Essential Utilities Inc (WTRG) 2013 Q3 法說會逐字稿

Good day, and welcome to the Aqua America, Incorporated third-quarter 2013 earnings call. Today's conference is being recorded. At this time, I would like to turn 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 third-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 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 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 risks and uncertainties.

During the course of this call, reference may be made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the Company's website. At this time, I would like turn the call over to Nick for his formal remarks, after which we will open up the call for questions.

Thanks, Brian. Good morning, everyone. Despite weather challenges this quarter, Aqua generated another record quarter, thanks to the efficiency of our operating model and our meaningful capital investment program.

We should produce our 14th straight year of income growth this year. And equally important is, internally generated cash is now in excess of our increasing capital investment in needed infrastructure.

As a result of our strong earnings and financial position, during the quarter we enacted our previously announced 9% dividend increase, as this is our 23rd in 22 years. And our 7th stock split in the last 20 years, in the form of a 5 for 4. So, therefore, all per-share numbers I will be using today are adjusted for that split.

One other note, even with our aggressive dividend program, which is averaged at between 6.5% and 7% CAGR over the 20 years since I've been CEO, our payout ratio is still well below our stated target of 60% to 70% of earnings.

Now I would like to provide some details on the quarter's results, and strategic activities we have in place to maintain and grow on our industry-leading positions and operating efficiency, financial strength, and our string of increasing profits.

First the quarter. We are pleased to record another solid quarter, net income up $13 million, or 25%, and EPS up 7% from year-ago numbers, or 24%. Unfortunately, it actually could have been better. But due to record rains; we had 11 inches above normal in the quarter, and many of you on the East Coast know what we experienced. This is the first quarter-over-quarter revenue decrease that I can remember with revenue down almost $10 million, or 4.8%, from last year with all of that due to the rain and the lack of consumption. So had that not happened, obviously, the numbers would have been better.

The quarter's unusual revenue decline is the fact that the recovery of capital investment in Pennsylvania is now taking place through our flow-through of repair tax deductions. And therefore, not normal revenue growth through rates. And that is, of course, also depressing the revenue stream and not the profit stream.

So basically, our growth was about 1.2%, between acquisitions and rates and surcharges. And about 6% loss on consumption from our normal numbers of last year. And, therefore, we had a 4.8% drop in revenues.

Now, to address the drivers behind the positive net income results, let me start with a status report on our customer growth and portfolio rationalization program. Through the end of September, we did nine acquisitions and grew customer base by 1.1%. This includes four in Pennsylvania, three in North Carolina, and two in Virginia. So you can see, all our states are working on this growth-track position strategy. We do anticipate a little pick-up in the activity in the fourth quarter, and we project closing a total of 14 acquisitions by the end of 2013.

We are seeing some positive trend in organic growth this year. And to date we have added about 5,000 customers just through organic growth, as compared to about 3,500 through the third quarter of last year. So we are projecting a plus of 1% this year, whereas in the past couple of years, we had not hit that 1%. From 2009 to 2012 we had pretty flat -- just under 1%, but we are projecting for this year closing in on closer to 1.5%.

Now management is also dedicating a great deal of time working on two transactions that are important to the completion of our portfolio rationalization program. We called it the pruning program initially that began in 2011. It has been a real reshuffling with the trades with American Water, and then some actual pruning of some states that were not making any money for us.

It will be three years to completion, but we have two left. One is Sarasota, Florida. In early September, the county commissioners did vote to move forward with the purchase of our water and wastewater operations. This purchase is scheduled to close late in 2013 or early in 2014 for a price of $36.8 million. And once the deal is complete, it will conclude our presence in Florida.

And although we really never earned a operating profit until we went discontinued in Florida, we will exit the state with a gain on the sale of an asset. And that will affect, hopefully, our fourth-quarter numbers a little bit. And we will talk about that later in the call.

Second transaction is in Fort Wayne, Indiana. At this point, we have signed a letter of intent with the city to sell our water operations -- not our wastewater -- to them for a price of $50 million, in addition to the $16.9 million that has already been paid. So a total of $67 million.

The letter states that we will also obtain wastewater treatment flows from the city. So we will be expanding our wastewater operation there under the current plan. This transaction will require numerous local and state approvals and at this point, we are projecting that the transaction will not close until the summer of 2014. You can find more detailed information on these transactions in our 10-Q.

Although the non-regulated portion of our business remains small, at 2% of our revenues, there was a significant event that I would like to talk about that occurred in October. Our partner at a joint venture pipeline, PVR Partners, will be merging with Regency Energy Partners LP, out of Texas.

This will basically triple the size of the company, and give the new company a lot more capital base for the needed infrastructure expansion that's occurring in the Marcellus region in Pennsylvania and Ohio and West Virginia. I have contacted the respective CEOs, and I am very comfortable that our Marcellus Shale business opportunities will continue well into the future.

Now, as previously reported, the first nine months of 2013 have shown sluggish Marcellus well-billing activity, due to low gas prices. There is really restrictive infrastructure. They can't the gas out. And that's ironic, because the wells that have been drilled are actually producing more gas than had been anticipated. So I guess it is a blessing in disguise, long term. But short term, it has provided some temporary setbacks.

Now, activity in the third quarter did pick up from the presentation I made a quarter ago and the joint venture did yield an EBITDA of $1.3 million of cash. With development expected to occur 2014 and the completion of additional infrastructure to handle Marcellus gas to get the gas out, we are starting to see direct lines going into New York City and south to Baltimore and Philadelphia.

We expect the pipeline project that we have already invested in to see improved performance in 2014 and beyond. We remain committed to the project and believe our water source, due to its reliability and lower cost, is the water that will be used when fracking picks up again.

Now let me turn to our capital program, which is also driving growth. Through September 30, Aqua has invested $216 million towards our $325 million-plus capital budget. To date, spending is on track, according to our budget. And we expect to end the year plus or minus 2%, or between $5 million to $10 million of our goal, up or down.

The detailed professional management of our capital program is something that I'm very happy with, and is crucial as we time capital-driven rate proceedings in New Jersey, Illinois, Ohio, North Carolina, and Virginia. Also, we now have DSIC programs, with the recent addition of North Carolina and New Jersey.

We now have surcharge programs in all our states, except Texas and Virginia. And we are currently working with the ICC in Texas -- PUC, which will be our new regulator, to explore such state-of-the-art regulatory programs can be adopted in those states.

The timing of infrastructure capital investments is crucial to maximize the effectiveness of all these surcharge programs. So it is not just building it, it's how you time your use of capital and your filings.

Since the beginning of the tax repair flow-through program in Pennsylvania -- and that was a result of the Pennsylvania PUC June 2012 rate order -- we have managed our capital budget in Pennsylvania at a very detailed level in line with regulatory expectations.

With the additional filter now of repair tax qualifications, such as certain larger main replacements, service lines, hydrant installations, and so on, certain aspects of our capital program are eligible, others aren't. And we are trying to obviously maximize the use of the program for the benefit of our customers and our shareholders.

Our approximate rate base at September 30 is $2.7 billion. Given this year's annual capital spending of about $340 million and annual depreciation of about $120 million, the annual growth rate in rate base approximates 8%. And just to put another comparison, we are spending almost 3 times depreciation on needed infrastructure rehabilitation throughout our system.

From our customers' perspective, the Pennsylvania mechanism is also working very well. Our DSIC surcharge, had we not adopted this tax flow, would have been over 7% this quarter. So our rates would have been 7% higher. And that would have brought in $30 million in revenue.

Now, we are getting the profits through the tax flow line, so in a comparison of revenue growth, that $30 million would have been in those numbers this quarter had we had the traditional DSIC. But we would have had higher rates, too, which I'm sure our customers are happier having the work done and not have to pay higher rates.

As we continue to earn a fair return in a number of our jurisdictions, we have entered what I will call the post-Aqua Source Era -- for those of you who have followed us for a while -- where the need for the large catch-up rate cases is now over. And it is lessening our exposure therefore to unfavorable rate rulings, such as the one we had in Florida about three or four years ago.

As discussed earlier, the repair tax election enabled the Company to stay out of rates in Pennsylvania. And it's actually allowed us to reduce rates for our Pennsylvania customers, because we eliminated a 2.8% surcharge when we started the program.

In 2013, the Company has -- we are still active in rates in every state but Pennsylvania. In 2013, the Company has already received rate awards and infrastructure surcharges in New Jersey, Texas, Illinois, Ohio, and Virginia, and is estimated to increase its annual revenues by about $12 million.

And the Company has $10.4 million of rate proceedings pending, as we speak, in Virginia, North Carolina, Texas, and New Jersey. And, additionally, Aqua America's state subsidiaries are expected to seek rate relief by filing requests from surcharges of approximately 7.7% by the end of the year.

So you can see, we are still very busy outside of Pennsylvania, building and getting fair return on that through surcharges and needed rate cases.

The Company continues to get stronger financially by every metric. We are now generating more cash than we need to spend for our expanding capital program, which is a first time for us, at least since I've been here. It turned in 2012 and will continue in 2013 and 2014. The cash flow from operations exceeded, in my memory, the first time in 2012. And that delta will actually grow a little in 2013, especially with the sale of the Sarasota and Fort Wayne.

As a matter of fact, we intend to reduce the dilution, which is -- we don't see any -- because of the cash, obviously, we see a reduced financing activities, needed as we move forward. That means slower growth in interest costs, to almost nil, and no new equity needs. Now, we haven't had any equity or major dilution for years -- over five, six years -- even though we have increased our capital program, expanded it greatly.

We intend to reduce the current dilution, which is now over 1%, that is a result of our DRIP programs for our shareholder purchase programs. Our shareholders can buy the stock without going through a broker, and many do, and then the employee stock distribution programs, either options or the employee stock purchase plan. That creates about a 1% dilution.

As of December 1, we have converted our DRIP program from original-issue shares to market shares that we are buying back. So it ensures no further dilution from the DRIP,and that was about half of the 1%.

Also, at our last Board meeting, our previously approved share repurchase plan, which had, had no activity for a number of years, was re-approved, providing the Company with the opportunity to purchase about 700,000 shares of stock on the open market, as management deems appropriate.

And the biggest reason for our new cash surplus is the fact that, in 2010 and 2011, due to federal policies and state policies on bonus-taxed depreciation, we were able to generate or grow our cash position. And those two years, we didn't actually surpass what we were spending. But then we accumulated the tax losses, which grew substantially in 2012, due to the repair tax deductions.

At present the use of our NOL is expected to last until 2017. And that provides for the next three, four years, additional cash for our expanded infrastructure rehabilitation program, again without having to worry about floating new debt and new equity.

Our debt position, Standard & Poor's reiterated our A+ credit rating in September. Out of all 227 electric, gas and water utilities rated by the Standard & Poor's, only one utility has a higher rating than Aqua Pennsylvania.

Over the years, we have worked diligently to drive down our borrowing costs. And I'm proud to say that we project our weighted average cost of fixed long-term debt to be below 5% by year end, which we believe is the lowest in the utility space. Keeping our borrowing rate low has helped control interest expenses, beneficial obviously both to our customers and shareholders.

Further reinforcing what it means to have good ratings like this, our Pennsylvania subsidiary closed on an issuance of $75 million of first mortgage bonds, $25 million at 4.39%, and the average maturity about 28 years. So, pretty long-term debt at 4.3% -- 4.39%, excuse me.

Now, we used the proceeds to refinance some higher coupon bonds in the 5%s, pay down short-term debt, and obviously to pay the cost of issuance, which was minor in this case.

Aqua management is especially proud of our ability to continue to be the industry leader in profit margins and efficiency of operations. This, of course, goes a long way to our good numbers.

O&M expense control has been very important -- as you know, we stressed it for over a decade -- and is treated in our Company as such, in internal meetings, regular financial reviews, and even is in our compensation structure. This focus has allowed us to achieve the lowest O&M ratio in the industry, while maintaining a very competitive level of O&M expenses per customer, which is what counts with the regulators.

During this period of minimal rate activity, we are placing even more emphasis in this area. And we expect our continued ability to hold down expense increases to be a key driver in our results over the next couple years. As an example, we controlled our growth in O&M expenses this quarter to just 1.1%. And if you assume -- if you acknowledge that we had 1.1% customer growth, if you really adjusted for that, O&M growth was zero.

In three of our states, O&M expense was actually down from last year -- New Jersey, Ohio, and Illinois. And I'm sure that will be well received when we present these results in upcoming rate proceedings. Because it will mean that the rate request will be almost entirely for capital, which is beneficial to both the shareholder and the customers.

One of these expense-saving initiatives is our electric demand response to ensure lower energy costs during peak use periods. So, rather than paying up when energy is tight, we actually pay down, because we turn on our alternate generators, and also some peak shaving, and [pump the juices], and so on.

Very engineering-driven program, operationally. And we actually were selected as the winner of the NAWC Management Innovation Award this year at our industry conference, due to the program we put on, due to electric demand response. This complements the solar power investments we made a year or two ago that now power four of our water plants. And obviously, the capital is being recovered, but the cost is zero when you are dealing with the cost of power versus buying it.

We are also converting our entire vehicle fleet to compressed natural gas, CNG. Because it is the right thing to do for the environment, but it also saves our customers money. We are seeing about -- the price of gasoline on the equivalent basis to a gallon, if you want to call it that, of CNG is about 3 to 1.

Labor, of course, is our biggest cost. Labor and benefits are the biggest costs in our operating expenses. We had five labor negotiations to complete this year. All are now completed. There was no work stoppage. We were able to obtain what we needed in the way of flexibility in our healthcare programs.

Our pension programs reinforced the fact that all new employees are no longer have an OPEB or a defined benefit pension plan, which we started back in the mid-2000s. And the settlement, the labor contracts -- the shortest contract was two years. That is our biggest union here in Pennsylvania. And that was 1.5% -- no, 1%, and -- let me make sure I have this right -- Pennsylvania was 1% and 2.15%. And the other four were all multi-year, four-year contracts at 2% a year.

So we are very pleased. We think it was a fair agreement. And, of course, our workforce is why we are as efficient and productive as we are.

Healthcare, which is on everybody's mind right now -- we had to change our design of our plan. We are confident our plan will meet all the Affordable Healthcare Act programs. We now self-insure, which is made possible through our strong balance sheet, and will also, we believe, save us money. And we think that if you look at last year and this year, as we have changed our plan, we held our healthcare cost to about 3% CAGR.

Purchasing. Interesting that, as we continue to grow and now prune, we now have established organizations in each of these states. A lot of the presidents are new, and the staff is -- a lot of the new staff has been hired over the last five years. And we have really grown from a single-state operation, when we were Philadelphia Suburban, to our current footprint, which is in nine states. And we had never centralized our purchasing.

We are currently in the early stages -- and this should take advantage of our buying power, and purchase more of the products and supplies we need on a national contract. We see considerable savings when we do that.

We also set up a program for operational. And that is our Aqua tab program, where our operations team is in the midst of a rollout of tablet devices for our field employees. All our field people will have tablets.

We will move -- it will include movement of paper-based work orders and time-consuming and costly to electronic work orders, replacement of more expensive laptops with cheaper, more user-friendly tablets. And will result in better reporting of the work that we do in operations, customer-based maintenance on our assets, et cetera, and regulatory work.

And of course, it gives management a whole new analysis potential as you look at all the statistics. We are really trying to liken ourselves to the FedEx and UPS operational model. Obviously we are about 1/100th the size of them. But it is the idea we got from them, and we are trying to adopt it here.

All these programs were made possible by the upgrading we made over the last two years in our IS systems. We believe we have state-of-the-art systems. Obviously, it meets all the SOX and accounting requirements. But we have been able to utilize these systems by making minor modifications in order to do the purchasing work, and the work we are doing now with the operational tracking. All of this is done well under $10 million. So it is not a huge cost to get these efficiencies.

It's been a little lengthy and a little granular, but I wanted to tell you why we are proud of these numbers. Had the weather cooperated a little bit, it would have been a blow-out quarter, obviously. We did exceed the first call by $0.01 in the third quarter. And we are comfortable with your first-call estimates for the fourth quarter and for the full year.

I want to remind you that next year's -- next quarter's comparison, 2012 to 2013, will not be as positive as the first three quarters have been. Because last year we took the entire year's repair tax credits in the fourth quarter. And that was about $0.18 post-split.

And although this year, with all the enhancements we have made and the efficiency in our capital program, we probably close to doubled the benefit of the flow-through because of catch up and the efficiencies. It's been spread over four quarters. So we are not going to be able to match an $0.18 quarter last time.

But you've all picked that up in your first-call estimates, your earnings estimates. So I'm comfortable if you just stick with what you've seen in there. But I wanted to make sure there's no surprises next quarter.

On the positive side, we might do better than your estimates, if you want to give us credit for the work we have done on Sarasota. And that could be $0.05 or so in the fourth quarter. We have looked at your early estimates for next year, and it shows, again, another increase in earnings. It will be our 15th straight year, if we are able to pull it off. And we are comfortable on a net income basis with that.

We look back and, over the past 14 years, we have had a CAGR of over 10%. Whether you do a 5-year, 10-year, 15-year or 20-year look back, the net income CAGRs have always exceeded the 10%. I think if we are able to perform well in this quarter and do the Sarasota sale, we will see that same net income expansion this year.

We are hopeful for next year. And we think that with a return to some weather, it makes a -- reasonable weather, it makes that achievable. Stop there and answer any questions.

Thank you. (Operator Instructions) Jonathan Reeder with Wells Fargo.

Just one question for you. You touched on a lot of my other questions already. But where do you see next year's CapEx budget coming in? I know previously, you outlined about $300 million annually from 2014 through 2017. Is that still accurate, that you see CapEx decreasing, assuming that bonus depreciation is not extended?

Well, the budget depreciation we are not calculating in our current numbers. So where I gave you those cash numbers and so on. The 50% is supposed to expire, [David], that's correct, at the end of this year unless there's a macro deal in Washington. Of course, the worst case, as you know, Jonathan, is they don't do anything and then nine months into the year they do it retroactively.

But our capital budget next year should be consistent with this year's. It is a run rate of [331]. I think the timing and the capacity of the companies that do it right, we don't want to get ahead of ourselves in making sure everything we do is going to last 100 years.

So I'm comfortable with -- if you want to use in your model about the same as this year. We gave you $325 million-plus. It could be as much as $340 million, it could be as low as $315 million this year, depending on how much closes by the end of year. And that depends on weather and everything else. If it stays warm through December, you can pave some streets and close [it if] you can, it goes into next year.

Okay, so $315 million to $340 million next year is fair for the CapEx budget?

Absolutely.

Okay. And then your other issue, which you've been alluding to on the call, is the cash situation that you are in. Such with the system sales and just your internally generated cash, it's starting to pile up, and what to do with it. Are there thoughts of further extending that share buyback program, really increasing the capacity on it? Or what else is being kicked around?

Well, all of the above. In a sense, it's a situation we have never had before. Now, we still have a healthy dividend, and that has to be paid. So the cash is compared to CapEx. But we still have to dip in and pay the dividend. But of course, your buyback could actually be accretive, because we pay such a healthy dividend. Same sense, cash wise. So if we are going to put in the bank and keep it as cash, you're not going to gain any interest on it versus you are paying almost 2% or whatever our yield is right now in the stock, pretax.

Are you seeing any -- go ahead, Nick, sorry.

Yes, I would say my personal -- and this is a Board decision. My personal feeling is that dividend reward is -- especially for a utility that's trading above book -- is a better thing for the shareholders, because it is immediate and ongoing. And it is real cash coming at you. It's a better way to go but the Board will make that decision.

And I don't want to imply that 700,000 shares that we have activated to it for buyback is really for a major buyback program. We have 175 million shares outstanding. It's really to fine-tune any dilution from option exercises, or there's a huge buying of our employees, which has never -- it's pretty steady on the employee stock purchase plan.

Right. So, are you --

Yes, we still have -- 55% of our shareholders are still retail, by the way. So dividends are important, I think, to that.

Okay. From an external use of the cash, external growth opportunities, anything you are seeing there? Any pick-up in terms of deploying that in an efficient manner?

Well, I think our capital budget does not include any acquisitions or any non regulated. Now, the non regulated has actually, after our initial investment, has actually [thrown] off cash. So there's no demand. If we get into a second pipeline, that would be use of it. Acquisitions would be a use of it.

So yes, that would be our first -- I think a growth oriented would be our first call. But we don't budget that because we have never had the trouble -- first, it is hard to estimate. And second of all, with our A+ rating, we can get money right away if we need it.

Right. Are there any near-term opportunities that you are getting excited about that would be substantial?

Well, we have a good pipeline in the nine states we are in. We are every day out knocking on doors. And we will do 4 or 5 in the next quarter, and we will probably do 15 to 20 again next year. We would like to see some bigger ones, but they come when they come.

All right. So nothing imminent of size though, that you can discuss?

Yes, I think we're hoping to get back to close to where we were in the mid-2000s, when we were averaging 3% to 4% growth a year, which is probably triple what the old electric growth used to be. It's probably now infinity, because there's not much growth in the electrics. And there's been -- as I remember back, there hasn't been great growth in most of the other water companies. We were doing most of the small system acquisitions.

Now everybody is looking at it, and we all are chasing the same ones, if we are in the same state. But I think with organic growth coming back, the hustle factor that we provide, we are hoping to get from below 1%, where we have been for three, four years -- and that's depressed earnings obviously. And made us more dependent on rates, we are hoping that we can get that up closer to the 3% to 4% where we have been.

Okay. Thanks for the time, Nick.

Okay.

Thank you. (Operator Instructions) Stewart Scharf with S&P Capital.

First, regarding whether -- as you go into the fourth quarter, rainfall has been below normal levels, but I assume that would have less impact, based on the season, or (inaudible).

Stewart, you are not coming through on our speaker.

Can you hear me?

That's better, yes.

Okay. A loose wire, I guess.

Okay.

Okay. So just regarding the low average rainfall so far this month. Does it have much of an impact in this quarter, at least that it's not the typical spring season and people --

No, we can -- you can absorb a little bit of extra rain. But it was like we had almost a year's rain in the summer this year. We usually get 35 to 40, and we almost had -- I think we had 27 in the summertime this year. So this is just -- this was absolutely, I think, an abnormal year. I don't know how the other companies that were reacting, unless it was all just in Pennsylvania and South Jersey.

But we were a little less affected by weather in the Midwest, although we had a terrible second quarter, but the third quarter was just slightly below 1%, 2%. And Texas had a blowout year. They are continuing to have dry, arid weather. So it is -- the portfolio being a little diverse helps us. But I would say the fourth quarter should not be any negative surprise, at least in what we are seeing through October. That's why I was comfortable with all the first-call estimates.

Right. And just regarding the states that you are focusing on now. Are you pleased with the way it is going in those states? Are you looking to other states? Any areas that you are not as happy with?

No. We are where we want to be now. Now, if there somebody who wants to do a trade and it makes sense, we would definitely look at that. But at this point, every one of our states, other than North Carolina, is doing very well, whether it is ROEs -- we are investing money, we have surcharges in every state, except for one is being adopted in North Carolina. But everyone except for Virginia and Texas.

So we have the mechanisms to invest the capital and be able to get the non regulatory lag recovery that you need if you're going to be huge investor of capital. And of course, Pennsylvania has always been a state that is at the forefront of unique regulatory mechanisms that help everybody. And that's what we see in this flow-through tax repair issue.

Okay. Now I --

I would say we are not -- if somebody has a huge company they want to sell in a state that we are not in, we would be looking at it. But we are not looking to sell any, or get out of any of the states we are in.

Okay, and when you -- can you hear me?

Yes.

Okay. It seems like there is a loose --? Regarding the repair tax then. When you go back in for rates, would that be the normal 9-month, 12-month lag? Or will it be a longer lag, just based on the transition between the end of the repair tax and implementing the rate hike?

That's an excellent question. Because the timing of our next -- of course, it is only in Pennsylvania. The other eight states are normal DSIC, if you have it. And then when your ROEs start deteriorating, you go in for a rate case. And by keeping expenses down in all these states, which we have been able to do, the rate request is less. But the shareholder doesn't get hurt, because you only get your benefit from the capital investment. The operating expenses are just passed through as our interest.

In Pennsylvania now, that whole thing is flipped. Because we are not getting rates. We are getting through the flow-through of the tax benefit. And in Pennsylvania, our first step would be to enact a DSIC, because we obviously are eligible. See, all the capital we are doing is not deferred. It is going into rate base, so its building rate base. It is just that the revenue coming in through the tax line is -- I call it revenue, but it's probably not technically correct -- but the net income, the money coming in through the tax line is replacing what we would have asked for in rates.

The minute our earnings go down to a point where there is a lag -- your point -- we would first initiate a DSIC. That could be as much as 7.5%, at which point then you would file a rate case. But it would eliminate that lag. And that was all part of the thinking of the OCA and PUC when they did the order. They asked us to stay out of Utah to eliminate our DSIC in 2013, and to not file a rate case in 2013. We obviously have lived up to that and plan not to do anything, probably for another year.

Okay, thank you. And regarding the grant [plus] the CNG.

Yes?

What percent of the cost grant covers the cost for a CNG?

That was, I think, 30% on the slow fill. These are not expensive. What we are doing, Stewart, is putting these -- and this could be adaptable to homes even, if car manufacturers want to push CNG. Right now, there are very few gas stations that you could pull up to and, in a minute and a half, get your tank filled with compressed natural gas. Because they are expensive, it is a high-pressurized device, maybe $1 million, and so on.

But there's this very inexpensive and not very complicated slow fill, where you push the gas into your tank and it compresses while it is being put into the tank. But it takes an hour or so to fill your tank. Well, no consumer is going to wait an hour at a gas station. But for us, we bring our fleet back every night. It sits idle for seven, eight hours. So we have plenty of down time to fill the tank up.

The $85,000 was -- let's see, this was for -- oh, no. This was for purchase of new vans. A van difference is about $28,000 for a traditional gas-fueled van, and high $30,000s for compressed natural gas, until they start manufacturing them in numbers that they can bring the price down. Because the extra tankage in the vehicle cannot cost $10,000. But in order to get some first movers, the state has these grant programs, which we are taking advantage of. And they like the fact that a Company of our size and reputation is seeing CNG as the future. Did I answer your question?

Yes, thanks. And just a couple quick ones. On the organic growth and acquisitions. Is that a normal mix you are looking at, for about 50-50 organic and acquisitions for additional customers? And just regarding the shale, are you still looking at the same doubling of earnings over the next few years?

Yes, I would say up to 2%, 2.5%, it would be pretty equal, organic and acquisitions. If we can exceed 2.5%, get up to 3%, 3.5% growth, the sell-to will probably come from acquisitions. It would mean we have to do more acquisitions.

Where we are growing organically fast is in North Carolina and in Texas, and certain parts of the suburbs of Philadelphia. It is -- I don't think the country's population is growing 1.5%, for us to think we are going to grow that much faster than the country's population. But we are in better areas of certain states, and they do grow faster.

Your second question was on the Marcellus. If a deal comes up that make sense, we will do it. We are never going to grow that business to 10%, 20% of our net income or our revenues. Because it takes time, anyhow. But I'm a true believer that Pennsylvania and Ohio, and now West Virginia, are going to benefit long-term from an energy renaissance. There's more gas than anybody ever thought. It has brought energy prices down, electric prices down, because of the abundance.

And it is a great way to look at your national defense problems, and get off everybody else's oil by switching gas, oil heat -- and I hope no oil heat dealers are on the phone -- but oil heat should be gas, and cars should be gas. I think there's a great future for the gas industry in Pennsylvania and Ohio. And Texas has always been.

And you still see any (inaudible) this year, and into next year?

Any acquisitions? Hello? Oh, yes, this year we will get cash. But the net income, because we are paying off the depreciation on the pipeline over a short period. So we are in business with an LLP, or an LP, I guess you call it -- MLP. So they don't care about net income, they care about cash. Right? Did you ever see their earnings release? So that's why I wanted to show you that the EBITDA on this was over $1 million, even though it is not pumping anywhere close to its current capacity. So if it ever gets to the level of the capacity of that pipeline, it throws off a lot of cash.

Okay, thanks a lot.

Okay, Stewart.

(Operator Instructions) It appears there are no other questions in the queue. I would like to turn it back to Nick DeBenedictis for any additional or closing remarks.

Thank you very much for all of your attention. Sorry for the length of the call, but we had a lot to tell you about today. Thank you.

That does conclude today's conference. Thank you for your participation.