Essential Utilities Inc (WTRG) 2012 Q3 法說會逐字稿

Good day, and welcome to the Aqua America Inc.

third quarter 2012 earnings conferences call.

Today's conference is being recorded.

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

Please go ahead, sir.

Thank you, [Debarty].

Good morning, everyone.

Thank you for joining us for Aqua America's third quarter 2012 earnings conference call.

If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at www.aquaamerica.com or call Emily Herman at 610-645-4271.

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

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with David Smeltzer, the Company's Chief Financial Officer.

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

Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties.

(technical difficulty) -- of this call, reference may be made to certain non-GAAP financial measures, reconciliation of these non-GAAP to GAAP financial (technical difficulty) -- are posted in the Investor Relations section on Company website.

At this time, I would like to turn the call over to Nick for some (technical difficulty) -- After which, we will open the call up for questions.

Thank you, Fred.

Good morning, everyone.

Pleased to report another solid and up quarter for Aqua America.

A couple stats, revenues are up 12% for the quarter, 10% over the last nine months.

Net income is up 23% for the quarter, 20% over the last nine months, (technical difficulty) verses 30% and 93% verses 79% for the nine months.

Obviously, very pleased with the financial results.

We're equally pleased that our shareholders of record on November 16 will be rewarded with a 6% dividend increase to a $0.70 annualized rate.

This is our twenty-second dividend increase in 21 years, and with a compounded annual increase over those two decades of 6.5%, we believe this ranks us the most consistent dividend payers on the New York Stock Exchange.

I would like now to acknowledge what the mid-Atlantic went through last week -- this week, excuse me, I'd like to forget it, with Hurricane Sandy.

We sympathize with the many people in our region, especially New Jersey, in which are still suffering (technical difficulty) the hurricane.

But I wanted to give you an update as how it affected Aqua America, the Corporation.

I am pleased to report that we survived the storm with no damage or employee injuries; that was the most important.

Equally important, thanks to the investments we've been making in infrastructure, new water treatment facilities, flood proofing, stand-by electric generators, et cetera, not one of our customers was without water during or after.

So we -- (technical difficulty) -- August, September and October for water sales due to weather.

After a strong July, and we reported in early August last time, I remember saying we had a strong July, but didn't know how August would fare.

It didn't fare very well.

The remainder of the Q3 actually deteriorated in five of our nine states, where we had less gallons delivered in 2012 verses 2011.

So it really wasn't a very good summer, and we were up against last summer, which was, again, the same solid June, July and then August, September, it just never stopped raining.

Very similar this year.

Thanks, however, to our cost controls, the new acquisitions we made on the trades and rate awards given early in the year, that's what allowed Aqua to achieve the revenue and net income increases that had we not had, we wouldn't have such solid results.

I'm pleased with Management's ability to curtail costs.

If you look at the balance sheet -- I'm sorry, PNL, you will see O&M is up 7%, 4.7 million.

Almost all of that, to the penny, is from the 57,000 new customers in continuing ops that we absorbed in Ohio from the trade with American in May.

To put that in perspective, it produced $11.3 million in new revenue, so healthy, healthy profits coming out of Ohio.

So if you take the O&M, and adjust it for just the Ohio new customers, O&M is actually flat.

I feel confident that we're going to continue to show that type of improvement in our efficiency ratio when we adjust for all the ins and outs.

As I mentioned earlier in the year, we thought even though we had a very good year last year, where we brought the ratio down 70 basis points, I said I thought we could do that again this year.

I think now, we probably could bring it down as much as 100 basis points between last year and this year when we compare year end '11 and year end '12.

The reason is we are really getting now structural improvements; it's not just G&A.

Our electric usage has been reduced through the use of our solar and all the investment we made in solar and also, the energy efficient pumps, VFDs that we've replaced.

That we're now going to use 4 million kilowatt hours less this year than we would have without the solar and without the pumps, and that's a considerable savings.

We pay a pretty good rate on electric because of our shopping, but I guess you could put anything you want on that.

Certain states are $0.10, certain states are $0.08 and so on, but considerable savings.

That's without the 0.5 million or so in what we call the SRECs you get from the electric companies for installing solar, solar RECs.

You will see about a $5 million reduction in our purchase water cost year-over-year, '12 over '11 in Pennsylvania because of our development of the new water sources that serve our Bensalem area.

You will also see continued success controlling of our Company's defined benefit pension plans, which is becoming a much bigger issue with many corporations.

We've taken steps over a decade ago to handle it and it is starting to now show the constraint that we expected it to show.

I think one of our largest future benefits is going to be the conversion of our truck fleet over the next five years to clean burning less expensive CNG fuels.

The economics, let alone less maintenance in the clean burning engines, but the economics alone, with the current price of gas is almost a cut in fuel cost of a half.

So we are very, very cognizant of our needs to continue to control costs; we're very pleased with what's happened to date.

Again, we're investing 325 plus capital investment program this year in water quality and infrastructure, and therefore, it will match last year's record.

At pace is about three times depreciation, so it's a healthy pace, but it also helps the future value of the Company.

Our 2013 plans, as we're developing our next year budget, we expect to continue to invest at this pace.

And all this without incurring any new equity infusion in our plans, and that's because of the growing internal cash generation from our operations.

Another bright spot is this year's improvement of our customer growth picture.

We have already completed a dozen acquisitions so far this year in six of our states, so it's not just one or two states, it's all over.

We should return to the 20 acquisitions by year end.

We had dropped below that in the last couple years due to lack of interest in anybody selling.

Our organic growth, just normal growth on our systems, is also showing an up tick.

So the combined net total growth from acquisitions and organic, we think in 2012, could reach 2% or about 19,000 customers.

That's up from 1% in '10, and then it dropped to 0.6 in '11.

We are hopeful to see it back to the realm of where we always used to be, which was the 2 to 4 range.

We, once again, have maintained our S&P rating; another write-up just came out a couple of weeks ago, as one of the highest ranked utilities by S&P of the 227 electric, gas and water that they follow.

Only one is ranked higher, and I have to acknowledge that this probably helped us do a refinancing just last week of $80 million.

We got 31 year length at 3.8%, and that saves us on the $80 million that we took down of about a saving annually of $1.6 million.

Our unregulated unit is growing in both services and the Marcellus share water delivery area.

I continue to be comfortable with my earlier estimates.

I think on the last call, when somebody asked me to project what this is going do, I told you I thought we could earn $0.01 this year, which is pretty good when you do a start-up, and earn money right from the beginning.

I think we'll now be a little bit in excess of $0.01.

I still anticipate that it will double each year over the next three years as we complete the second and third phases of our successful Royal Water Pipeline.

Our pruning program, which then morphed into a trading program when we worked with our sister -- our fellow company, American, when Jeff Sterba and I started talking about trading rather than selling out-right, and they have both been successful for both companies.

We continue with that, and our execution on the integration of the new customers in Ohio to date, and of course, Texas last year has been flawless and financially successful.

We also work with another colleague company, Connecticut Water, and disposed of our main properties; they're doing very well with it.

We are, too, because we reinvested the proceeds into investment capital building infrastructure throughout our states, and that has added in excess of a penny annually to earnings starting in '12.

We sold this on January 1, and we'll continue each year and of course, with no risk; it's already locked in.

The Missouri Texas swap we did last year continues in '12 to be $0.005 accretive, so that transaction was very positive for us.

Of course, Texas is one of our growth states.

And the Ohio for New York trade, which occurred this May, this year, will add in excess of $0.01.

It will be $0.01 accretive over what it would have been had we just stayed there.

I think when we get all the rates through, and the capital infusion over the next two years in Ohio, it will probably end up being $0.03 accretive.

And more importantly, open up new areas for growth in both our regulated, as we're now the largest, by far, water company in Ohio.

And unregulated as the Utica Shale matches the Marcellus Shale for development in the energy rich areas of those two states.

We also, in our pruning area, have decided to sell our Florida operations from our initial purchase in 2003 through 2011, when we finally started turning a profit.

We've absorbed $8.5 million in losses and had invested over $55 million to improve the system.

We've now turned the corner; we're making money.

Service wise, it's meeting all standards, and we think it's quite an achievement turn-around.

We're meeting all environmental standards.

It's just we don't see any strong growth potential in Florida for us, and we have never been able to achieve the needed economy of scale to make it a long term investment for us in Florida.

We're talking to some viable opportunity -- people who have viable opportunities to take on our Florida operations.

Despite the poor October weather, I'm still comfortable with first call for the fourth quarter and therefore, for the year, which although it's even with last year's fourth quarter results, which were $0.24 GAAP.

That $0.24 included a one time $0.03 gain, nearly $0.03 gain in '11 from the PA Bonus Depreciation Tax Treatment, which did not re-occur in 2012, so it's up against a one-time tax benefit we got last year.

So if you want to take a look at it, if you give us the adjustment for that one time tax, I still think revenues are going to be up almost 10% year-over-year, and net income adjusted would be up a similar 10% to 12% regarding the normal process of the Company.

I think -- sorry for the granularity.

You can see a lot is happening with the Company and a lot of positive things for Aqua.

So I will open it up for any questions.

(Operator Instructions)

We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll take our first question from Ryan Connors with Janney Montgomery Scott.

Hi Nick.

Hi Ryan.

First of all, thanks for the detail on the structural cost improvements.

I thought that was a very interesting part of your remarks.

Can you just clarify, when you are citing numbers like saving 4 million-kilowatt hours and $5 million on purchased water, those are annualized numbers you're giving?

Yes, between '11 and '12, we will have used -- had we not done the solar and the VFDs, we would have used 4 million-kilowatts more.

Okay.

Okay, good.

Now, we always grow, so therefore, you're using more electricity, but I put it on the same store basis.

Got it, okay.

Yes, that's helpful.

Just kind of a bigger picture question for you, get your take on.

One of the take aways from me from the NAWC event early last month was, certainly got the sense that ROE is just broadly, nationally will continue to be under a little bit of strain, and that it's not really an ideal environment from a regulatory perspective, in that sense.

And the reasons for that, I'd like to get your take on what the reasons for that are.

But -- so, A, do you agree with that kind of take away, and then I noticed that the rate case pipeline is a little bit light relative to your normal run rate.

You have 9 million in rate cases outstanding today.

Is that in any way a function of recognizing it's not a great environment to be in for rates, or is that just happenstance?

Well, I think a good utility can control when and if it needs regulatory relief, and part of what you reward management for is timing, right?

So I think, I can't argue that when we just borrowed 31 year money at 3.8% that interest rates are not -- probably at their all time low, and that has to have a reflection on ROEs.

They were 14%, 15% when I started, started meaning with Aqua, so I think they have bottomed out.

I think you have seen them start coming down over the last year, probably.

They're in the high-nine's, low-ten's now, where they were mid- to high-ten's.

The -- what we're looking at is mostly infrastructure, so we don't need to go in for as many rate cases verses try to control costs and use the infrastructure surcharges to continue to pay and get rapid return for our investments.

Okay, that makes a lot of sense.

Thanks, Nick.

We'll take our next question from Jonathan Reeder with Wells Fargo Securities.

Hey, good morning, Nick.

I was wondering has the Florida operations been moved to discontinued ops?

Yes, we did that as of 3Q.

We don't have a deal yet; we're talking with one party, which we put in our release, Jonathan, but that doesn't limit us to that party.

We've actually made it a fairly public process in Florida.

I don't know if anybody else knows about it, but -- so we put it in discontinued.

You'll see that in this queue.

Okay, and then just going through that process a little bit, what's the process if FGUA doesn't end up buying the system?

Or conversely, if you do reach a deal with them by I think it was the end of November, you mentioned in the release, when would you expect it to close?

If FGUA is as successful as the total or partial acquire of the systems.

I think we have like 70 systems.

The -- I don't believe it will close much better the first quarter of next year, and the reason we went first to FGUA was because we felt going with a non-regulated unit, it may be quicker.

Whenever you decide to sell something, speed is important because employees want to know what their future looks like, and you just want to move on.

We gave them a deadline, which they agreed to, of November 30 to say yes, no so we weren't negotiating for six months and then deciding.

I would anticipate, first of all, I have no reason to believe it won't be successful, but there are other people who have already implied that they're interested.

We're not going to wait around.

It's basically, if we don't have a deal with them by November 30, then we'll move on.

If we can do something with FGUA, I'm anticipating first quarter.

Okay, do you happen to know what the rate base and debt associated with your Florida operations are?

Is that something you are willing to discuss?

Yes, if you can call Dave or Bob Rubin after the call, I don't want to give you just numbers off the top of my head.

I don't have them here, but we can give you the detail.

Okay, and then the other thing on O&M ratio, you said you expect to be about 100 basis points better this year.

Is that just for the regulated operations or consolidated, or maybe the better way to phrase it is how should we look at the cost structure of the water utility -- or not the water utility, but the shale water pipelines once they're fully operating?

Yes, that's a good point, because as it gets to be bigger, it could influence either up or down the O&M to revenue.

Bob, is the O&M to revenue strictly regulated, that you gave me or is that -- ?

Nick, that's Aqua America.

We do have it for the regulated segment, as well.

It will appear in the 10-Q eventually when we file.

Okay.

But we do have the regulated available if you want it.

And I'm going to guess that the regulated would even be lower.

That's correct.

I think at this point, the services business and the Marcellus, because of the start up costs, probably have a higher O&M to revenue.

But the revenue stream is so small, Jonathan, that it hasn't really, the Delta -- the variance on it doesn't really move the needle.

The other part, just for technical reasons, Jonathan, we're getting paid through an equity distribution, so that's not revenue.

It's all expense, right?

Okay.

The equity distribution, when you look at our P&L, is not on the revenue line, whereas the expenses are on the O&M line.

It's actually hurting us.

Okay, that helps.

As it gets bigger, we're going to have to re-adjust that.

Okay, but it will be continued -- the equity will be realized separate from the revenue line on a continuing basis.

We'd love to add the two together because it's all -- that's the way we get revenue from the Virginia partnership.

Then they distribute it, and it comes in as equity distribution, but all the expenses that we incur on our side to run this new business are in the expense column of the O&M.

Okay, and then -- so you're -- once the pipeline's up and running, is the expense ratio, if there would be a revenue line, is that pretty marginal?

I mean is it -- once the pipeline's in the ground, the associated expenses are pretty minimal with operating the pipeline?

Yes, I think when it gets to full flow, and that's going to be the biggest judgment factor.

This is a commodity business verses a regulated business.

If we could fill the pipeline 100% everyday, your EBITDA to revenue is probably going to be in the 80s.

If it's 30% of the time, it's probably going to be the EBITDA to revenue is probably going to be in the 40s or 50s.

Our regulated EBITDA to revenue is in the high 50s.

Okay.

That's a good way of looking at it.

We can give you all those numbers and you can make your own assessment as to what it makes O&M, but my comment now would be it skews it one way or the other depending on capacity in the pipeline.

Right now, it's skewing it upward, but it's so small, we didn't decide to take it out yet and give you a different number.

We're confident, even with that upward skewing -- slight upward skewing, we're going to beat O&M to revenue by 100 basis points.

Okay, yes, I appreciate all the detail you give on it because obviously, it is a growing portion of the business and one where there is potential additional upside, be it in Ohio and Texas for you.

So just trying to wrap our hands around it so all the little incremental details certainly help today.

Appreciate the call today, Nick.

What I can say, Jonathan, because I know you had a lot of questions, we talked about it.

What I'm confident on, we're only done Phase 1, so the maximum is 0.5 million gallons a day.

We have been hitting almost capacity in the pipeline, which tells me that when they're drilling, they're using the pipeline water because of the reliability and the lack of environmental issues with using trucks.

I'm sure there is trucks still being used in areas that aren't close to the impoundments, to get from the impoundments to those wells.

But I don't see us competing with the trucks too much.

I think once they buy our water, the pricing is right; I think it's working.

Okay, thank you.

We'll take our next question from Stewart Scharf with S&P Capital IQ.

Good morning.

Good morning, Stewart.

How are you?

I hope everything is okay in New York.

Well, I'm still without power holed up in a hotel here.

Oh, boy.

Other than that, doing all right.

All right, sorry.

Thank you.

Regarding -- can you just walk through a little bit of the process of selling the Florida operations, and why you decided after all these years, and your losses, and what brought you to that decision at this time?

Well, first of all, very honestly, the regulatory climate, we have not been able to get along like we do in the other states.

I think there is a compact, and we know what to expect, and the regulator knows what to expect from us.

We just haven't had been able to develop that in Florida.

That's probably, for a regulated utility, one of the most important things.

Second, is we were not seeing any growth in Florida, and the reason we got in Florida was to grow, and Florida isn't growing, at least in the water part of it.

Third, was the fact that it was our one of our smaller states, and it's 3%, and the economy of scale just wasn't there if you couldn't grow.

Therefore, you didn't have the potential to be able to refine numbers like we just talked about with Jonathan, getting your O&M to revenue down and so on.

We didn't see the potential for that.

So why did we stay so long?

Well, because we wanted to try and make a college try out of it.

Also, to be very honest, we didn't feel we could ever sell it at a reasonable price unless it was environmentally compliant, service was better and that we were starting to make some money.

It's hard to sell something that's losing.

But we're at that point now, and we just made a tough decision.

Is this our better future, or should we put the money that we'll get out of Florida and reinvest it in other states and do better?

That's where we ended up.

To be very honest, just because it was small, didn't mean it wasn't taking as much attention from Management.

With all the other things we're looking at, like the unregulated and everything else, it's the old 80/20 rule, 80% of your time is going into 20% of your problems.

It just was taking too much time.

We just made the tough decision about three months ago that maybe we should see if there are some people out there, and the first person we talked to had interest.

And that was the FGUA, and that's why it's now public.

Okay, and you mentioned -- I noticed that there were some [comp E's] around Jersey, the places where they were requiring or suggesting well water for hurricane.

How did you manage to avoid that impact of the hurricane in your areas?

Well, we didn't.

I mean, maybe we were lucky in the sense that some of our areas aren't right on the barrier islands.

Right on the barrier island, if we were there, we'd have the same problem.

But we are throughout New Jersey, which got hit; we are in four different areas.

We had standby generators ready, our systems are in fairly good shape, we flood proofed our well areas, so we avoided some of the traditional problems you get.

A little bit of luck, but a little bit of preparation.

The standby generators really make the difference.

When the power is out and you have a well, you're not getting any water out of the well unless you have your own generators, and that's really made the difference.

We invested in those about three, four years ago.

Okay, and regarding the housing market, are you looking for just a continued gradual improvement over the next couple of years, or you think this is more of an aberration?

No, no.

I think it's -- and I'm not just spinning as a Chamber of Commerce guy.

There has been so much -- first of all, probably the overheated 1.3 to 1.5 housing starts a year was overheated, and everybody was buying a house and nobody could afford buying a house.

But we're talking about an increase in housing that's off a base that is ridiculously low, 400,000 housing starts a year nationally.

My gut reaction is 750 to 1 million is where it's going to settle out over the next couple years as people get more confident, the banks start getting more confident and loaning money.

I don't think we are going to see hay days where anybody that wants a house is going to be able to buy it.

On the other hand, the used housing market, existing housing sales, pricing has firmed up.

So people who were trapped in their old house are now looking at new houses, and therefore, their house will be up and so on.

So it's a psychological issue, a bank issue, but it's also a demographics issue, and I think there was just -- I think a lot of people are still living in apartments that don't want to be there.

They did a lot of apartment building over the last three or four years.

Some people who are living at home may be moving into apartments, which will free up that to go to a home, so I think it's long term.

I don't think it's going to zoom up, I think it's going to be nice and steady.

Not all that 2%, Stewart, I don't want to mislead you, came from organic growth, new houses.

A lot it came from the difference between how many customers we absorbed in Ohio and sold in New York.

Okay, and you said there were 12 deals completed and you're looking at 20 for this year, is that right?

Yes, we think another 8 in the fourth quarter.

For those, I assume they would be in your core regions of critical mass?

Texas.

Yes, yes, they'd only be -- I can tell you where they are.

They're in Pennsylvania, two in Texas, three in Illinois.

They're in the regulatory phase now, where the regulators are ready to approve them, and we can't announce them or close them until we're sure we're allowed to and that's with the regulator process.

Okay.

We're starting to see some activity there, too.

I guess of the 12, 2 or 3 of them are municipal.

We are starting to see the municipal governments realizing that maybe they don't have the economy of scale.

These aren't big municipal governments; these aren't New York City or anything like that, but Kitter was one we just did, we did one Mifflinburg.

These are 2,000, 3,000 customer systems, but they're municipal verses private.

Okay, and the guidance to '13, pretty much continuing in that 10% growth range?

Yes, I think we're back to that 20 a year verses dropping to 10 like we did.

That's built into our plan in the sense that we expect our corporate development people to be coming up with deals.

Everyday they're working on them, but you don't get one everyday, unless you are knocking on somebody's door, it doesn't happen.

I mean the earnings growth, '13.

Oh, oh, yes.

We've always been consistent.

I don't want to talk about 20% earnings growth, but we've been very consistent that over the long term, 10% is achievable.

Right, okay.

I thought you mentioned in the past you're looking more doubling up for the sale project over five years?

I had mentioned three, but you still see it doubling over five years?

Yes, I was a little bit more aggressive in today's call.

I said we could earn a $0.01 in '12, I think we're going to earn in excess of $0.01.

I think it will double every year over the next three years.

Not double over three, but double over year, over the next '13, '14, '15.

We're building Phase 2 now, and that should be in play in '13.

We started Phase 3, which should be in play in '14.

That's why I'm saying as we put more pipe in, we're going to be selling more and it's profitable, so therefore, it hits the bottom line.

Okay, great.

Thank you very much.

Good, Stewart.

We'll take our next question from Gerry Sweeney with Boenning.

Good morning, Nick.

How you doing?

Good, Gerry.

I wanted to bring up a question.

I know you guys are towards the forefront and are very much looking forward.

Wastewater, I think, is it at the end of this year, you can start doing combined rate cases and adding in wastewater in Pennsylvania?

I mean, this would seem like there is certainly an opportunity there, and it may be developing over the next couple years.

What's your take on this?

There were two key regulatory decisions made this year, and then a third one that we're anticipating before the Ohio legislature goes sign or die.

The Ohio one is a future test year and an expansion of the surcharge, so two very, very positive things for regulated water in Ohio if it passes.

The Pennsylvania passed a law earlier this year to combine rate bases to allow a sewer disk to be applied for.

Of course, I mentioned in our rate case that the OCA negotiated a -- if we decide to do any kind of election of the repair tax credit bill when the IRS puts their final numbers out, they've allowed that to happen in our Company because we negotiated in the settlement.

The third area was New Jersey, where last week, we got approval of the New Jersey disk, which is a five year program.

So that's very, very exciting in New Jersey.

We've already doubled our capital outlays for '13 based on what we were going do and what we will do now with the infrastructure surcharge.

Believe me, after you see New Jersey's situation, you can see the infrastructure bill is the right thing to do.

Regarding the specific question you asked me, we would have to file our next water case with sewer in it.

That's not going to be for a couple years.

Do you look at that as an opportunity?

I mean, obviously, from the acquisition front?

Yes.

Is it going to be a focus, is it as profitable in terms of buying some of the smaller systems out there?

If you can provide any detail on what your plans are.

Sure.

Sewer is more challenging because it's a different law, Clean Water Act, different type of employees from a standpoint of technical skills.

But as a sanitary engineer, we -- you know, you're trained coming in or going out, right?

Yes.

(laughter).

It's that simple.

Hydraulics is the same, municipalities is the same and your rate base is the same.

Somehow they never did it that way in the regulatory field or even in some of the water companies, never wanted to get into wastewater.

We saw no different, we got into it.

And now this law in Pennsylvania recognizes that why should there be two separate rate bases, two separate rate cases, it's all the same.

We're excited about it.

Okay.

I think it will help us because the sewer is a little more expensive up front because most of the plants have not been maintained as much as they should.

That's why they want to sell them.

Okay.

I would imagine there is probably less opposition from public?

They don't want to sell the water, but they don't --

It's interesting.

The polls show water is like selling your first born, whereas wastewater doesn't have that same emotion.

One's in and one's out, so I guess that's -- as you said.

Yes.

Then just one other point.

You were talking about the acquisitions and just overall organic growth, and I think Stewart mentioned it, but I'm not sure if I heard it clearly.

Would a safe assumption -- are you planning on essentially, 2% going forward on maybe a combined basis on those, or is that still a little bit of a wait and see approach in terms of the organic and acquisition front?

Yes, well, our five year planning for the Board, which is what we do in order to do the dividend, was more conservative than it had been in the past.

In the past, we had always looked at a 2% to 4% normal growth period, but after '08, we dropped it --

Yes.

-- to 1%, which we didn't even hit last year.

But I'm anxious to get it back up because then you don't have to depend on rates as much.

Got it, okay.

And I think that is it from my end.

Okay, thanks.

All right, appreciate it.

All right, Gerry.

We'll take our next question from Spencer Joyce with Hilliard Lyons.

Good morning, guys.

Thanks for taking my call and congrats on a nice quarter here.

Thanks, Spencer.

Thanks.

A couple of questions here.

First one to touch again a bit on the hurricane.

I know you mentioned doubling the capital out-ways toward New Jersey for next year.

Do you think that some of the damage or trouble in certain areas where you don't operate may present any acquisition opportunities there?

Well, you know, I hate to even speculate because right now, it's recovery.

But I assume if it's a small system who doesn't have the capital to fix it correctly, and doesn't want to make the investment, that a sale to a bigger company like ourselves or American would be a viable option.

Yes, I know, still a bit of a touchy subject there.

Yes.

I mean, we're not knocking on any doors.

We're knocking on doors to help people at this point, but if something falls out of it, obviously, we want to -- New Jersey is one of our key states and we want to grow in New Jersey.

To switch gears a little bit, looking back at the pipeline joint venture there.

Once it's up and mature, do you expect the earnings generation there to be pretty stable across quarters, or do you expect to see a bit of a seasonal up tick there, possibly?

No, no, no, I don't think it will be seasonal.

Maybe dead of the winter, it's tough, just because of the snow, getting rigs up there and all that.

I think it's really going to be contingent upon gas prices as to how much drilling, and I think what we've found over just in the two years we've been really following it in depth, is that the reserves are higher than anybody thought and the dry gas is clean coming out.

And I think part of it's going to be how many cars are converted to natural gas, how many pipelines to feed New York are going to be built so you don't need the southwest to northeast lines as much.

But there has been so much gas produced that the flow of gas is actually going the opposite way now in many of these pipes, which is very, very -- nobody would have predicted that just a year ago.

So the exciting thing for Pennsylvania is two things.

One, one of the refineries that was going to be shut down in Philadelphia has now been turned into a place where the gas is going to come down and they're going to refract the gas.

And in Pittsburgh area, the Governor announced that Shell is considering locating their ethane cracker, which would be similar to what they did in Houston 25 years ago right outside of Pittsburgh, Beaver County.

So that would be a huge economic boom and demand pull for the gas.

I think we're in the embryonic stage of another -- oil and gas in the 1850s started in Pennsylvania; I'm really, of course, I am a Pennsylvanian, but I really think this is a game changer in Pennsylvania.

Okay, yes.

Thanks for that there.

A final follow up to switch gears again here.

I know last quarter, weather was a bit of a tail wind for you guys.

I think it was around $0.015, you guys estimated, may have been attributable to some drought conditions.

Yes.

I know going into this quarter, we were looking to replace some easier comps, I think, due to some heavy rainfall last year.

Is there a sense there what that normalization may have contributed to this quarter?

I'll get you a number, but not much.

I would have said a lot after July; I think we were up almost $0.02 just in July.

But we didn't have a very good August and September, and it was similar last year.

And we had normalized our projections in our budget, feeling it would be a better August because last August was terrible, too; but it wasn't much.

The actual numbers for the three months taking in July's effect, in five of our nine states we're actually down in actual sales.

They were up in revenues because we had rate cases and other things, but -- so no, it wasn't a great quarter send-out wise.

Okay, all right.

That's all I had.

Thanks guys.

All right.

We'll take our next question from Michael Roomberg with Ladenburg Thalmann.

Hi Nick.

Michael.

Sorry, I jumped on the call a little bit late, so if you have already answered this, I apologize in advance.

I noticed CapEx was running at a faster clip than last year.

Last year, you were a bit back end loaded, I think fourth quarter was over 100 million.

Can you update us on where you stand with your program this year, and what you expect for the balance of the year?

We are a little ahead of what we told you earlier in the year, which was 300 million.

We think it's going to be 325 plus.

Part of that is because we have been getting, first of all, good prices and second of all, because we had a warm winter, '12 winter was very warm, we got an early start.

That's why you're seeing it not all back end loaded.

It looks like almost perfectly nine months is three quarters.

We're comfortable and next year, as I projected, would be about that same level, which is about three times depreciation.

Got it.

Okay, thank you.

With respect to the dividend, it's nice to see the increase.

I'm just wondering if you can take a moment to update us on the policy, the thinking around the dividend, whether it's payout ratio that you see over the next five years or so, or a nominal increased rate or percentage increased rate.

Yes, sure.

First of all, as you know, we're still a retail stock, so 55%, 60% of our investors are individuals.

Many of the funds who hold us are value and are very happy to see the dividend increased.

We've had it since, I think, 1968 or something, something like that.

We've been increasing it since we got back into the water business 20 years ago, and it's gone up 20 years in a row, and I would say, significant, 6.5% compounded.

The rationale is we don't want to get into the -- just for paying dividend so we can say we raised the dividend due $0.005 or something like that, and then be paying out 95%.

We are down in the 60s now, we think it belongs between 60 and 70; we are in the lower end of that range now.

So we felt very comfortable with the amount and the fact that it would be consistent.

Okay, okay.

Thank you.

I think it's the Board's intent, and you could argue 20 years in a row shows it that they really do want to continue to increase the dividend, but not get to the point where it starts hurting our need.

Now, the other factor we always look at, will the dividend increase cause cash deterrence to a -- and then have to issue more equity?

Our five year plan has no equity issuance.

I said earlier on the call, clearly, we are saying that with a 325 this year and plus next year, we don't see any equity infusion other than the drip.

You know, we have a drip where we give people a chance to get their dividend, put it back in the Company.

Yes, and do you foresee the drip as continuing as current form indefinitely?

Well, it's a popular program because we give 5% off on the stock.

But that's something the Board probably would consider if they felt we were getting our -- you know, if we were getting too much stock in the Company.

And we are growing equity pretty healthy in the five year plan.

Not issuing equity, growing equity from retained earnings.

Right, right.

Lastly, I did catch your comment with respect to transitioning the fleet over the coming years towards CNG.

Can you just quantify that?

Is it possible to do that at this point?

Sure, yes.

We want to be a first mover on this, just like we were with solar.

I really believe in it.

It's economically driven, unlike solar where we used every subsidy we could get to make it work.

This works just -- the only deterrent in my mind is Detroit because there are not enough people who want the cars yet because they haven't realized the savings they could have.

There are still people who fear safety, which is just a misnomer.

There is no safety issue; it's actually safer.

It's not a liquid fuel; you have an accident, it's going to escape in the air, it's not going to fall on the ground and then somebody could ignite.

Until you get the cars, they won't put the gas stations in, right?

Right.

It's a chicken and egg.

So we felt as a fleet provider, we had the opportunity to put our own gas stations up, fill them at night, and we have started to convert whatever is up for renewal, they're going to be replaced with NGV.

Now, the problem is they charge you more for NGV vehicle original equipment.

The pay back is 3 years, 4 years to make up that difference, and we have trucks for 7 to 10 years, so it makes sense for our rate payers.

But on the other hand, it shouldn't be anymore expensive.

It's an engine, right?

Right.

But because -- and I ran into this when I was at EPA.

I don't want to sound like a government hawk or anything like this, but until EPA set MPG standards, Detroit didn't build small cars because the marketing people run Detroit.

And if the government says we're going to say natural gas just Iike in India, China, it's going to be our main fuel for vehicles, Detroit will build it.

It's not like you don't have the engineering.

So we're planning to stay out front on it.

You asked me to put numbers on it.

Equivalent diesel fuel, $4 is less than $2.

Your MPG on a truck, which is like 5 miles to a gallon, and how many miles you drive it, you could figure out the pay back.

It is absolutely economically positive, especially if they give the prices to be the same.

What is the nominal difference in capital per vehicle on a percentage basis?

Enormous.

$100,000 dump truck is right now, $130,000.

Okay.

That's OEM.

We did not want to retrofit a gasoline engine to get natural gas, then you have all kinds of trouble.

So we're only looking at new, and because they're not selling a lot, they pay more for that engine.

Therefore, they try and get it back right away.

That's what I'm saying, it has to be mandated.

Do you have a rough idea of how much you spend on your vehicle fleet every year in terms of capital?

No, but I can get you that.

Why don't you call Dave to get you that?

Okay, will do.

Thanks so much.

Okay.

(Operator Instructions)

We'll take our next question from Heike Doerr with Robert W Baird.

Thank you.

Nick, I'm hoping we can talk about the fourth quarter.

I want to just make sure I understand the numbers correctly.

As we understood, fourth quarter last year was $0.24, that was $0.20 from continuing operations, $0.03 benefit from bonus depreciations and about $0.01 from discontinued ops.

I believe you mentioned that you were comfortable with the first call estimate, which I think you said was $0.20, but I believe is $0.24.

I just want to make sure we are talking apples to apples here.

Yes, yes.

I'm comfortable with first call, which the lawyers tell me I can't say what it is.

I think you're very close if you said $0.24.

Okay.

You look at Thomson, I don't know.

If that's the number that you think first call is, I'm comfortable with it.

Okay.

So when you talk about -- (multiple speakers).

Go ahead, sorry.

But I want to make sure is if you look at our GAAP last year, it was $0.24, and it looks like it's a flat quarter, and you just described the real number was $0.20 to $0.21.

Okay, so when you say you are comfortable with first call, you mean on a continuing operations basis?

Yes.

Okay, thanks.

Dave, am I right on that?

I want to make sure of the technicality -- Is Dave still on?

Yes, we're here.

$0.24.

$0.24, but Heike said, is it continuing operations?

Continuing operations last year was what?

For the fourth quarter, yes, $0.20 without the tax benefit.

Right, and apples to apples would be the $0.24.

Yes.

Right.

We're comfortable with first call on a continuing operations basis, right.

Okay, thanks.

I wanted to make sure we were all talking about the same numbers.

(Operator Instructions)

And there are no further questions at this time.

Okay, thank you, everyone.

That does conclude today's conference.

Thank you for your participation.