Essential Utilities Inc (WTRG) 2013 Q2 法說會逐字稿

Good day and welcome to Aqua America, Inc.'s second-quarter 2013 earnings conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Brian Dingerdissen, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone. Thank you for joining us for Aqua America's second-quarter 2013 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 610-645-1196. There will also be a webcast of this event available on our site. Presenting today is Nick DeBenedictis, Chairman and President of Aqua America, along with 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, reference may be made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the investor relations section of the Company's website.

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

Thank you, Brian, and good morning, everyone. I'm pleased to announce another record quarter for Aqua and we're well on our way to a 14th straight year of consecutive earnings growth.

Net income for the quarter rose to $53.6 million from $41.4 million in 2012, that's a 29% increase. But I'd like to qualify that some of this jump was expected from the spreading of the benefits for the tax repair for 2012 that were taken entirely in Q4 2012. And this year the tax repair benefits remain spread proportionally over each quarter. Having said that, still a very healthy quarter.

Also want to acknowledge the effective September 1, the dividend will rise to $0.76 annually, $0.19 for the quarter, that's about a 9% increase. And then Aqua's stock was split 5-for-4. Obviously you're going to see a lower price on the stock on September 1, but you'll have 25% more shares. And the dividend rate ongoing quarterly will be $0.152.

Getting back to today's call, in addition to the increased net income and cash generation, very pleased with the management execution that produced operational efficiency and the positive results being generated by the multi-year program to rationalize our utility portfolio. We have called it pruning, but it's really portfolio rationalization.

Most of the properties we have probably disposed of actually were not earning at the same levels as our remaining properties. So as witnessed in the Florida dispositions where we really didn't earn any operating profit for eight years until the final year when we sold them. And I think the new assets that were being invested in are running at a higher margin than the ones we've disposed of. So I think that's a very positive.

Although O&M does not appear to have risen -- although O&M appears to have risen, I'm sorry, more than expected for the quarter over last year, there were some anomalies I'd like to express to you. 2012 O&M was actually positively affected with a $4.5 million of one-time reserve reversals due to the success we had in some rate cases and we had reserved just in case we didn't get those successes, and we did. So about $4.5 million was taken off the expense line.

While this year's second quarter O&M was just the opposite, adversely affected by a write-off of all of the rate case expenses in Texas of $1.1 million when we received the final order for that case. If you take these adjustments for what I would call non-continuing items in the expense column, it represents an O&M year-over-year increase of 8.8%. So you can take the 8.8% off the number that's there now. And that gets us well under 3% and maintains our status as one of the most efficient utilities in the country.

This quarter also provided some hopeful signs regarding customer growth. After four years of sub par growth of 1% or less, first six months we've completed eight system acquisitions, two of which were municipal, and are seeing an uptick in organic growth the first time in three years. This year we hope to see our customer growth closer to a respectable 1.5%. And I also hope to see better results in the second half of 2013 from our non regulated operations, the Marcellus pipeline having had not a good first half based on the fact of lack of drilling.

Of course the other key growth driver, and it has been for two decades, is our continuing substantive investments in our water and wastewater systems in all our states. In the first six months, we invested $135 million and still expected to by year end spend $325 million plus continuing the record of our past three years where we spent that plus, and that was those 2010, 2011 and 2012.

The difference is the cash generation from operations for the first six months was actually higher than our capital expenditures. $159 million providing a $25 million delta above our CapEx needs in the first six months. This is shifting cash generation, which started in 2012 and now continues in 2013. It's the first time Aqua has been really operating cash positive in my 20 years as a CEO and really changes the format of our former heavy borrowing and heavy equity issuance.

We just refinanced in the second quarter $85 million of first mortgage bonds to refinance the Ohio acquisition and take out some higher cost bonds. And that -- we were able to do that $85 million for almost 30 years, 27-year average at 4.06%, tremendous rate. And we're going to do one more debt this year refinancing some Pennsylvania debt in the 5%s. We expect to get into the 4%s here too in a private placement.

After that, we see minimal borrowing and no equity issuance, except for the minimal amount that we use each year for the DRIP and employee long-term equity incentives. And we clearly are seeing a strengthening in our balance sheet, our equity to total capitalization ratio has risen over 100 basis points and that should reinforce our S&P A+ rating.

The Company is still growing in value as we are investing capital at over 2.5% of depreciation -- 2.5 times, excuse me, 250% of depreciation. And we're still growing rate base in excess of 6% annually.

Now we recover these investments through rate case activity in all of our states except Pennsylvania. This year we've successfully completed cases in Virginia, Texas and Ohio. We're implementing DSIC infrastructure surcharges in Ohio, New Jersey for the first time Illinois. And just filed last week a statewide case in North Carolina to recover the major capital we're putting in all these states.

As a result of our rate freeze in Pennsylvania in conjunction with the 2012 PUC order that granted us flow-through treatment of the benefits of the repair tax accounting change in return for the not raising rates. Cash and earnings are being returned to the balance sheet in a different way than the normal way which is through the revenue column in the rate cases. They're coming in through lower effective tax rates.

Now this visionary process by Pennsylvania has proven to be a positive for our customers through better service because we're still maintaining the high investment levels especially in repairing infrastructure. Clearly it's helping our rate payers, since there's a rate freeze. But it still provides our shareholders a return on their investment.

This mechanism explains the lower than normal growth in revenues year-over-year expected from our former business model where we would have been asking for rate cases in 2013 in Pennsylvania. If you just assume we kept the DSIC in place that was in place on 1/1 when we dropped -- on 12/31 when we eliminated it under the order, this quarter's revenues would have increased from the 2.1% increase it shows on the income statement to about 5%.

Now obviously with all the capital we're investing in Pennsylvania this year in excess of $200 million and we're going to do 140 miles of new pipe, our DSIC would have grown a lot further than that, but I'm just giving you that as a litmus test on the revenue column. And of course that affects every other ratio that sometimes we used to use as to putting the revenue as the denominator.

Now as many of you know from looking out the window, our revenues and net income were also affected this spring and summer by rainy weather, coupled with the trend of structural usage decline due to conservation and replacement of low flow appliances and bathroom fixtures, something the industry has been acknowledging for the last decade. To put a number on it although it is always difficult with weather, we believe earnings could have been affected by as much as $0.02 this quarter.

Now Management's been spending a great deal of time to finalize two significant pieces of our remaining pruning program, and we have letter of intent with Fort Wayne and our agreement of sale with Sarasota. But have numerous legal and regulatory processes to accomplish before these sales can be finalized. Because of that, it's difficult to estimate whether they'll occur in 2013 or 2014, but have provided great detail as to the progress in our Q, and I refer you there and we'll answer any questions obviously you have.

We're pleased to have exceeded first call by $0.02 and are still comfortable with what will be a slightly -- obviously a slightly upward revised first call based on this quarter for the year. Comparisons this year quarter to quarter remain difficult as you all now, from the fact that we took all of the tax repairs under the accounting policies when we announced it in the fourth quarter of 2012. And so fourth quarter of 2012 had $0.22 in tax repair. And due to the tax eligibility -- and this year we're spreading them according to each quarter as to how many projects we do.

Due to the tax eligibility of projects when you synchronize it with our capital program, in addition to the pre 2012 catch up provision that's allowed under the accounting policies and by the PUC order, we were told to amortize it over a 10-year period. So we're bringing in one-tenth in a year.

Those factors enhance the eligibility of many of the projects we're doing with our capital program and then this catch up. They enhance 2013's tax benefit over 2012 which we've told you would be more in 2013 than 2012, but being spread over four quarters. The benefit is currently right around $0.10 a share gross. But it's difficult to value the amount of loss revenues and profits from the rate freeze in Pennsylvania to get to that net number. But I just want to give you a range of where we're at at this point.

Regarding 2014 it appears the value of the tax benefit will decrease slightly from our 2013 run rate. But I'm still comfortable with your 2014 first call, which we see as a consensus on Thomson, because we'll make up any drop I believe in tax repair through growth in the rest of our regulated and non-regulated operations. And continuing our operational efficiencies and of course the benefits of the pruning program will continue especially with the Sarasota and Fort Wayne sale.

I think I'll stop there and ask for any questions. Thank you for listening.

Thank you.

(Operator Instructions)

Ryan Connors, Janney Montgomery Scott.

I have a philosophical question for you Nick on the repair tax. And I was a little surprised to see you use the term rate freeze to describe what you've default instituted in Pennsylvania. And you've talked in the past about the fact that you're on a several hundred year replacement cycle for your infrastructure and you need to accelerate that. Presumably that over time requires higher rates.

And so my question is, is there any risk in your mind that instituting a rate freeze for any period of time conditions the rate payer and the consumer advocate to believe that that's a new reality? And maybe that makes it tougher to get the rate increases that presumably you'll ultimately need down the road? Just as a high-level question.

I don't believe it does. We have long-term models and I can -- I feel very comfortable that having the tax benefits accrued to us in lieu of rates is the right thing to do. It's not going to last forever. The word freeze isn't my word because if you read the order, you'll see that you don't get the tax benefit flow-through unless you promise not to -- that you eliminated the DSIC and also to not file a rate case in 2013.

Okay. And is there any update? I know it's -- obviously you can't tell us too much about this, but any update -- updated thinking on when you might be able to be back in with you next rate case in Pennsylvania?

At this point the only commitment we've made is through 2013.

Okay. So in other words, it's reasonable to assume that there could be a rate case filed in 2014?

I'm not saying anything until we look at 2014.

Okay. Thanks for your time.

Leslie Rich, JPMorgan.

When you said for 2013 it's $0.10 per share gross for the tax repair, is that relative to 2012 or how does that number relate to the 2012 when you had $0.22?

If you had taken 2012 and spread it out over the quarters, it would have been roughly $0.06 a quarter. Probably a little heavier in the summer, $0.07, and light in the first quarter which of course is already gone. So that's a comparison to that.

The $0.22 basically is in the $0.35 to $0.40 range now. The reason being is the fact that we had the catch up which is amortized over a 10-year period which was not in the 2012 number because it wasn't filed yet.

And the other reason is because we maintained capital spending actually higher than what was anticipated. And some of the mix of projects are more eligible for tax repair than others. And let me explain what I mean by that.

Pipe is almost 100% repair eligible, things like valves and hydrants. But if you redo a water plant, you may have zero repair tax eligibility because you're not really repairing it, you're expanding it or improving it. So we've had two of the big four accountants reviewing every transaction and they tell us what the rules are and what's eligible and what's not eligible. But obviously we try and synchronize our capital program to maintain the highest levels of eligibility.

Okay, so in aggregate it's $0.35 to $0.40 a share benefit in 2013 and then you would see it continuing at that level in 2014 and beyond or --?

Well that's a gross number now because of the previous question from Ryan was when are you going in for rates. Because your regulatory lag sets in, this is still in rate base, we're still paying for it, we still have to borrow a little bit of money, not as much as we used to to keep -- to maintain it. So you have the regulatory lag from all of the investment in Pennsylvania with no rate.

So it's not a just add that to this, you have to net it out, we're foregoing rate cases. And that's why Ryan's question of when will you be going in again, and I -- this point we know we're not going in in 2013, that's all I can really tell you at this point.

Okay and --

I hope that clarifies a little bit. I don't what you just adding $0.35 to last year's earnings though.

And then in the Marcellus, any update there? You said drilling activity was a bit slow in the first half.

Yes. Let me clarify the thing I just said. Don't forget last year we did book $0.22, so it's the delta, it's not an additional, it's the delta between the $0.35 and $0.40 and the $0.22.

Understood.

Understood, okay. Yes, basically the drillers are producing out of the wells that they already have. They've drilled something like -- they've tested and have permits and have exploratory drilled for hundreds more than they're producing out of and until they get the market demand. And the price up and the fact that they're getting more out of each well they are producing now, the need for frac water to get new wells being produced has slowed down.

Now we're starting to see a pick up in late -- mid July and through August in a steady sale. So hopefully that -- we're going to see a brighter second half than the first half. I think it's still inevitable -- Pennsylvania's future is going to be tied to energy and they're going to drill these wells, but when gas prices get to $5 I think you're going to see a lot more activity than the $3.

So your CapEx forecasts for that line of business, have they changed?

No. We spent most of the CapEx that's already in the numbers for the last year. We finished up the pipeline this year, the full pipeline was about $110 million, of which we put $55 million up. And I'd say of that $55 million probably $45 million we expended last year. So this is about a $10 million -- we finished up it's done, so it's $10 million this year.

We have a couple of more projects we're looking at but we want to make sure that the drilling starts before we start. We don't want to be too far ahead of them. It's inevitable but it's timing. Unlike a utility business where you're used to quarterly timing God knows to perfection except for weather, this one has a competitive market edge to it.

Okay, thank you.

Heike Doerr, Robert W. Baird

Nick on the topic of Marcellus, year-over-year are you expecting the joint venture to contribute more in 2013 than it had in 2012 despite the drag we've seen in the first two quarters? Will you more than offset that in the second half?

No I don't want to predict that. I think if you look at it, Heike, I think it lost $0.01 in the first half. And probably make that up but I'm not sure it's going to make up the other $0.01 that we earned last year. I hope it does, but it would have to really take off in August and the rest of the year.

And how should we think about your expectations for that business in 2014, 2015 then based on what we're seeing thus far?

Well I think we said initially hopefully we can make $0.01 then $0.02, then $0.04. I think it's all delayed now one year.

I think it's going to happen it's just that the infrastructure is not there to get the gas out. It's being built as we speak and it's inevitable if you think you may have visited that area, so you know it's boomtown.

But it's just that they need sales and almost every electric generators talking about building gas. So it's going to be demand driven in the electric industry alone let alone automobiles which are going to CNG and everything else. But you need the pipes to get it out.

And who are your major customers?

Range, EXCO is another one, Shell, there's one other one, Southwest. They're the four that have been taking water this year.

Okay and you provide water to all four?

Yes.

Nick I noticed you didn't mention the railway. Is that a transaction that we're still going to see happen or did that not get necessary approvals for the right-of-way?

Right now we're not proceeding with buying full rail. We're talking to the rail operator who may buy it and then we will work on the right-of-way. The thing we wanted out of it was not to be in the railroad business, we wanted to be -- have access to a right-of-way along the rail line. That's still a possibility but we've decided not to buy the railroad to get it.

And that was that $3 million, that was if you have bought the whole railway?

The big cost though, Heike, was not the $3 million to buy it, it was that X million to fix it because you have to have repairs. And we just decided that until Marcellus, down there it would be not Marcellus but Utica, until Utica really took off which it's where Pennsylvania was two or three years ago that there was no need to run a railroad for two or three years while you waited for the pipeline. So that was the decision we made just in the last month.

Okay. And the final question on this repair tax that we're all struggling to understand. Can you talk us through how we should think about the seasonality of this?

In the second quarter, I think there was a much greater contribution than we had expected, I at least had been expecting that we would see a pretty steady benefit throughout the four quarters. But now it sounds like you're saying that seasonally we'll see some swings?

Well the reason that there was a swing is we do more construction -- you have to book the tax when you do the capital. And also, your projects in any one quarter could be more eligible or not eligible. So it is very difficult. I wouldn't call it weather seasonality other than the fact that it's easier to construct capital during the springtime and summertime than the fall and than the winter.

But it's really what projects you do during that quarter and what they're eligible for. So one pipeline might be 100% eligible, another one maybe 30% eligible. A water plant maybe 15% eligible and until the accounting firms look at and say this is the number, that's what we have to live with.

So there is a little bit of variability. Is there anything else Dave, you'd want to add to that?

Yes it's -- in conjunction with Nick's comments relative to the different deductibilities of projects, we do look at it on an annual basis and calculate our effective tax rate. So as that effective tax rate applies to different levels of pretax income each quarter, that's going to create some variability in the deduction and in the results of the repair as well.

But each year we would see the repair tax benefit decline, right? So the 2013 -- so the 2014 benefit would be lower than the 2013 benefit?

I think slightly. I mean if we were, Heike, if we were to cut capital spending in Pennsylvania from whatever it is now $220 million to $150 million it would drop precipitously. Remember we don't get it unless we build projects. That was the idea of the order to get the investment in Pennsylvania and not raise rates and use the effective tax rate to compensate our shareholders for their return.

If we don't build the capital we don't get that effective tax rate difference because we're not eliminating a capital expenditure and calling it a, quote, repair i.e. expense. So that's the self-policing mechanism. So if we were to cut capital, then the repair would drop -- I mean the benefit would drop precipitously.

Now to Ryan's question, is if you -- why would you cut capital? Well because there's too much lag. Well at that point, you're going in for a rate case.

Aren't you on the hook to keep the capital spending constant as part of the agreement with the commission?

No there's no -- that was not part of the agreement. The self-policing mechanism that the people understood in the agreement was if you don't spend it, you're going to drop in your repairs. I mean basically it -- reality makes us want to keep it constant, not some order but -- because if you don't spend the capital you don't get the tax repair.

Right. All right, I'll stop there, let someone else ask. Thanks.

(Operator Instructions)

Stewart Scharf, S&P Capital IQ.

Can you talk a little bit about the organic growth and what regions you're seeing the greatest prospects as the housing market recovers?

We're seeing -- first of all Stewart, it's not -- we're not cheering in the streets with the 0.6 over 0.4 on organic, I'm talking organic acquisitions is up a little bit. But Texas is one of our faster growing areas and that's growing everywhere across the state, not just regionally. We are seeing a little growth in Pennsylvania especially in the areas where the Marcellus is. And we're starting to see a return in our core area itself, Eastern Pennsylvania basically Philly.

North Carolina has had a tough economy and they're still in the 10% unemployment. So I think that's a future hope for us that that's going to start up again especially with the retirees that go to North Carolina versus all the way to Florida.

And then Ohio surprisingly is strong. And I think it's because the economy is getting stronger in Ohio due to the auto industry and also drilling. So we're seeing a little bit more stress in Ohio than we had seen over the last three or four years.

Okay and you said the weather affect was roughly is 2% -- $0.02 impact in the quarter or -- and how much was it, was it mostly I guess June the heavy rain month?

Yes it was mainly rain. Because we figure the structural decline as a steady state. But it is part of why revenues dropped year-over-year.

But the weather we think was a $0.02 impact based on the fact that what sales used to be adjusted for the structural decline in the past and what they were this time. And the only thing we could attribute that to was the record amount of rain, so that people are not watering their lawns. We haven't had a great July either, but hopefully August will turn around. But I think you're hearing that from all of the water companies who are reporting.

Thank you. And could you expand a little bit more on your borrowing strategy? Rates are low and your return on equity, is that still in the 10% to 11% range what you're looking to do with -- you maintain very low rates with borrowing and you're not planning to borrow as much and refinancing bonds and so forth? Can you explain that strategy?

Sure, sure. Any refi, which is maybe $30 million, $40 million a year it comes up that it's cost effective, we'll do. I don't call that new borrowing it's just net.

And we still have plenty of that on the books as every year -- this year it would be [85] -- yes, it'd be [84] or [85] comes due and remember where interest rates used to be back then, am I right on that, yes, 30 years. And we would just refi those at a lower rate. But the amount on top of that that we need is the part that's diminishing because of the cash generation and the core business with the higher depreciation. And the fact that we are getting cash from the lack of paying taxes on the tax repair flow-through.

So we used to -- I'm going to say we used to borrow maybe $100 million, $125 million a year continuing to build our balance sheet because we're putting in $250 million over depreciation. So I mean that's a very simplistic way of looking at it, but that's what we were for 10 years. And now that borrowings probably -- and that's including for the dividend, and that borrowing now is maybe $10 million to $20 million a year. So it is a much lower demand.

We think interest rates stay lower than they used to be, not maybe as low as they are today, so the impact on future pro formas is minimal. And the fact that we are not needing to do any equity cuts back on some of the dilution you saw back in the -- when we were growing rapidly in over rate base and on acquisitions. In the 1990s and 2000s we were diluting probably in the range of 3% to 5% a year.

Now it's down to -- this year was heavy because of the DRIP and some of the equity programs but the -- incentive programs. But we see it -- we projected about 1% a year and we'd probably even be able to fine tune that by buying back some of the DRIP program.

Okay thanks.

We're in a much stronger financial position I guess is the word to say. Higher equity to total capitalization, less borrowing needs, the lowest -- probably one of the lowest under 5% borrowing overall debt. And an S&P rating of A+ which ranks us second or third out of all of the utilities rated by S&P. And everything is leaning towards getting stronger versus weaker is maybe another way to characterize it.

Okay, thank you.

Tim Winter, Gabelli & Co.

I was wondering if you could talk a little bit more about the strengthening financial position and cash flow generation? I guess maybe start -- first question would be, what kind of cash are you expecting from these two pending sales? And then longer term, are you rethinking the dividend policy, the payout ratio, maybe special dividend at the end of the year or share repurchase? But your stocks trade at 3.5 times book, equity ratio, you already got the A+ credit rating, what's your thought processes there?

Yes well you're pretty astute. Obviously the equity ratio we don't want go higher than what we get in rates. So that one is one that you can always moderate by giving it away during shareholders as dividends, right?

The part about the cash coming in from the two big sales, probably between $75 million and $100 million. Now I'm not counting that in the numbers that I gave you in the press release. The $25 million or so looks like it holds this year and probably next in the sense of how much more will generate than what we spend in CapEx even at this elevated level. But we still have to pay the dividend.

Now dividend policy, I think we tipped our hand at the last meeting by raising the dividend not $0.04 but by $0.06, 9% versus 6%. With the numbers we pro forma in our five-year plan that's very, very doable and still staying within a 60% payout ratio, which I think is the low end for most utilities.

And then any thoughts about maybe leaving a special dividend at the end of every year or something of that nature?

Well that's a Board discussion and we've been always been more to the consistency. I think a lot of our investors especially the 55% to the retail, everybody likes more money, but the consistency I think we've raised our dividend what 23 times in 21 years or something like that. Every year, CAGR has been 6% to 7%. And I would rather have that kind of -- me personally, Board makes the decisions, I'd rather have that kind of consistency to be predictable in the model than to give it all away at one time and than maybe not able to afford it the following year.

I'm very comfortable saying there'd be no reason why the Board couldn't continue with its current policy over the coming years based on what we are seeing with our cash flows and our balance sheet. But I don't want to imply that they are looking at a special dividend, but it's something they could.

Okay. And then back to the repair tax flow-through issue, how do you address the ability to do that should you file for another rate case in Pennsylvania? Is there any risk to that?

Well no, I think the next rate case it probably -- the repair tax stays, most utilities are taking the repair tax. I mean it's not new, the misunderstanding I think is that this was a new policy. We probably waited longer than most utilities to do it because we wanted to see what the final order was from the IRS, and that didn't come out til late -- was it late 2011, Dave, or early --

December 2011.

December of 2011.

Temporary rates.

And then they came out with electric, I don't think you'll ever see a ruling for water but -- because we're all so small. But we took the electric rules and followed them. We've hired one of the big four separate from our auditor to give us advice and to give us actually a program to do it. And then we had our own auditor, another big four, audit that.

So I mean we basically have been as conservative I think as any company. The difference was the offering that the consumer advocate and the PUC gave us was if you are allowed to flow-through the benefit and avoid rate increases, you can't raise rates. So that's what we did. We only committed to one year i.e what Ryan's question was, if it still works, we'll do it in 2014. And when it stops working, we have to go in for a rate case.

When we went for the rate case, they may change the whole plan. We'll still have the repair tax, we'll still have deferred taxes, it's just how they treat that. But if they don't treat it the way they're treating it now, we start raising rates again. Won't be a phenomenal rate increase because of the efficiency of the Company and the fact that our depreciation is already included in rates a lot of it.

So it just shifts the whole mechanism, but it doesn't mean we don't have repair tax, don't get the cash benefit of the repair tax. Just like every other water company who did it in a different way is getting right now, or every electric, they're all getting the benefit of the cash. They're just treating it differently in the way they're getting the rate base. Did that help a little bit or --?

Yes thank you for clarifying that.

(Operator Instructions)

Gerry Sweeney, Boenning.

Not to belabor the repair tax, but we'll see a DSIC before you go in for rates formally, so that would almost be like a precursor, a warning sign to get ready. Okay.

Exactly because we've built up enough DSIC eligible capital that we -- just like if we had not taken the repair Gerry our DSIC would probably be close to 5% right now.

Okay. So we'll keep an eye out for that and once we see that, we know you're looking at a rate case at some point thereafter.

Yes, but as long as cash and profits are coming in, there is no rationale to file for a rate case. I mean that's the comparison, it's a balancing that when it's time you would go in for rates, but in the meantime you've avoided all this rate increase for all of the capital that you've done. So I think it's pretty visionary. I realize it's difficult to understand, but believe me we're so conservative, we wouldn't have done it if it wasn't -- couldn't pass the muster of two accounting firms.

No, I believe it. It's -- no, I'm a utility analyst sometimes, getting outside that box is challenging for me.

Now -- and than one other question on the Marcellus. I know the assets -- the pipeline is a good asset when drilling is more active. But the one I guess negative thought I'd had on it was Aqua America is known for consistency and earnings. And then you're moving into a business that is less than consistent, if not ripe with volatility.

Is this a business that you still want to stay in longer term? It's a good asset but maybe value you see developing you take a look back at things, you say maybe this isn't exactly what we want to be in? Any thoughts on that front?

Well of course all of the investment's been made other than starting a whole new line. The run rate, if the consistency and earnings I agree with you, it's not traditional the way we do things. On the other hand, on a $1, I guess first call is $1.40 something and we're talking last year it was $0.01. So if it went away it's not killing us on the consistency.

Sure, yes.

On the other hand it has the chance of getting up to $0.08 to $0.10, which has the sizzle. And that was on one pipeline. And if that would happen, you could multiply it. So I'm not ready to write off Marcellus drilling or the energy boom in Pennsylvania yet. I do think --

No I understand.

And I don't see it really hurting our consistency and earnings other than maybe upside potential. But clearly we're not going to, until we know we have drillers ready, we're not going to start the second one.

Okay, so you're looking at it from a risk reward standpoint. Low risk, high reward. Okay got it. All right.

The margins on it are phenomenal once the water goes through it.

Yes. Got it okay. Thanks a lot, I appreciate it.

Angie Storozynski, Macquarie.

I wanted to go back to that repair tax accounting, because I did cover a lot of utilities and many of them actually do have this tax treatment in play. Now utilities is a cost-plus business, so if you go through our rate case and you pass basically your revenue will be adjusted accordingly to the amount of money that you're collecting or paying in taxes. So I don't quite understand why you say that you've retained that benefit for the foreseeable future regardless of rate cases.

Yes, the -- when Nick said we retain it, he simply meant that from a technical accounting perspective we're still going to be booking that repair benefit on our books. It is likely that some, perhaps all of that benefit, will be captured in the calculation of the revenue requirement in that next case. So from that perspective, just as today we're giving some of it back to customers through not filing a DSIC and not implementing a rate case this year as we would have otherwise intended. In the future, a greater percentage of the benefit will be captured by the customers in the rate case.

Right.

But at the time we filed that rate case, we'll also trade that off for a recovery of a return on all of the capital that we put in in the ensuing years and we're going at a $200 million plus a year rate.

Less depreciation.

Right.

Right, no I mean I understand. But this is basically shared with customers as just any other benefit that a cost plus structure has. Now let's move on, so if you are to file a DSIC for a DSIC in 2014, what happens to the repair tax deductions 2014?

If we do file a DSIC did you say?

Yes if you do.

The repair tax deduction would not be impacted at all if we file a DSIC. We're not saying we're going to file a DSIC, but when we do file a DSIC, it doesn't impact the repair deduction at all.

What would impact the repair deduction would be the completion of a base rate case. And it doesn't impact the deduction per se, as Nick was saying, it only impacts the fact that the benefit would likely be incorporated in the next revenue requirement calculation.

Okay. And then separately, I might have missed that, the assets that are being sold, will they -- are they -- or would they be actually earnings accretive this year? So if you're excluding them as discontinued ops, they would have had a positive EPS contribution this quarter?

Yes the assets that are being sold, our remaining assets in Florida where our key profitable asset in Florida and certainly that would have had a contribution. And the asset that's in Indiana, certainly makes a contribution as well. So whether you're speaking of a contribution from a continuing operations perspective or you're speaking of whether we're going to get a gain on the sale of those assets, in both cases the answer is yes.

And that's already embedded in your internal earnings projections, that the asset sales actually contribute your annual earnings?

Well they will contribute from a net income perspective, but certainly not a component of continuing operations.

So the gain on -- okay, I understand what you're saying. Thank you.

Heike Doerr.

To talk about rate case pipeline, I know you just filed in North Carolina. Nick, can you maybe outline for us what states you expect to file in later this year and into early 2014?

Sure. Just completed cases in Virginia, Texas and we have a small one in Texas we're ready to file again, we had the regional rates. We've completed the max DSIC in Illinois. We're in our third or fourth phases in a DSIC in our Ohio operation.

And we just filed for, they call it a SIC in Ohio, and we just filed for the old American properties, a SIC on those, the first -- in Ohio it's 3, 6, 9, 12. We're on nine in one of our Ohio operations and we're on three on the American. We also intend to file a statewide case in Ohio for all but the two facilities that are locally negotiated rates, which are Struthers and Stark, where we got a 4.75% rate increase in one and a 3% I think earlier this year in the other. So those are in a multi year plan.

Almost like a SIC.

Is that statewide Ohio case you expect to file before year end?

Yes. We're filing -- we just filed a small waste water case in New Jersey. We intend to file a statewide water case in New Jersey by year end. And North Carolina we just filed.

And a bigger picture question, as you think about policy I know we just got a DSIC in North Carolina, congratulations on your efforts getting that passed. What else should we be looking at as far as helping to fix structural regulatory issues and what states you might be targeting next?

Well one is policy. Well first of all, we do not have SIC, WISC, whatever you want to call it, any kind of mechanism yet in Virginia and Texas. We tried legislation in Texas, but now that we're at the PUC we think there's a better chance in Texas. And in Virginia we're talking regulatory wise as to whether that could be adopted with or without legislation and talking to the regulators at the ICC.

Regarding legislation or I think it's more interpretation of policy, you've heard the presentations we've given at the [Neyruz]. The way that the staff in some states calculates the drop in consumption has tended to be averaging it over the past, now if you have a declining consumption any average is bad, right? So we're trying to find new ways of getting a realistic future test year addressing projected revenues from -- or projected consumption and therefore revenues.

We're looking at small system acquisition legislation in Ohio. There was one other state which does not have it -- New Jersey. Just got it in Illinois which would give you a little more predictability on when you buy a small system that you'll get full treatment and rates of the system. Because as you know, some of their accounting isn't always as perfect as the PUCs want them and they have to take their books and readjust them. I think that's about it.

Thanks, I appreciate your insight on that.

Thank you. That concludes our Q&A session for today. I'll turn the conference back over to Nick for any additional or closing remarks.

I appreciate everybody's understanding. I know it's difficult in some of these new accounting -- new ways of accounting policies, although they're not new. But I think I'd like to re-stress it was a pretty good quarter and appreciate your listening. Thank you.

Thank you, ladies and gentlemen, this does conclude today's presentation. You may now disconnect.