hopefully the Pennsylvania tax extended, then we stay at the levels of the $75 million.

Now, all this spending is a lot of numbers, but the capital spending is truly paying off to our customers.

We had, as I mentioned erratic weather, tropical storms, hurricane and an early October snowfall, and I'm proud to say all our customers had service at 100% reliability.

And I think that's because of all the capital investment we've been making.

We realized that the electric service was interrupted because of downed wires and so on.

But none of our customers felt that because we had diesel generators, standby generators, solar at some of our plants, which were in service even without the electricity being in service.

Now the increase in cash from tax policies has also reduced the pressure to get rates to pay for all this capital.

And it also of course reinforces our S&P rating which is A+ for Pennsylvania, our biggest operation and where most of the capital is being infused, and that was the S&P rating was reaffirmed this quarter, and we have a 1+ recoverability which I think is a significant factor for those who want to lend money to companies.

Although the pressure is not as great because we give back because of the bonus depreciation, some of this in rates, because we didn't have to borrow and float equity obviously, we still had a very busy rate year and continue to be busy.

$21 million has already been awarded to us through this month.

As a matter of fact we just got a decision for about $0.5 million annualized awarded this week in Indiana.

The cases that have generated this $21 million are as I mentioned, Indiana, Ohio, North Carolina and Pennsylvania and some were surcharges.

Which is called disquips and something else, I can't remember the other name.

We still have significant rate cases totaling $15 million on going in Florida, Texas and Illinois.

They all should come to conclusion late this year or early next year.

Therefore the benefits will be through '12.

And in the fourth quarter, we expect to file over $50 million of rates and surcharges in Pennsylvania, Virginia, New Jersey, Texas and Ohio.

And most of these returns will be felt sometime in mid to late '12.

We're seeing some pickup in our acquisition program despite the new housing melee and the state of the economy.

I'm always the eternal optimist, half full glass but organic growth, which is the base growth of just people hooking on to our system by building a new house, has moved up slightly but ever so slightly from a little less than 0.4 to a little more than 0.4.

Figure about a half a percent we're looking at as a projection and hopefully it gets better in '12 and then better again in '13 as the economy recovers.

Acquisitions have been bringing in over the last two years, three years, again a reduced amount but about 0.5%.

This area we would like to see in the 2%, 3%, 4% range but at this point, I think it's affected by the economy.

Now we just announced one small one this morning, a $1.5 million acquisition.

This gets us up to about a dozen or about ten for the year.

There's at least four or five we think we can do by the end of the year.

We have, looking at my sheet here, 15 under agreement.

So the pipeline is still active.

We hope to increase it, and that's going to be one of our initiatives for next year.

Now this year, however, we spent a lot of time on rearranging our portfolio with American Water being our key partner in doing this.

Both of us have been rearranging and managing our portfolio to stay in the states where we have economy of scale and where we have the best chance for return on our investment.

The readjustments we did just as a quick reminder in states of Texas, Missouri, Maine, New York and Ohio.

We are now completely out of Missouri.

Our last transaction occurred I think late in the second quarter.

3700 customers.

We never made money in Missouri.

We understand American's doing better than we did and they're making money already because of their economy of scale.

In return, we got 5300 customers in Texas where we understood American was not making any money.

And we're actually doing better than expected profit wise on these assets because of the synergies we brought to the table.

So that's a trading a loser for a winner on both of our portfolios, ours and American's.

So it truly was win-win.

The Maine sale to Connecticut Water is going very smoothly.

We had to book the taxes on a significant gain this quarter, and that's the bulk of the $0.05 that hit the GAAP earnings this quarter.

But we don't pay them again, I hope that we don't pay them again.

No cash went out the door.

It's all non-cash but we eventually have to actually pay the cash for it that we're booked in now.

But the accounting method would be showing only the gain, and that will be probably first quarter of next year.

And we're working very closely with American management now and hopefully both of us hope that we'll get the approvals to trade our Aqua New York's 51,000 customers for American's 57,000 customers sometime in the first quarter.

Now as a refresher, these are book value trades so there should be no significant tax issues involved when we do that trade.

Talk about the revenue and the expenses for the quarter.

Revenues were up 2%.

Clearly lower than you're used to and we're used to.

And I'm going to have to blame most of that on the weather.

We had 30 inches of rain, versus a normal 8 inches in August and September.

A hot July where we did very well in the East Coast properties and I thought it was going to be a record quarter, and then August and September were just basically devastating.

Just to give you an idea, Pennsylvania send out year-over-year was down 4%.

New Jersey and New York, where there's a lot more lawn watering, was down 15%.

That's actual gallons sold in '10 versus actual gallons sold in '11.

So significant.

Now, the good news is Texas and North Carolina were extremely hot and it didn't rain a lot until the hurricane came up the coast in North Carolina.

And we did pretty well balancing it, and that's why overall, we think there was about a 3% hit to revenues due to weather.

So you can take the two and say it should have been 5, and that 5 would have been zero from weather and hopefully sometimes weather and rates and growth you get some.

So to just dissect the 2%, grew 4.5 from rates, probably a half from acquisition, a half from organic growth, less 3, and that would have been a normalized growth pattern for the quarter without a good comparison on weather obviously.

Now the good news is that although revenues were only up $4 million, 2%, expenses and taxes, local taxes, real cash out the door only went up 1.6% or about $1 million.

So by being efficient, we were able to actually, even with only a 2% revenue growth, actually help the bottom line because of our expenditures.

Just as a refresher, we track rather than net margins, we track O&M to revenue which is the part that we really can control.

Depreciation of course is non-cash.

Taxes we can't control, meaning the local taxes and the assessments.

So O&M to revenue, just as a refresher, '09 we were at 40.3%.

$0.40 out of every dollar of revenue went out in costs and didn't go towards capital or profits.

We took that down 170 basis points.

We like to say we can do 50 to 100 a year.

We had a spectacular '09 through '10.

Brought it down to 38.6.

We anticipate about again 75 to 100 basis points this year.

We already are showing almost that in our trailing 12 months.

And then it should levelize off or maybe go a little less.

There's an asymptotic relationship here.

We can't go to zero.

I would like to but I don't think we can make it to zero.

I don't know, where it levelizes outs in the mid 30s or whatever, but our hope is that the Ohio synergies will help us bring it down a little more.

Maybe a little better weather next year, which is revenues without expenses will help us and so on, but I don't want to predict that.

So I think you're in the 37.5, 38 range, that's probably the right range.

Okay.

Now, in looking at where we're -- with continuing and discontinued and GAAP and the state tax adjustment because it's one time and so on, let me start by saying, I'm going to project that in 2012, we will obviously complete all the sales, so therefore diminish the taxes issue and so on from the discontinued operations.

And complete the sale of Maine which we'll book a gain on.

We anticipate obviously doing a little better on acquisitions and organic growth, but that is almost completely dependent on the economy.

We're hoping to a return to normal weather.

If you look at this year's $0.32 non-GAAP, last year's what I would call operating earnings last year was about $0.32.

Is that correct?

I mean that was without any GAAPs and all that [bore]?

Yeah, Q3 of last year, in other words what we reported last year, because there was no noise in last year's income.

$0.32.

That had about $0.02 in it because it was up significantly from, like, $0.26 the year prior.

And that had about $0.02 in good weather, if you remember last year.

So $0.30 would have been a real number, and we projected $0.33 without noise, I'll call it, number, none of this is accounting lingo so I'm sure the lawyers are fainting.

So that $0.33 would have been a normal operation.

10% over a normal year.

Unfortunately, it wasn't a normal year and I would argue we lost at least $0.02 from weather.

And remember you always lose 0.25%, 0.5% so that's a $0.0025, a $0.005 at $1 earnings from conservation that you have to make up along the way.

And you make that up through either rate adjustments or selling a little bit more or getting more acquisitions.

So we had a real swing this quarter of $0.04 between just because of the weather, $0.04 plus.

And last quarter at this time, three months ago, I said , look, I think $0.33 is a reasonable number from pure operations because if you took the $0.02 out of the extra out of 10, that would have been $0.30.

10% would have been $0.33.

Now I remember this was August I think we did our call, and we had just had a record July, so I was very, very conservative in that $0.33, not knowing what was going to hit us in August and September.

Which wiped out July plus.

I said the $0.33 would be positively affected by what we are considering a one-time tax plus, but it's real GAAP and it's real money in Pennsylvania, and that would get us to $0.35.

Many companies are just putting it in there and not mentioning it to you, and we're doing it.

We're saying basically that $0.02 is not going to be around, we don't think in 2012.

So that would have gotten us to $0.35.

And then I said expect because of tax policies, accounting policies regarding discontinued operations up for sale, i.e., you have to pay the taxes before you sell the property on any gain, knock off $0.05.

And that's about where it ended up.

Which would have been the $0.30 GAAP which is what basically is what's reportable, $0.30, and that is against the $0.32 of last year.

And that's including -- now the weather cost us $0.02 so clearly we made that up somewhere along the line by better operations, less expenses, whatever.

So I would like to take you from GAAP earnings which is the $0.30 for this quarter and therefore $0.79 versus last year's $0.69.

The fourth quarter last year was a continuing trend in '08 we earned $0.19, in '09 we earn $0.20, in '10 we earned $0.21.

The $0.69 was the three quarters GAAP earnings so that was $0.90.

If we take this year's projection, I'm very comfortable with current First Call which is $0.23, my understanding.

So if we have $0.79 GAAP plus the $0.23, that would be $1.02.

Now, if you want to take that $1.02 and try and figure out what's really the core operations of the Company, if you look at the full year, we picked up probably $0.09 real earnings, real cash but $0.09 that may not repeat next year if the Pennsylvania tax bonus depreciation doesn't come through again.

So of course that brings you to $0.93 versus $0.90 in '09.

But that $1.02 that I gave you also included $0.06 of discontinued write-offs for taxes that were one time and it avoids the gain obviously.

So that's about $0.99 for the year.

Assuming we hit the First Call number GAAP $0.23.

$0.90 versus $0.99 is right on target with what I think we projected and you all expect which is a 10% growth rate.

Very comfortable with next year's First Call which is $1.04 my understanding.

What's next year's First

$1.08.

Which gets us right back into that range of what we have been able to produce over the last 15 years which is a 10% CAGR on EPS.

So hopefully that clarifies all these different charts and numbers we gave.

But so far, the first nine months has been a very solid performance.

I'm very optimistic that we're going to be hitting and transforming the portfolio and getting that accomplished so there should be no surprises.

And I think both Companies, American and ourselves are going to benefit from the reshuffling of our portfolios.

I'm also hopeful that next year the weather returns to more normalized weather.

We anticipate spending another $300 million plus in capital.

We anticipate continuing to try and get rate relief, but our rate cases now are much lower percentage-wise than they were in the past, thanks to the surcharge picking up most of the capital needs in most of our states.

So it's a much more predictable model and predictable look going forward.

We have one thing that I mentioned in the release.

I don't want to overemphasize, its relationship to the core business, but it is something I'm personally excited about because it's in our states, Texas, Pennsylvania and Ohio, and that's the rapid development of the deep horizontal drilling-type gases that I've just seen a dramatic change both in the electric industry and also our industry based on the fact of the water aspect of the drilling and also the fact that it's causing a surplus of natural gas which is keeping electric prices down.

Many of you analysts understand that direct relationship of gas prices to electric prices.

It is booming in Pennsylvania.

Having been up there quite often, seeing our little towns where houses weren't painted and stores were vacant, little towns now are thriving.

You can't get a hotel room in some of these -- motel room I should say -- in some of these towns.

And it's exciting.

It's exciting.

It's exciting for Pennsylvania.

It will be exciting for Ohio.

It's always been exciting for Texas.

And it will help our general Company because we're in those three states, but we're looking at an unregulated opportunity which is in its embryonic stage right now and that is putting in pipelines to replace the thousands of trucks that have to be brought for every well to be pumped.

This is unregulated.

They're individually negotiated.

We have already built close relationships with four or five of the big drillers which will be dominant in that area, and obviously we think we know what we're doing.

We know how to move water whether it's for wells or for domestic or industrial uses.

I mentioned that in the release mainly because it's something that's exciting to me and I think could have some real potential going forward.

Thank you for your time and we open it up for questions.

Thank you.

(Operator Instructions).

We will go first to Michael Gaugler with Brean Murray, Carret & Co

Good morning, everyone and congrats on a nice quarter under some very difficult weather conditions.

Thanks, Mike.

I want to follow up on your closing comments on the Marcellus Shale opportunity.

I saw in your release that you mentioned first stage of that pipeline that you're working on currently is looking to open up and I'm wondering what kind of returns are you expecting on your investments up there.

Well, here again it's economy of scale.

If we have just the one customer that we have locked in now at the amounts that they anticipate needing, now it's not guaranteed because they could stop drilling tomorrow, but as long as they're drilling, they're going to need the water.

The returns will be, and this is at 100% equity.

So obviously it could be leveraged.

The returns are in excess of the regulated returns.

At 100% equity.

I like that math.

No wonder you've been up there a lot.

(Laughter)

What else are you seeing up there, I know you kind of made a broad stroke that, you know, it's kind of going gangbusters there, but I mean for Aqua in particular, are you working on other pipeline opportunities, or are you just focused on (multiple speakers).

No, no, we're talking to other, see the people we're dealing with are what they call the midstream gas gatherers.

They are not the Shells and the Exxons and the Chesapeakes and the Ranges and the Atlases and so on.

They're our customers in the end, but the pipelines are put in in conjunction with a gas company, midstream collector, already putting in a line so it gets it from the well to the transcontinental pipelines, which is Tennessee and Transco that runs across Pennsylvania.

So some of these names you've never heard of, like I don't know how many people have heard of PVR.

They are publicly traded, but they're resource developers, but there are other companies like them that we're talking to who are already planning the pipeline and we're just basically saying, let us partner with you on the water side so that as you're pulling one line, we'll build you two.

If you have time, I would love to show you how we're boring under streams and showing you the sophistication of the construction and the pumping process and so on, and this is all mountainous terrain.

I don't know how the trucks get up the hills.

But it's going to be much more efficient for these drillers so they have the water when they need it versus waiting for the trucks and if it's raining, they have plenty of water in the streams to get but they can't get the trucks up the road because of the mud.

This avoids all that.

It gives them reliability which is really what they're paying for.

I might take you up on the offer for the tour.

Yes.

The other thing on the acquisition you made this morning, kind of valuing that off of a per connection basis, is that about what you're typically paying these days, or is that one a little bit more?

This one was a little more.

It's, you know, an arm's length transaction because this was not a troubled water company so we couldn't, it wasn't forced to sell.

But it's going to grow to a thousand homes.

It's a very nice development.

I rode around and looked at it.

Up near the mountaintop golf course and very nice area.

It's between Hazelton and Wilkes Barre.

This one we paid for some of that growth because there will be no payment back as the houses hook up, we get all the revenue.

Okay.

All right, ,

Thanks.

We'll go next to Christopher Purchill from Janney Montgomery Scott.

Congratulations.

Thank you so much, appreciate that.

Thank you also for the thorough review of the quarter.

You know, there are a lot of moving parts but I think you did a great job in clarifying things for us.

Roy hasn't yelled at me yet.

You kind of mentioned this a couple times on the call.

I'm just curious, you know, if you're hearing any discussion out of Harrisburg or out of Washington on extending that bonus depreciation into '12.

I'm glad you brought that up.

The Jobs Act Bill has not moved too well and now they're talking about doing it separately, absolutely has an extension of the 100% bonus depreciation factor for '12.

So if there is any section of the Jobs Bill that's passed, I think there's a shot that the bonus depreciation will happen.

Regarding the state bonus depreciation, I've talked to key administration officials, and they are, I don't know what the right word is, they are sanguine.

They're willing to look at doing if the Feds do it, the state would do it.

Now having said that, the state budgets are very tight and this is really a hit on the state budget in the sense that it's real cash that's not coming in.

They get it later, but it's a question of whether they want to spur investment or take the cash now and, you know, be able to balance the budget better or whatever.

We're hopeful that with a couple months to really convince the Administration because they don't write their budget until, you know, December, January, it's proposed to see if the Feds do it, that the state would follow suit.

Okay.

That would obviously, the Federal would not change First Call for 2012, but if we picked up the bonus depreciation again, that's another $0.08, $0.09.

Right.

Okay.

But regardless of what happens there, you don't, you know, see yourself in the secondary, you know, equity market?

No.

For the foreseeable future?

No, looking at next year even with all the tax policies disappearing, we're closing in on almost funding our whole capital budget with just internally generated cash because of the profit increases and the depreciation increases.

Okay, great.

And then just quickly on the efficiency ratio.

You've talked in the past, I think it was on the last call, talked, you know, in two years, you could get that number down 36%, 37%, talking about, you know, mid 30's% on this call.

If you were to look at that improvement and kind of, you know, break it up into its core pieces, you know, how would you kind of allocate it between, you know, improvement in the south and, you know, the general asset swaps, I don't know if you're seeing any specific expense signs where you have reductions.

I would kind of doubt that.

But how would you break out the expected improvement I guess over the next two years?

Four areas to get granular.

First, the south still has some room to go and Chris Franklin as you know is working on that to as you grow, not grow your expenses as fast as you grow your revenues and/or customers so that is the biggest potential and we think Ohio has some big potential now that we're going to be a 200,000 customers system, or 150,000 versus 80,000 or whatever it is now, 110,000 now and it's going to 170,000.

The second area is pensions and this is really a north issue, not the south.

And I think if you look at most of the utilities that you and your colleagues on the phone are following, you're going to see big hits to pensions next year.

So anybody who has a large unfunded pension plan is really going to get hit pretty hard because interest rates are so low on the Treasury that the accounting rules say you have to discount it at a rate that's tied to the Treasury.

And where we were discounting the pensions at let's say 5.75, it could be below 5 this year.

That is a huge jump even if the market does well on the other end of your asset return.

That's going to affect everybody, including us because we have a pension plan in some of our older states, although we have frozen new entrants to the pension plan.

We still have probably a third of our older state employees on it, in other words all the south is no pensions.

And an enhanced 401K, defined contribution.

But the north still has about a third of the union employees on the plan.

Well, actually more than just union.

Union and non-union.

Anyhow.

So the pension is going to be -- Now, I guess it doesn't affect P&L but it does affect cash and it does affect, you know, risk factor in case if the rules ever change because we're able to book that as a regulatory asset and then try and recover it in future rate cases.

I think this is what you're right up in on the Cal Water said, that's what they have a tracking account.

But they still have to mark to market.

So I anticipate it being a bigger issue with some larger electrics and maybe even, you know, some of the water companies than it will be with us.

But '12's expenses will be affected by an increased payment into these plants even though it's a regulatory asset and we'll recover it in rates.

Very similar to what you heard from Cal Water the other day.

The third area is purchased power.

Actually third area is the other part of benefits.

Secondary is the healthcare.

And by changing policies around and everything else, 20% contributions, we're at least limited the '12 over '11 growth in healthcare to about 4% or 5%.

It was almost 13% '11 over '10 and I think healthcare is something you to have look at as to what it's doing to all these companies.

The next issue is power and it's been one of the fastest rising costs.

The solar is having an impact for us, and we're starting to look now at maybe natural gas versus diesel on the generators and maybe producing our own power.

Becoming our own interknock.

Obviously we would have to look at what the regulators say about that, but I think if you have a lot of gas, which we do, it sort of starts making sense rather than build new generating stations.

The other area that we're cutting into is purchased water.

We just signed a contract to get off of one of our larger suppliers in February of '12 and we're looking at another contract that we're hopefully going to be able to get out of by 2017 or sooner, which will cut our purchased water which is now in the $11 million, $12 million range or more.

Probably cut it in half.

So those are the things that we're looking at that will cut the expense side, and that's why I'm optimistic we can get a little lower.

Right.

Very helpful.

Thanks, Nick.

Take care.

Thanks.

We'll go next to Heike Doerr.

Thank you.

I wondered if we could talk a little bit about the CapEx budget for this year.

I believe we had been talking about $325 million.

Now we're talking about $300 million.

Can you tell us what changed?

No, no, this year 2011, I said we will exceed last year's $326 million by $5 million to $10 million.

Okay.

So we're talking $330 million to $335 million.

And how should we think about 2012?

In excess of $300 million because we haven't really developed the whole plan yet.

Pretty much basic .

We're at a $321 million right

Got it.

Do you have an update for us on House Bill 1294 in Pennsylvania and if that goes through how you would think about implementing a forward test year?

Yes.

Really Pennsylvania almost has a forward test year now.

We don't call it that but Pennsylvania allows you to forward labor contracts, healthcare benefits that are signed on.

So it won't be as big a plus as some of the electrics are making it.

It passed the House overwhelmingly.

We're supportive of it.

It does have one provision for combining water and waste water rate base, which will help us and Pennsylvania American, because we have small amounts of our overall rate base are in waste water, so that will take away the risk of never earning fair amount on your waste water.

And the other thing is will allow us to develop because the legislation won't be needed, a waste water DSIC.

I do think, though, it has much more potential and I'm being very honest with you.

It's a plus for us, but it's a big plus for the electrics and gas because they'll get a DSIC where they don't have it now.

Right.

Are there any other efforts like this to change larger regulatory policy that is you guys are undertaking in some of your other larger states?

Well, we proposed legislation and they got at least through committee but they didn't break through and get it passed in Texas, North Carolina for a DSIC.

And the DSIC would be broadened beyond pipe because pipe isn't the problem.

It's wells and tanks and small, and in Ohio we're working right now on legislation which would mimic the gas legislation which allows for a future test year which is very big and a DSIC which we already have.

But broadened amount of things that could be included in the DSIC and how it's implemented in a future test year method versus a historic test year method.

So if that is approved and, and it's already been approved for gas, that will be a very, very positive thing for our Ohio operation.

Got it.

Thanks for the insight.

Okay, great.

We'll go next to Michael Roomberg from Ladenburg Thalmann & Co.

Good morning, guys.

I had a couple questions on the asset sales, the asset swaps in terms of the financial impact in the fourth quarter and the first quarter of next year.

So you booked the tax implications of the gain on the sale.

Can you quantify what the gain will be and what the timing of that will be for Maine?

1Q and I'm going to say $0.06 to $0.08.

Gotcha.

Okay.

And also, you know, kind of looking backwards so that we can get a better understanding of how discontinued ops will affect the fourth quarter of 2011.

Can you quantify the impact of New York and Maine in your financials in the fourth quarter of 2010?

There will be very little tax implications.

We will have stopped depreciation because we accelerated all the depreciation into this quarter.

That was part of the hit to this quarter's earnings because that's the rule.

And Bob, I think it's pretty, we picked up maybe $0.005.

Yeah, probably $0.005, Michael.

Okay.

And safe to assume that the revenue contribution from those assets was around $10 million, just in terms of getting a top line number?

From continuing ops?

We'll look that up and give you the exact numbers from last year's fourth quarter for those two states and you can anticipate what they would have been this year.

There's very little movement in Maine and New York.

The only time they really sell a lot more or a lot less is from May to September.

Right.

Because of the lawn watering so it probably should be pretty, pretty basic.

Gotcha.

Okay.

All right, thank you.

And with respect to the, I guess more aggressive CapEx budget, is that $330 million to $335 million range that we're now looking at, is that inclusive of this pipeline JV project?

Just wondering if our capital budget includes the JV contribution?

No, the JV is 100%, both of us are doing 100% equity right now and it's off the balance sheet.

Gotcha, okay.

And with respect to that project, what is the impact if any of the bonus depreciation on the cash flows that you could realize from that project in years 1 and beyond?

Well, it will be eligible for both the State and Federal.

Now there's no state taxes yet paid because it's not operating yet.

It's still being built and if there's no tax increase, if there's no bonus depreciation next year then we won't get any advantage of it.

On the other hand, the bonus depreciation for this year we are going to take, right, Dave, because it will be completed by year end.

You just reminded me I'm going to be on a phone call with the engineers this afternoon because we're trying to gets all the solar projects done by the end of the year too.

We have three in Jersey -- or two in Jersey and one in Pennsylvania so that we get the bonus depreciation and the ITC.

Gotcha.

That's all I had.

Congratulations on a nice quarter.

Right.

It is $10.5 million to $11 million, Bob just looked it up.

Thank you.

The revenues for those two.

We'll go next to Stewart Scharf from S&P Capital.

Hi Stewart.

I was wondering if you could add some color to what you were talking about with the sale drilling and the water systems; in the past, you mentioned about the stations off the highway to make it easier.

Oh, yeah.

And just the comparison of what how that will affect these systems that you're installing, these pipelines, and what the potential is, the time table and the growth rate and so forth.

Sure.

Well first of all, the evolution of this Industry is very interesting to watch.

It was a lot of talk five years ago because the technology was so new and they were still saying we think there's a lot of gas in Pennsylvania.

I'm pretty sure that's now been confirmed and actually the first couple wells out produced any projections.

The second is everybody thought gas prices would be $7.00, a million BTU and they were around $4.00 and they're still drilling, so that tells you something.

Third is the drilling has started the land accumulation and the royalties and all that, it's still happening but not at the frantic pace it was because a lot of the land has already been garnered for the drilling.

And what we saw about a year, year-and-a-half ago was an increased usage of our fire hydrants in our small towns up there (technical difficulty) big tanker trucks to come in and pay for it.

They pay tariff rate, and what we were getting was complaints from the town officials, we don't want all these trucks filling up at the fire hydrants.

So we started looking at how can we get them out, you know, still sell them water but get them out of the little towns.

So we set up and we now have five already located stations right on highways that the trucks don't ever have to go into the town.

They pull up to the highway.

We've run a pipeline to that filling station and we pay tariff rate to the water company and the trucker pays our unregulated entity.

The fair going rate on what they pay anywhere else when they do it.

Now, we're still looking at stations in places to put more because there will be always be trucks because the drill count, the drill rig count is probably only one-tenth of what it's going to be eventually.

So times ten the number of trucks that are there now which are already aggravating people and clogging up the highways and clogging up the small towns.

A typical tanker truck is 4,300 gallons to 5,000 gallons.

A typical well takes 4 million to 5 million gallons of water for one drill.

One time, one drill.

So if you're going to do 500 wells to 1,000 wells a year, you can multiply the number of trucks that have to be on the road just to service those.

So what we thought was if we did a pipeline, give you an example, the one we're doing now is 3 million gallons of water a day.

We will be set 24/search, whenever that driller wants to fill the impoundment pond they have right next to the drilling rig, they can turn the spigot on.

In any one day we think we'll pump as much as 3 million gallons and we're going to charge them for the price that we think we deserve to get and they deserve to pay to get that convenience, and it's clearly cheaper than the trucks, less environmentally damaging to the roads and to the streams because of all the run-off from the trucks coming up the hill and digging up dirt and rocks and all that coming up the hills to these rigs.

So we really think it's a win-win.

We won't have pipelines all over.

We won't replace every truck, but it's such a common sense economy of scale move, but you need money to do it, and that's why the drillers aren't going to put the money up and that's why we think this is a great investment, an upfront investment that will pay off for years to come.

Does that help?

Is there any way to quantify the timetables of how much you could actually, you know, earn over the next say three to five years?

Why don't you give me a call on that.

I can give you what, you know, what I'm allowed to give you because these are all independent confidential contracts and then you could calculate it for yourself.

Okay, great.

Thanks a lot.

We'll go next to Jonathan Reeder from Wells Fargo.

Good morning, Nick.

Hi, Jonathan.

So if I can just kind of, what's that?

Should I congratulate you on the St.

Louis Cardinals or are you still a Phillies fan.

I was never a Phillies fan.

That was pretty amazing this year.

Fun ride while it lasted.

So just trying to read through the weather noise, would you characterize overall 2011 as normal given the favorable June and July and then, you know, the really wet August and September?

Or has that more than offset it?

A bad winter.

That was more expense.

We had a lot of breaks, it was cold this winter for some reason.

Good June, great July and terrible August and September and October's flat.

Great year in Texas because it's been hot and dry in Texas all year.

That's helped balance some of it out.

So I would say taking into account the good year in Texas and North Carolina and the bad years elsewhere, I think $0.02 to $0.03 negative.

Versus last year which was at least $0.02 positive.

Right.

So I guess if last year was $0.02 positive, this is $0.02 to $0.03 negative so maybe $0.01 lower than normal I guess?

Right.

Okay.

And then on the O&M efficiency ratio, is there any reason Q4 would go up from I guess what the trailing 12-month ratio is right now, were there any kind of, you know, sales gains recorded last year Q4 that helped I guess lower it?

No, but remember fourth quarter, if you just look at it as a quarter, is always higher, first and fourth are higher because your revenues drop and your expenses are fixed.

So really if we took just the third quarter, sometimes you're as low as 35%, 34%, something like that.

So fourth quarter usually doesn't help.

But that's why I give your trailing 12.

All we have to do is beat last year's fourth quarter.

Right.

So I mean relative to the trailing 12, you would think for the full year we would come in around there, maybe a little better even?

Yeah, maybe ten bases points.

But there was no one-time sales that go into reduction of expense or anything like that last year's fourth quarter.

Right.

That's what I was trying to get at.

Okay.

And then I guess last question, assuming the Pennsylvania bonus depreciation isn't extended for 2012, what's the expected effective tax rate?

Well, your federal tax rate?

Yeah, it would be much more in line with last year's rate.

Standard minor flow-through items probably around the 40% mark.

Okay.

Thanks for the insight.

Great.

At this time we have no further questions.

Thank you very much, everyone.

And that concludes today's conference.

We thank for your participation.