Essential Utilities Inc (WTRG) 2011 Q4 法說會逐字稿

Good day and welcome to the Aqua America Inc.

fourth-quarter full-year 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, Jeremy.

Good morning, everyone.

Thank you for joining us for Aqua America's fourth-quarter and full-year 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 aquaamerica.com or by calling Fred Martino at 610-645-1916.

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 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 risk, 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 risk and uncertainties.

During the course of this call, references 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 the call up for questions.

Thank you, Brian, and good morning, everyone.

We are very pleased this morning to announce Aqua's 12th straight year of earnings gains for the year ended 2011 and the strong fourth quarter beating consensus, and our quarter was $0.24 versus $0.21, up 14% on 1% more shares outstanding.

For the year, 2011 GAAP from continuing operations was $1.04 versus $0.86, up 21%.

Our investors have come to expect consistency in our results and predictability in our business model of growth and efficiency, and 2011 was no exception.

We had our 12th straight year of increased EPS for a CAGR over 10% over the 12-year period With 2011 rising on a GAAP basis 14% on a GAAP from continuing operations basis 21%.

It was our 20th straight year of dividend increases.

We looked at a 20-year CAGR, and it comes to 6.4%.

This year we raised the dividend 6.5%, so, as you can see, pretty consistent.

We predicted at the beginning of the year a capital spend between $325 million and $335 million, and we came in at $331 million.

Only the landing of the space shuttle is more accurate.

However, one of the key items that I am very proud of is that we have now addressed all our environmental issues, and we are investing in more green projects to reduce energy use and for reducing purchased water, which is an expense and turn it into a capital outlet.

We maintained and bettered our industry-leading efficiency ratio, lowering it again for the fifth straight year.

In 2011 Aqua improved 70 basis points from 38.7% to 38%.

Now that is a non-GAAP measure, and we started tracking this 15 years ago, and it is simply an operating expense, all your operating expenses over your revenues, as you can interpret in a lot of different ways.

And, once again for the 12th consecutive year, we have lowered our embedded cost of long-term debt to 5.30%.

While Aqua Pennsylvania maintained its A+ rating, we are proud to say it is ranked as the fourth highest out of 235 utilities ranked by S&P.

So, once again, 2011 was another predictable and successful year.

But 2011 was also an unpredictable and transformational year for Aqua.

It was a year of very unprecedented weather, which I will get into.

It was a year of rapid rationalization of our regulated portfolio, something we had been talking about, but it really came home to roost in 2011.

It embarked venture into burgeoning energy fields of Pennsylvania and, Ohio which three years ago we would not have even known existed, and tax policies, which we obviously accepted but utilized and generated an unexpected additional cash flows and an additional $0.107 in earnings, which I will explain later in the call.

The year ended with a major reorganization of our senior management team to better align the team with our strategic planning and the extension of my employee contract for three additional years to ensure a smooth management succession.

When we ended last year, we had 14 states, and we were suggesting over the last couple of years a pruning, which is another word for rationalization program, that we needed to maximize our earnings potential, and honestly management did not believe it would happen as quickly as it has.

Within months, will be operating in four fewer states and expect to continue increasing our net income as a result of this rationalization.

We have worked very hard and very closely with our water industry peers to do some transactions that I think truly make sense for both parties.

And let me take a minute of your time just to summarize them.

Late in 2010, we sold a very small operation and money-losing operation in South Carolina.

In May of 2011, we sold our Missouri operation, which was only 3000 customers to American Missouri, and over the years, eight years we owned it, we lost an average $200,000 annually to maintain that property and to run it right.

2011 we expanded in Texas through the purchase of a number of systems and 5000 customers from American as part of the trade, and I can tell you after six months we are already earning the same ROE as the rest of Texas because we initiated and implemented our program immediately.

And in just six months -- so you can normalize this -- we earned over $200,000 in that six-month period, turning a loss in Missouri into a gain in Texas.

We announced in July and sold at the end of December or the first day of January for official purposes our main operation to Connecticut Water.

Once again, I think it's a win-win.

Six months is a remarkably fast time to have a franchise transfer.

I think that's credit to Connecticut Water's reputation, but it is also a credit to our main operation's reputation.

We sold the operation for $37 million plus assuming all debt.

After taxes on the profit, we will have $26 million in equity cash to invest in our other state operations, and we will increase the earnings power to Aqua from the roughly $1.5 million, $1.6 million annually we used to make out of Maine to about $2.8 million annually by reinvesting it in the higher earning states.

We expect the trade of our Aqua New York operations 51,000 customers to American for Aqua America's Ohio properties of 57,000 to occur early in the second quarter, and both companies are confident that the current profitability will be enhanced by both of us improving economies of scale.

New York is currently 5% of our customer base, but only 2% of our net income, and the earned ROE in New York is underperforming the rest of the Company's overall performance by as much as 40%.

Ohio's current performance is similar, and we are optimistic that we can improve the performance of the systems that serve the 57,000 customers we are buying at the same levels we experienced for the 90,000 current customers we have in Ohio.

So a transformational year in our portfolio of our regulated companies.

Now whether it was truly erratic in 2011 versus much more favorable and normal I would call it in 2010, revenues were reduced approximately 2% due to the reduced consumption, chiefly in the mid-Atlantic region.

We were flat in the Midwest, down significantly in the mid-Atlantic, and actually up in the Southern states with Texas experiencing a drought.

But the mid-Atlantic region, which is more than half our customers, had the wettest year on record.

Now, as I mentioned, some of the negative effect was mitigated by record sales in Texas, but not enough to offset what we believe to be as much as a $0.02 difference from a normal weather year.

Now most people fear the tax man, but in 2011 we welcomed him as we explained in our three prior earnings calls for 2011, we tried to explain that not all the GAAP earnings were coming from operations and some were from tax policies.

The end of the year the analysis shows that 10.7% of our GAAP earnings came from this one-time retroactive policy to grant 100% bonus depreciation and for one of our key jurisdictions to allow a flow-through of that.

This policy was retroactive I think it was in February or March of 2011.

It was enacted retroactive to September of 2010, so the first quarter was affected even greater than the other quarters.

And on the addendum sheet that we added to the press release, hopefully it's on our website and people have seen it, we put by quarter the amount that we got from these taxes of $0.107 for the year.

And the first quarter, as you can see, if you were looking at it was the highest of the four quarters at $0.031.

That was because of its retroactive status all the way to September of 2010.

Now the most recent tax package that was passed by Congress on the payroll tax, there was an attempt, but it failed to put bonus depreciation in again for 2011.

I'm sorry for 2012.

The 100% bonus depreciation expired at the end of 2011; it goes to 50% this year, which is still more than normal; and all of our planning for 2012's budget and cash flows and capital spend is based on that 50%, and the fact that the first tax bill that went through -- and I'm not sure there's going to be many more tax bills that pass this year -- it did not get into that bill.

So, if anything, it looks like it's late in the year, and who knows if it will be retroactive and all that.

But we can't plan for possibilities, but we are planning for the 50% bonus depreciation this year.

But it was nice while we had it in 2011.

Now, other than the actual help to GAAP earnings, which we would like to at the end of the call explain what the one-time effect was -- therefore, you can judge how you want to go forward with the comparisons -- the good news is that our cash flow in 2011 was over $365 million, actually $367 million, and it well exceeded our capital outlays and allowed us to reduce our 2011 and actually into 2012 planned borrowings.

So it has actually reduced our overall debt load there for our interest.

And it also significantly increased our net income in 2011.

However, I would like to also say that since 2006 we looked at the last five-year period.

We've more than doubled our net cash flows from operations, but that all didn't come from this one-year tax advantage.

Deferred taxes are only part of the story.

When you compound net income at 10% a year and depreciation at about 7% a year, there are also big factors in why we have become much more cash self-sufficient to support our capital programs.

And that is why, therefore, we do not need as much debt floating as we did in the early part of this decade and also the last decade, excuse me, and also we have not had an offering for I think it's four years, and we don't anticipate any equity offering for our current operations in 2012.

Now the difficult part, which is to try and take what is generally all good news and explain four different sets of numbers that various analysts are tracking and looking at, and I will give you my opinion.

On the website, you'll see a pretty detailed sheet by quarter over the last three years that shows what the effect of the loss of New York and Maine will have to our continuing operations.

This does not include the Missouri sale or the Texas purchase, which I gave you a little bit of granular data on earlier.

Personally I believe the appropriate analysis for the future would be our adjusted GAAP from continuing operations to predict the future.

But you could use GAAP, but I do hope that you will take note of the four quarters this year where we had the $0.107 of taxes, and we would -- for projections we are adjusting them out.

So let me just throw some numbers at you.

If you want to do just GAAP, I'll start with 2007 through 2011.

So you will have a five-year comparison.

2007 GAAP was $0.67 and $0.69 in 2008, $0.74 in 2009.

You can see how we started to assimilate all the heater properties in the AquaSource properties; $0.86 in 2010 and then $1.04 -- again, this is unadjusted GAAP in 2011, so that is an 11.5% CAGR.

2007 was a good year to start, too, not coincidentally the five-year period, but we really grew quite a bit in the 2004, 2005, 2006 time period when we bought AquaSource, Heater, New York Water and Florida properties.

And that was a 25% growth spurt in two years, and we had to assimilate that, and that's really -- 2007 was the start of the assimilation.

You can see how by rationalizing and improving the capital structures and getting rate cases in all these states and fixing them up, we have been able to get back to the old Aqua America, Philadelphia suburban, which was just a steady 10%.

Our GAAP from -- I am sorry -- I gave you the first one was GAAP from continuing.

That was the 11.5% CAGR.

If you take GAAP, straight GAAP numbers, which are on the sheet also, they were $0.71 in 2007, $0.73, $0.77, $0.90, $1.03.

And that is a 10% CAGR.

If you take GAAP from continuing, which would mean New York and Maine are out and roughly $0.03 a year they threw off, but not equally in every quarter, New York lost money two quarters and then would make money the last two.

The GAAP from continuing -- and I'm going to adjust this for the $0.107 in 2011, and you can see that is right up top of the sheet where [$1.04] was the real number for GAAP continuing, $0.107 paying the $0.937 rounded up to $0.94.

The numbers would be $0.67, $0.69, $0.74, $0.86 and $0.94, which comes to just over a 9% CAGR.

And if you want to say that the $0.94 was maybe a $0.01 or $0.02 light because of the fact that we had abnormal weather this year you're right back there at the 10%.

And I'm very comfortable that we will continue whichever number you want to use as long as you adjust the continuing for the one-time effect of the tax benefit that will -- 2012 will look just like the rest of the years, and we can continue with the 10% growth either GAAP from continuing, adjusted, or with the GAAP itself.

Now the reason the GAAP itself would be different is that Maine in the first quarter this year could throw off as much as $0.07 to $0.08.

Now, it will look good on the numbers, but obviously it is a one-time sale, and I have tried to adjust that, and it would be adjusted out of the continuing.

But it is real dollars, and it is going to be earning in the future at a much better pace than if we had kept Maine for the rest of the Company.

So, kind of confusing, but I thought if I gave you all of these numbers you could better judge the past history but also the future potential of the Company.

I think I'll stop there and open it up for questions.

(Operator Instructions) Michael Bloomberg, Ladenburg Thalmann.

Good morning, Nick.

Thank you for the very detailed update there.

I appreciate it.

Good.

I just had a quick question on your Texas operations.

It's often difficult for us to get a real-time perspective on developments down there, and I'm just wondering if you can kind of give us a general overview of your operational footprint there, you know, current regulatory proceedings that are in place and your growth plans there.

We seem to be one of the few companies that like to be in Texas, and we have had success in Texas.

We are the largest.

We are in three basic regions.

We have an O&M contract all the way out in West Texas, but most of our regulated operations are in the three areas -- Dallas-Fort Worth, which we call our North division; the Southeast, which is Montgomery County in the suburbs of Houston; and third would be in Austin to San Antonio area.

All three are consolidated, but within the region.

So we won't have one rate structure in Texas.

We have three, actually six -- water and wastewater -- but they are all consolidated.

We have a settlement in our most recent case, the Southeast case, which is well described in the K, if you read it.

In our mind, it was like any settlement.

Both sides feel like they did well and we do, and that one is now behind us.

We have two active cases where there has been very little controversy or opinion.

We filed these cases in late 2011, and we will be ready now for the process in Texas, which is to allow what they call interim rates, Michael.

And then you have to then prove the case, and after the interim rates, you either give back or you get more at the end when they finally rule.

And that is the process.

We have always been treated very fairly, so we're comfortable with that process.

It's one of our fastest growth states.

The reason we have economy of scale there and America didn't, we are no better managers than they are.

It's just that we were able to take their operation, basically cut 30% to 40% out of the cost structure, put it into our existing structure, pick up some of their employees who are good employees, and one is the manager, and we were lucky enough to get a hot summer.

But I normalize that $200,000.

We actually earn well in excess of $260,000.

On a six-month basis, that would be $0.5 million.

So you can see we are very pleased with the transaction, and we are continuing to look in Texas and expand Texas.

Okay.

In terms of the interim rates that you mentioned, I mean can you give us an idea of the magnitude and when they went into effect?

Well, the interim rates do not go into effect until the Commission approves that, and I have to get back to you rather than give you a guess.

I think it's March or April, but I'm not positive, and then usually they rule later now.

One time we had four years before we finalized the case, so that was the first one.

The second one was much quicker, and it's only been a year on the settlement.

The one that is settled, which the Southeast, we anticipate hearing at some point from the official commission ruling, even though their staff has agreed to it, sometime maybe as early as end of March, and that would finalize that case.

The other -- and there's a lot written in the K.

If you have questions after you read that, I will go into much more detail.

The other two cases were filed.

We are not collecting any revenues yet.

We sent all the notices out, having hearings and so on, and I think it is April before we are allowed to start charging interim rates.

And I just don't remember the percentages, but I think they are well in excess of the teens to 20%.

Okay.

That's helpful.

Thank you.

Just real quickly on the non-reg side, it's good to see the progress on the Marcellus pipeline.

Just trying to get an idea if you might be able to handicap the number of wells that could be serviced or drilled based on the water supply that could come through that pipeline over the lifetime of the region.

Sure.

The way I would look at it is we fill impalements, and then the Ranges and the EXCOs and the SouthWests all take the water from their impalements and take it to their various well sites.

So it's really I don't know how many wells they will do off of each impalement, but we just keep filling the impalement with a spigot basically.

The impalements are at least 5 million gallons each.

They are pretty big, big swimming pools.

A typical well can take up to 4 million gallons.

A typical truck is about 4000 gallons.

So that's why you need 1000 trucks for every well, and that's what is causing the environmental degradation.

So this way they would take the trucks only or maybe they would have an overlay on pipeline from their impalement to their well pads, and so there would be much less truck traffic.

We will be able to pump if we get the permit -- and it's not final yet -- up to 3.5 million gallons through this one pipeline that we are working on now.

And the 3.5 million you could argue a day would cover, let's say, it's 3.5 million gallons per well.

That is really only one well a day that we would be able to do, but it doesn't work that way.

But I'm giving you that example.

So we think that once we get the pumping station built and the pipeline built, it will be in constant use.

Because it fills up the pond of 5 million, and as they're working that arm, we are refilling it and so on.

It's like our tanks would be on a normal system.

So I guess just to be clear, even with the collapse in natural gas prices recently, I mean you still feel fairly confident that the pipeline will be utilized in pretty short order here and on a continuous basis?

Well, we will know within a month.

The companies that have signed on to us are bugging us, when is it going to get done?

So that tells me they are still drilling.

But you're absolutely right.

Gas prices got down to as low as $2.10.

There is a point where it doesn't pay to drill I assume.

I'm not in that business, but we think they are still drilling.

Ryan Connors, Janney Montgomery Scott.

Good morning, Nick.

Good morning, Ryan.

I wanted to, first off, just echo Michael's sentiments, and thanks for the detailed walk-through of the numbers.

I mean that is very, very helpful and the different ways to look at it.

But on that note, clearly the swaps are creating complexity in the financial results and the reporting, as you note, in terms of First Call and that sort of thing.

And I know you have got to negotiate separately with, say, Connecticut Water on Maine.

But with your largest peer there, they are talking about more of these swaps, and most people believe they will continue.

Why not just get it all done in fell swoop, get everybody in a room and talk about what makes sense where and just get one big deal done instead of having potentially two or three years of these types of discussions on the complexities that this introduces into the results?

Well, I mean we are always open and constantly looking.

There's also a capacity issue as to how many you can do, at least two a year.

I mean I don't want to underestimate the time it takes regulatory-wise, planning wise, new employees.

We have 80 employees who are leaving us and 80 new coming, training, pension benefits that are different and so on.

And I would love to say we could do everything at one time.

That's what we tried to do at AquaSource and Heater, and we ended up getting indigestion.

So if there are more out there, I'm sure they will happen if they make sense.

But I don't -- we are not in discussions right now, serious discussions on anything else until we get Ohio up and running, and Maine is almost done.

We are doing the final numbers now and New York sold, at which point we're ready to go back in and look at some more.

Okay.

Fair enough.

And then in terms of I just wanted to get your update on regulatory developments, you know most notably for you in Pennsylvania but also elsewhere.

I mean what are the three or four regulatory changes you see on the horizon whether they be fixed or future test years or whatever?

Which states do you see significant change for better or worse on the horizon here in terms of regulation?

Three pieces of legislation that are very positive for us, one is in New Jersey, there appears to be at least support at the commission level for a New Jersey style disc.

And we are happy with that if it happens, and we will immediately shift our capital programs and increase our capital spending in New Jersey, especially on the infrastructure, if it occurs.

And we are planning -- we have two budgets for New Jersey, one with and one without the disc for 2011 -- for 2012, I am sorry.

In Pennsylvania a bill was passed that actually helped the gas companies because we had two very unfortunate explosions in 2011 to address their deferred maintenance problems, and we were able to make sure that water wasn't forgotten in that bill.

Two things occurred.

First of all, it allows a future test year, which is even clearer than the current modified future test year we have in Pennsylvania for all utility electrics utilities -- electric gas and water.

Second, it allows water companies who have wastewater in addition to water, which is fairly new for ourselves and America in New York, and I don't think New York has any wastewater nor does United in Pennsylvania.

They may.

I don't know.

But Pennsylvania, American and ourselves did get into wastewater in the late 90s.

A very small piece of our business, and it is an administrative burden on everybody because these are small systems with small cases.

They have allowed for the consolidation of those, a consolidation of the rate base between water and wastewater, and therefore, a modifying effect on some small water sewer systems whose prices would become unaffordable if you fixed them the way EPA wants you to fix them.

So that's a positive.

Plus, we are allowed now to apply for a sewer disc, which will be called a SIC.

I don't know why it's called SIC, but that's what it's going to be called, which we plan to use.

In Ohio there is a bill right now that was passed for gas, and there is one being considered for water to allow for a future test year.

Currently Ohio is a historic only test year.

Ohio has good regulatory climate.

They have a they call it a SIC, surcharge and improvement charge, or something like that.

It allows four 3%ers.

So you can get up to 12% in between rate cases.

But they have a historic test year, which causes lag.

So, therefore, nobody can stay out four years.

So that's being looked at, and there is at least legislation sponsored to possibly give water the same future (inaudible) and wastewater, same future test year as gas just got last year.

Okay.

That's a great update.

Thanks, Nick.

And then finally, this seems like an issue we discuss almost annually now, but now we're hearing again about a potential increase in the tax rate on dividends as some of these tax plants get floated in the election cycle.

What are your current thoughts on that, and if we did see a dramatic bump-up in dividend taxation rates, would that at all impact your capital deployment priorities, payout ratios, etc.?

Well, it clearly would affect the companies who are trying to sell stock, which we are not, and I think it will affect the utilities more.

It will affect every dividend paying stock.

It will affect the utilities who are higher-yielders, and you can see our industry has traditionally been lower than 3%.

But we have a little bit of growth aspect to the valuation of our stocks versus strictly on a yield basis like some of the more older, mature, less growth-oriented electric utilities.

Now having said that, the last -- when it dropped the last time, it dropped from ordinary, Ryan, which was at that point over 40% to 15%.

I think it is 15%.

And that was a dramatic drop, and I think you're exactly right.

There was a nice jump.

And I think it was during the Bush years.

It was early 2000s when they did this.

It's been around for eight, nine, 10 years.

The risk -- I haven't heard the latest of the President's proposals, but I'm not sure where his budget is going anyhow.

But the rumor is possibly going up to 20% or 25%.

Wrong direction, but not at the speed that it came down.

We're going to obviously be heard, and we have a couple of members on Ways and Means.

I have already started lobbying them and explained to them, and I'll be glad off-line to share some of the ideas we are talking to them about to basically earmark utilities as companies who are absolutely going to invest in America.

Our money is not going to go overseas.

And as long as the money is being utilized to invest here, you don't want to hurt capital-intensive industries, which need investors to continue to grow in America.

And in some way to reward them whether it is a -- and there was this back in -- I'm the only one old enough to remember this.

Back in 1979 there was a bill, which was passed, that allowed reinvested dividends, which I will share with you, and I have already shared that with some of the members that would really make sense.

And you treated as low capital gains at that time it was 12%.

I am not sure we are going to get there, but it worked.

And it kept people investing and reinvesting dividends into utilities, which had to invest at least that much in capital, so that all the money was gone back into the ground in the US.

That's a great point.

Thanks for your help, Nick.

Stewart Scharf, S&P Capital IQ.

Good morning.

Hi, how are you?

Could you talk a little bit about your acquisitions and your strategy?

I know several years ago some of the larger acquisitions like AquaSource and Heater took time to bring up the ROEs seemed pretty weak, and it seems like now with some of the deals we are able to get the ROE up to your traditional levels quicker, and they are smaller deals.

So are you focusing more on the deals that you've been making now in your strategic or critical mass states, or is it just based on opportunity where you would seek a similar deal like a few years ago?

Right.

Of course, the AquaSource nobody expected and it just came upon, and we were one of the few companies ready and waiting to do the deal.

And we knew it was a troubled company, but it did take us longer than we had anticipated to invest in it and capitalize it and then get fair rate cases.

And that catchup period is now still happening, but it's come from the basement.

I guess we are halfway up the office tower now.

Whereas some of our more traditional states -- Ohio, Pennsylvania, New Jersey -- are more mature, and by managing correctly, avoiding regulatory lag, and then, of course, with a disc, you are able to almost fully earn, which is exactly what the system says you're supposed to do so that you're getting a fair return for your investors dollars.

Regarding the concentration, we are very pleased with the three big states that we will have, and we're hoping that with organic growth coming back, we will see some rapid growth in two of the Southern states, North Carolina and Florida.

But the Texas, Ohio and Pennsylvania are being helped by the energy issue of the gas, and it's creating a new wave of growth in certain areas that we hope to capitalize on.

So I would say the more likelihood for 2012 and 2013 will be you will see a rash of what we call small/middle sized, but that's all there is out there, other than one or two systems that may be sold.

The small systems, whether they be municipal or private, we just got approval just the other day for three in Pennsylvania, which are the typical size that we are looking for, and we reorganized and have now a Senior Executive Vice President doing nothing but development, which could be regulated or unregulated with a hint towards the energy side.

And I'm going to be spending a lot more time in my last three years on that part of the business now that the other part of the business seems to be humming.

Does that answer your question?

I mean there's only three or four publicly traded that are of size that would be a possibility, and these are like collector cards, as I have always said.

They're not for sale unless the owner decides to sell them.

The smaller private companies that are private equity owned, we really don't have access to the public figures.

But I know that the pension funds love the water business, so as you can see from some of the last transactions.

And rightfully so because of pretty much -- if you look at our numbers, whether it is five, 10 or 20 years, it is about 10% CAGR, and I don't know how many pension funds are earning that.

So there's a lot of interest in the field, but not a lot of interest in the 10,000 customer system in Idaho where you have to do a lot of work to get it.

Everybody wants the 0.5 million customer system that is already fixed.

Right.

Okay.

That's helpful.

And on your rate request, how is that going?

Is it generally -- you are basically getting a historical percentage on rates?

We've been doing pretty well.

We get our normal -- as you know, we always feel we should get more investment return on the investment we made than the regulators filing decree.

And that is usually the biggest part of the difference.

We very seldom lose any dollars on operating costs of significance, and that's because our operating costs are so low compared to all the other water and electric companies.

It's hard to cut from the best in the field.

Regarding the current cases, the big ones are in New Jersey where we are having hearings as we speak, and we have not had much controversy, and we anticipate early summer for settlement.

And in Pennsylvania, which is always our biggest every two years and we are starting our hearings, and so far the comments have been very, very constructive.

So it is a ROE case and a capital case, and capital was spent, and there is very little prudency challenges.

I am feeling pretty good about them.

That's the bulk.

In the release I put in there how many cases we have already gotten this year and what the annualized return is, and Pennsylvania is in there for $36 million.

And we did ask for 11% -- I think 11.75% ROE, which would be -- we would love to get it, but we don't think we'll get 11.75%.

And when you take 25 basis points off of the ROE allowed, it drops millions at a time.

I can't give you the exact number, but maybe if you want to call [Dane Rye] later, we can figure it out for you.

You said that the organic growth is picking up.

Where are you seeing that and how much seeing new housing units and (multiple speakers)?

-- hope.

Pennsylvania perked up a little bit, but I think a lot of that, again, is the energy related.

Texas slowed down, but never to the point where it stopped.

It still was 2% last year, which is still pretty good.

Texas is still importing people.

And we are starting to see some stabilization in North Carolina, which is the state we have the most potential because in North Carolina we are the developer of the communities outside the cities, and when a builder goes in and plots 500 lots and then starts the development, they lay all the pipe, and maybe they sell 30 or 40 houses, at which point we give them so much per house as it is sold, but we have access in that example to 470 more homes, and they are just waiting to get built.

Most of the building will occur where you already have infrastructure roads and a reason to be there because there's already some people being there versus spec development.

We are optimistic.

It's not going to be overnight, believe me, but I think in the next five years we will see return to organic.

I mean we have dropped almost 100 -- we were growing 1.5%, 2%.

Last year it was 0.3%, I think.

So we dropped 100 basis points or more on growth rate organically.

And that would make a big difference in getting rid of lag if we can get that back.

Okay.

Thank you very much.

Is your electric back on?

Yes, the winds were pretty high the other day, but they stayed on.

Good.

Michael Gaugler, Brean Murray.

Good morning, everyone.

Congrats on a nice quarter.

A lot of my questions have been already answered.

I do have two.

In your comments this morning, you kind of highlighted improvements in O&M and where those trends are headed, and you guys have certainly done a nice job here.

This is an area we are seeing other companies like AWK focusing on as well in their presentations, and we do get questions from investors on it as well.

I guess my question.

We have got given now that you've got some nonregulated business and some nonregulated business coming on, AWK has coming on as well.

Are the metrics there fairly comparable across most of the water utilities, or does some of the non-reg kind of flow into that?

The way we did it was everything.

In other words, we just took a simple line off the P&L of operation and maintenance, which we give you and divide it into whatever the revenues are, regulated or unregulated, and that is the number.

But I did see American and rightfully so.

If they are looking at the regulated group and they are looking at not all the O&M but one of the elements, purchased water, which truly is part of our core business but we add it, taken out.

So I felt apples to apples, I did do that calculation.

Let me see if I have it.

I mean ours is on everything.

If you took out purchase water and you took out the O&M expenses from our unregulated, which are very much higher, I mean nobody has markets like the water business, right?

The trucking business where we had the septage hauling, the margins are 12%.

So it is 88% O&M, but it is not a big part of our business.

But if you took all that out and adjust for purchased water, we would be around, let's see, just excluding about [35], it looks like.

Work that up for me, about [35.5] versus (multiple speakers).

So if you want to do an apples to apples comparison, I still think we are 800 to 1000 basis points better than anybody else in the industry, but we have been working at it for 20 years.

It's not easy to get down.

Understood.

That's helpful, too, as we look out toward the California utilities given the volumes and purchase order they have.

And then kind of I am going to kind of follow-up here on the non-reg side, the Marcellus pipeline, saw in your release that is coming online shortly.

I would guess that that's going to have some kind of an impact on 2012 EPS and would appreciate any guidance you could provide if not earnings perhaps sales so we could at least put a margin on that business.

Absolutely.

Right now the budget assumes nothing, right, Dave?

A little bit in bulk water sales from what we did last year matching that.

That's filling stations we have around the state for the truck.

And I am comfortable without anything up or down for Marcellus with the 10% rejection I said I was comfortable with on the adjusted continuing ops.

Then if you want to do GAAP, add another, whatever, $0.08, $0.09 -- $0.07 or $0.08, I am sorry, for Maine.

The outlays I think what I would like to do is, have you ever been up there, Michael, looking at these spaces?

I have not yet, but would love to go.

Maybe that's the best way to show you, and it would have to be springtime when we are doing Phase 2, and you can see where the line comes in.

And so these are no small engineering feat.

I mean we are pumping at 1000 psi.

We had to get numerous permits.

When you see them constructing this pipeline, you realize its mountains putting in, holding and then having backhoes hold up the bigger equipment that is digging that claws.

It's amazing.

Not digging the hole in the beach.

But once it's up, we think that it's so competitive to the trucks that even at the price we are selling, which is a almost multiple of what we get for regulated water, it is still competitive with the trucks.

And I will show you some of the numbers, then you can do your own projections.

But the key will be if they are drilling or not.

And like going up there and flying up there, maybe you will get a feel for all the pads and what these impalements look like.

Thanks, Nick.

I appreciate the offer.

Good.

Michael Roomberg, Ladenburg Thalmann.

Thank you.

Nick, I just wanted to follow-up on something that you brought up a few minutes ago, which is the influx of private capital, the appeal of water utilities to private capital and pension funds and so.

For us it seems to kind of present a two-edge sword.

On the one hand, it seems like there's a bit of a crowding out or a competition for attractive assets between you and the private guys.

But, on the other side, with the valuation multiples that these guys are paying, it would seem to suggest that the entire sector is undervalued.

And I'm just wondering if you can comment on that in terms of how you see these guys approaching the industry, whether -- at a certain point, whether or not they look to guys like yourselves to acquire?

Well, the last time I'll call them big players -- and these are big players.

These are the big Canadian pension funds, the Australian infrastructure funds, and, of course, Citi, JP and so on.

So it is the biggest of the big players.

The last time that happened to our industry was in mid part of the last decade when GE came into the market and Siemens.

And the evaluations ran probably a little bit ahead of themselves, but we were trading above [40] on forward earnings.

Based on the fact that GE was going to buy everybody out or that somebody missed something, and since we were already in the business, our earnings were worth more.

We've now settled back to in the [20 range, 20, 21] depending on which one of the numbers you want to use.

But I think that is more based on the consistency, the EBITDA to revenue numbers of close to 60%.

The dividend yield, which you could do away with immediately if you went private, all those considerations.

I mean these are truly unique companies, and the fact that some of them like the bigger ones who are publicly traded are well run and don't bring with it a lot of risk, I think it garners that premium.

Whether we should trade at [20 or 25] or higher, who knows?

So I think it does put a floor on the stocks as do dividends eventually, but I've always believed that these are I call them collector cars.

They're (inaudible).

They are old Packards or whatever in the sense that you can't create one, and they're not making anymore, and they are only for sale when somebody wants to sell them.

Now the ones that have been bought at huge multiples to EBITDA, which I think they are even getting huger as they continue to operate them, are companies that were I would argue not the best of the group when they were part of the 20 or so that were around at the time.

So there is something to be said for, once you pay for these things, you have to run them.

And I think that is my bigger fear of value destruction than we are overpriced.

I think there is an undervaluation here, but we also want to make sure that the private equity people who are buying some of the other ones run them well.

Because it will hurt all of us in the long run, but also hurt the valuations.

I don't know if that was too philosophical or --?

No, that's spot on.

Thank you so much.

Jonathan Reeder, Wells Fargo.

Hey, good morning, Nick.

I won't keep you long, just a couple of quick questions.

I just wanted to make sure, the bonus depreciation that you're talking about, the 50% in 2012, you're talking on the federal level, not Pennsylvania?

Yes, the state of Pennsylvania will do nothing unless it is 100%, and even if it is 100%, I've talked to the Secretary of Revenue.

Even if it is 100%, now that the governor's budget has been proposed and it's another tough budget, very little likelihood that -- well, no likelihood if bonus is not passed retroactive before June probably.

I don't know the state would retroactively do it because it costs the state budget money.

So I would say the chance of that $0.107 reappearing in 2012 is very, very slim.

Okay.

Second, just a little bit of clarification, the adjusted EPS and earnings that you were talking about, that does not, I guess, guests exclude any of your, like, sale gains over the last couple of years, is that correct?

Like I think in 2010, you guys have like $0.01 investment sale gain.

No, because I'm not saying they are continuing ops, but every year we have something we sell -- land or stock in somebody we bought like Southwestern, which is $0.01 in whatever year.

So rather than trying to go back 12 years and figure out what they all were, those are in.

But they are pretty consistent.

Okay.

And was there something, remind me, in 2011 like in Q1, was there (multiple speakers)?

2010 -- when was Southwest 2011 or 2010?

(multiple speakers) 2010 -- in 2010 there was $0.01 or $0.015 a gain.

The first quarter we had the Southwest properties -- I thought it was 2011.

We better make sure.

(multiple speakers) Yes, in 2011 this year we budgeted and told you we budgeted a condemnation sale in Texas.

And that was like $0.01 or something, right?

Yeah, a little under $0.01 I think, but they are all -- whenever you sell a system, it's usually $0.0075 to a $0.015.

All right.

I just wanted to make sure.

Yes, so that first quarter of 2012 will not have -- like that $0.19 adjusted, it was $0.22.

I am glad you brought this up because let me just give you, $0.22 was the GAAP.

If you take the $0.03 off, $0.031 of the state tax, that was $0.19.

Included in the $0.19 last year was $0.01, which it should be included.

There was $0.01 in the first quarter, not in all the other quarters, of a land sale.

Yes, that's what I was thinking, and I was just wanting to make sure that I was thinking about it correctly.

Yes, if you are a purist, we are up against $0.18 last year.

I mean taking all the noise out, if you want to take that $0.01 off of Crighton Ridge.

Yeah, I figure while we are stripping out a lot of this noise, might as well get it all right.

Gerard Sweeney, Boenning.

Good afternoon, guys, now that it is after 12, but a quick question.

I hope I'm the last guy for you but a quick question.

You did mention, I guess, some of the wastewater, the ability to consolidate some of the rate cases there, as well as the sewer disc or SIC that's coming down the line.

Would that change or alter your thoughts or change your thoughts in anyway in terms of acquiring some more sewer systems?

I know it hasn't been a large piece of your business, but that is definitely a positive regulatory improvement as here in PA.

Absolutely in Pennsylvania.

Texas we looked at -- I mean in some of our southern states, Gery, wastewater is 35% to 50% of our business.

So there is no reluctance to -- we already have it consolidated.

In New Jersey we only have two or three, so consolidated rates in the two would be a big plus if we could get it.

And in Pennsylvania the reason we didn't do more wastewater was consolidated rates were not available; now they are.

So absolutely you hit the nail on the head.

Okay.

Not to belabor some of the Marcellus stuff, just a couple of quick questions.

The pipeline, is that -- where is that located?

Is that up in the northern tier like the (multiple speakers)?

(multiple speakers) -- dry gas.

It starts in a place called Jersey Shore, which is little bit west of Williamsport on the west branch of the Susquehanna like Lycoming County.

Yep, I know it.

And 18 miles long and you're still working on the permits, correct?

No, Phase 1 18 miles should be completed by March, early March.

We should be -- (multiple speakers)

I'm sorry, go ahead.

$24 million total costs.

We are starting Phase 2 shortly, which will be another 25-mile run to the river so we can get to the access to the water.

Right now we buy water from a reservoir up in Jersey Shore.

Okay.

Got it.

On the permit side from, I guess, from the SRBC, how -- are they four-year permits, or are they longer?

At least five, but I think they're evergreen, but I'll get an exact answer and get back to you on that.

If you have a chance, come over one day, and we'll show you the whole map and explain it (multiple speakers).

I would love to.

I've spent more time than I care up in Williamsport recently.

Oh good.

It is rather amazing.

I know things are definitely slowing down there, but our drilling is still going to -- on a relative basis, it is still going to stay relatively strong.

Warp speed, that's right.

And then the -- on the pipeline, is that take or pay the contracts, do you know?

Two of them were take or pay, one of them is a guaranteed to buy all the water from us, assuming they are pumping.

which we we felt was a due risk.

And they are paying a higher price per gallon for that fact that they're not 100% take or pay.

And then obviously you said the next couple years, you are going to be focusing a little bit more on energy side.

Have you been given much thought as to what is next?

Obviously there are some, I guess, sourcing pipeline opportunities, not only in Pennsylvania, but as [Utica] develops in a couple of those key counties in eastern Ohio.

But curious if you've given it any more thoughts where you can broaden it out or if you are in a position to discuss those?

No, we have already a plan, and we are in discussion, and we have already started a station out in Western Pennsylvania to serve Western Pennsylvania, Eastern Ohio, mainly shale, a little bit of Chesapeake.

And we are basically -- we will be the only water company in Ohio at the end of May or excuse me at the end of March.

So we are looking at Eastern Ohio, Western Pennsylvania as center of operation, and then the Williamsport Tioga Bradford areas similar in Pennsylvania in the Northeast.

But right now just focusing more on sourcing of water?

Yes, we are eventually looking, but right now there is not much of a market as to the treatment.

That's how we get started treatment, and then we morphed into the water supply, and the water supply is more immediate and something we feel very comfortable with, but we haven't given up on trying to get to the treatment side.

Got it.

I may take you up.

I've spent a lot of time out in Southwest looking at some private companies as well, so I know there is a lot going on there.

Would love to talk to you, yes.

I appreciate it.

Thanks a lot.

(Operator Instructions) Cleo Zagrean, Macquarie.

Good afternoon.

First question, could you please give us more insight into how the organization of management helps promote your strategy?

And then secondly, if you see more opportunities in the municipal area than you might have in the recent past.

Thank you.

Right.

One of the concerns was the fact that I am nearing retirement age, and where would the Company go under new direction?

And we've started strategic planning.

We decided that we had great executives here that we could groom into the next CEO.

We've organized so that the succession plan would be inevitable that one of the three people that are Executive Vice Presidents now will be the next Chairman, and that to use my years, which are now three left, three and a half left, would be to gear the strategic plan so that we are growing the Company at the kind of pace we have been growing.

It's not easy to keep growing 10% year in and year out for 20 years.

But we think the potential is here.

One of the earlier questions about the uniqueness and the earnings powers of these investments, and we just want to make sure that I spent most of my time in the last three years worrying about the future and the growth.

Does that sort of address it?

Yes, I was just wondering if the specific position assigned to (technical difficulty) and acquisitions of munis signals an increased focus towards those areas of your business?

Absolutely.

And if you could comment on the long-term potential of those areas a little bit, that would be appreciated.

Well, the issues that will affect the munis are going to be the technology advances that are occurring, the fact that the EPA will start enforcing, whether or not low-cost financing stays forever, at which point the munis would be at a disadvantage and just the practicality of size.

Many of the municipal governments -- I am not talking city of Philadelphia or city of Boston -- but the one that we just bought or announced that we are buying, Mifflinville, Pennsylvania, 500, 700 customers, don't even have $1 million in revenues, how can you stay on top of all the rules and regulations?

So it's the small municipal and the small privates, which I think the demographics are inevitable that they have to be combined with something there.

And you expect significant opportunities to integrate efficiency into system, or there are limits to the margins at which those smaller acquisitions can operate?

No, no, no, it's a good point.

The reason one of the earlier questions was, were we looking everywhere for opportunity?

I think Stewart asked it.

We were going to concentrate in the states we are in, which is quite a bit other than California, the nation's top population states, and use them as, therefore, you can get immediate synergies by tucking them into your existing organization.

In that state, the overheads are covered and the management is covered.

That is the highest priority.

Thank you very much.

And there is 20,000 plus small systems, municipal and private in those states.

So it's not like there's no inventory.

Okay?

That concludes today's question-and-answer session.

Mr.

DeBenedictis, at this time I would like to turn the conference back over to you for any additional or closing remarks.

Thank you very much, and thank you for the questions.

That concludes today's conference.

Thank you for your participation.