Aqua America Inc WTR
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/25/2013

Operator: Good day and welcome to the Aqua America, Incorporated Full Year 2012 Earnings Conference Call. Today's conference is being recorded.

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

Brian Dingerdissen - Director, IR: Thank you, Angela. Good morning, everyone. Thank you for joining us for Aqua America's fourth quarter and full year 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 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 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 to turn the call over to Nick for his formal remarks, after which, we will open the call up for questions.

Nicholas DeBenedictis - Chairman, President and CEO: Thank you, Brian. Good morning, everyone and thank you for joining us for our conference call this morning to announce record breaking earnings for Aqua.

I'd like to also start by congratulating Jennifer Lawrence who won the Academies last night. Thanks to all the water she drank during the making of Silver Linings Playbook which was filmed less than a mile from our headquarters. Maybe someday she'll be our company's spokesman but we can't afford that.

If you put 2012 results in perspective it took 125 years for Aqua to break the $100 million net income mark that was in 2009. And I'm pleased to report today that in just three years, in 2012, we earned $197 million or $1.40 a share, up 37% for the year. Aqua expects to go over the $200 million mark in '13, achieving a new milestone in the Company's long history.

2012 marked a 13th straight year of record net income and the 20th year in my 21 years as CEO of increasing earnings. Since 2008, when we began to profitably assimilate the rapid growth we experienced in the mid-2000s and we started our successful pruning program. Our CAGR or net income has grown 15% compounded between '08 and '12. This is well in excess of the 10% expected by the Street, and as a matter of fact, we hit the 10% CAGR goal which would have occurred in '15, three years early in 2012, and I'd say the key ingredients for this strong net income showing at '12 was a solid year of operations complemented by the adoption of repair tax accounting change permitted in our 2012 Pennsylvania rate case. Our CFO, Dave Smeltzer will explain in detail this win-win tax and regulatory policy later in the call.

Let me spend some time now on the specifics of our 2012 operating results. Overall, 2012 was exceptionally strong strategically and operationally. From an execution basis, 2012 was a resounding success. Let me just tick off some of the year in results. We probably sold our Maine operations early in the year with no remnant issues. We completed the New York for Ohio swap with American Water flawlessly. The Ohio assets were integrated seamlessly into our existing Ohio properties. It's accretive to earnings in its first year and Ohio's net income is above earlier projections. Aqua invested a record $348 million, the most ever in infrastructure improvements, and I think that is one of the reasons we survived super storm Sandy so well on the east coast properties we have.

Our New Jersey subsidiary received its first ever disc approval in that state and we intend to start using that this year. We lowered our cost of debt to 5.06 on 1.5 billion while maintaining our S&P A+ rating for our larger subsidiary in Pennsylvania. We worked with through EEI, Edison Electric Institute and we were successful in the interlocking of the dividend tax rate to the capital gains tax maintaining the 15% taxation level for the benefit of our retail shareholders who make less than $450,000 and most of those are 55% who hold our shares outstanding. So that was a big issue for us.

We saw a return of the housing market and when complemented by 18 acquisitions, we saw our existing customer base grow by almost 2%. Lastly continuing with our successful pruning program we announced in September that we are exploring the sale of our Florida operations. I expect soon be announcing a smooth profitable exit from our businesses in Florida in the quarter.

2012 was also a year of new emphasis on our non-regulated business, which has grown to 2% of revenues and in 2012 generated $0.02 in earnings, about half from Aqua Resources and the other from our startup business Aqua Capital Ventures. That’s one that’s supply water via pipeline to natural gas drillers in Pennsylvania and we are on track to double the results of this business in 2013.

If we just look at operations and consider the year-end tax benefit of $0.22 which all happened in the fourth quarter. Our adjusted earnings from operations which is obviously a non-GAAP number would have been $166 million or $1.18 and that’s 15% increase over the 2011 GAAP earnings of $1.03. In 2012 revenues were up $70 million to $758 million an increase of 10.3% rate increases accounted for 5.8% or over half of this and approximately 4% or 40% of the increase came from new acquisitions including the new Ohio properties.

The remainder was from growth in the unregulated business so a strong revenue year. In 2013 we see revenues continuing to grow despite the fact that this is an important fact that no revenues are added through the tax repair or Aqua Capital Venture because they come in through the equity earning line for the case of Aqua Capital Venture, the revenues come in -- what we would normally call revenues come in through the equity earning line as it's a joint venture and of course the Pennsylvania returns come in through the reduction in the tax line. Even though they both add to the bottom line despite this we'll still project a 4% to 5% gain in revenues in '13. Regarding expenses 2012 was a strong year for cost control on a same-store sales basis. Although you'll see a 5.9% increase in the O&M lines between '11 and '12. As we explained in detail in the press release, when adjusted for new acquisitions, meaning, the large Ohio acquisition which had comparable expenses in '11 grew (Indiscernible) very pleased with our long-term trend of cost control, and I think it's exemplified by the lowering of what we call our efficiency ratio, which is O&M to revenue, which in 2008, when we started this program was 40.4%, still low in our industry and we've lowered that now to 35.9% in '12, a 150 basis point drop over the four years, over 100 basis points a year and I've always said we try and get 50 basis points year-over-year to double that.

The efficiency ratio going forward on foreseeable will not be as accurate an indicator over the next couple of years due to the large amount of earnings that are going to be derived from two net income generators that don't have revenues, that's the repair tax and capital ventures. So this would be like comparing apples to oranges if we keep comparing prior year to current year. But in any measurement that we'll come up with, we believe Aqua is now the most efficient utility in the nation and we don't expect to lose that advantage. We are continuing in our capital program to deploy expense-reducing projects that address electrical expenses like our active solar program or purchase water program, which we lower – we are continuing to lower our water that we purchased from municipal governments in lieu of treating our own. We are doing a conversion of our fleet to CNG for fuel savings, compressed natural gas and we're working in all our areas where we have residual waste treatment to lower the cost of the trucking in the landfill by having a treatment onsite at many of our plants.

In addition, we've already taken and we'll explore further ways to reduce legacy pension cost and other benefit programs. Now, rates to support our continuing capital program in excess of $325 million, which has been for the last couple of years will come exclusively from our operations outside of Pennsylvania. We are – and Dave will explain the agreement we have set with Pennsylvania PUC.

We are emphasizing surcharge eligible infrastructure programs in New Jersey, Ohio, Illinois and preparing to file 2013 statewide cases in North Carolina, Ohio and New Jersey. We also expect to finalize our already settled cases in Texas and Virginia, and of course, the cash and returns on all Pennsylvania capital we'll be employing – deploying will be provided by the repair tax deduction. Once again Dave will explain how that mechanism works.

We once again lowered our embedded cost of debt in 2012 to 5.06 on $1.5 billion of debt. We expect to lower this further in 2013 as we refinance over $50 million on our debt in various states and expect to get lower interest rates and then we have $60 million that we have to put in to longer debt and replace regarding the Ohio American purchase of last year which we're carrying with short.

Now, our cash flow picture has greatly improved since 2010 due to the 2011 100% bonus depreciation program where we also got a flow through the state. In 2012 we had a 50% bonus depreciation and of course better earnings from operations that we're announcing today.

Now as this trend continues as we expect it to we will no longer need any new debt to cover our capital needs including our normal system acquisition program. We also saw our book value increase 10% this year and our equity to capital ratio grow by 200 basis points up to 45.5%. We see this ratio continuing to improve and predicting no new stock offerings barring a large acquisition for the foreseeable future.

As a point of reference our last public offering was 2006 we continue to experience a small dilution in earnings per share, due to Aqua's popular DRIP program and the employee long-term compensation programs which due to the rising stock prices has in the accounting has to show more shares.

We're investigating a share buyback to minimize the slight dilutive effects of these programs. Now that I have covered the highlights of '12 perhaps in more detail than you wished, I would like to turn the call over to Dave Smeltzer to explain a real simple and exciting topic how the repair tax works Dave.

David P. Smeltzer - EVP and CFO: Thanks Nick. First maybe I will talk with a little bit of history. This issue of deducting certain kinds of costs that had typically been capitalized really was solidified in a federal express case a number of years ago they had expensed on their tax return a jet engine replacement on one of their planes. The IRS determined that in fact the jet engine was the unit of property and therefore the replacement of that unit of property should be capitalized. So the – it went to court. And ultimately, the court determined that the plane indeed was the unit of the property and actually couldn't fly without the key component of the engine. And so therefore, since the plane was the unit of property, the replacement of the engine on that plane was a proper expense, and that case really opened the door for a number of other interpretations in terms of expensing cost that had previously been capitalized for tax purposes.

We've studied this potential for some time now, didn't elect to change our tax policy earlier due in part to the fact that sufficient guidance wasn't readily available. This issue was not addressed at any of our prior rate cases before the 2011 PA filing. However, many companies including utilities have been utilizing this tax accounting change since the mid-2000s. Most typically, companies who have made this change accelerating tax deductions account for it using deferred tax accounting where the accelerated tax deduction benefit resides on the balance sheet as a deferred tax liability, and yeah, as you know in these instances, it doesn't flow through to reduce income tax expense.

As the deduction and the related benefits to customers became more utilized with much greater clarity in the tax implication, we were asked by the PA Office of Consumer Advocate to actually discuss our tax policy plan upon the filing of our November 2011 PA rate case.

Recognizing that PA allows flow-through accounting for income taxes in a number of instances and that other utilities had recently reached agreements with the PaPUC regarding their repair deductions. We entered testimony into that case laying out our plan to take the repair deduction and flow through the benefit. Again, by flow through, it simply means that rather than tying up that benefit on the balance sheet as a deferred income tax, that benefit – a cash benefit in fact actually flows through to the income statement as a reduction in our income tax expense. So it's important to note this is not a one-time item, in fact it's a permanent change in the way we account for repair related tax deductions and obviously we expect us to be ongoing for a long, long time.

Now, recognizing the prospects for enhanced long-term customer benefits relating to this treatment, we entered into an agreement with the parties of our last rate case, which was eventually approved by the PUC to utilize this flow through treatment for our Aqua PA repair deductions, but only to be effective after the company analyzed its potentially eligible projects and decided to make this tax accounting change. The potential change itself was not reflected in the order that became effective June 2012.

Now, in return for a commitment not to raise rates in 2013, the 2012 benefits of this accounting change accrued to the shareholders. Going forward, we would expect a similar annual repair deduction since a key to our settlement was that we plan to continue our significant levels of investment in infrastructure rehabilitation. In addition, in 2013 the first of a 10-year amortization of the catch-up deduction would also accrue to our shareholders. And many of you know the catch-up deduction actually represents the deductions of eligible projects going back prior to 2012 and we go back as far as we can and accumulate the remaining tax basis on those eligible projects take that deduction on our 2012 return, but based on the agreement with the PA PUC that will flow through to income little over approximate 10 year period we expect that to begin in 2013.

So we fully expect that upon completion of our next Aqua PA rate case sometime beyond 2013. More of the benefits of this change will improve our customers through a lower revenue requirement than would otherwise be necessary. And at the same time the next rate case will provide a fair return on all the capital, that Aqua will have deployed over this multi-year period making us whole going forward. So while there are Middle Eastern shareholder benefits which we're beginning to recognize today in our Q4 results there are also initial and long-term customer benefits related to this mechanism that was in fact approved by the PUC so I would like to go over some of those.

First is disk immediately following the adoption of the tax repair in fact on January 1 the company lowered its rates by eliminating the PA disk which was at the time set at 2.82% but would've risen every quarter in 2013.

The company doesn't expect to make any news this filings or incorporate any such disk charges on its customer bills in 2013.

To put this in perspective for 2013 we would expect that allowable discharges based on our past practice bending and qualifying capital projects would've approximated over $22 million or by fourth quarter '13 we would've expected, we could reached the 7.5% cap on the discharge on each customer bill. That would represent about $30 million in annualized revenue that will now be forgoing and essentially replaced with the flow-through benefit of the tax of the repair tax change, so that's disc. And the second is an impact on rates. If you've followed the Company for a number of time, you know that we have a long track record of filing a Pennsylvania rate case about every other year, and November 2013 would've been the scheduled date for our next rate filing, because of the benefit of the 10-year amortization of the catch-up adjustment which we expect to begin in '13 and for instance with the PUC order, we will be notifying the parties to that rate case of Aqua's intent to postpone into next base rate case filing beyond the expected 2013 filing.

And then the third area of benefit to customers is capital spending. We don't expect to slow down during this period while we are foregoing a disc cost recovery and postponing our scheduled rate filing, the Company plans to continue spending record amounts of capital in excess of $230 million a year in Aqua, Pennsylvania, improving its distribution system and other facilities to address system reliability and ensure the long-term viability of our systems for the benefit of our customers.

So that's the quick simple overview of tax repair. Nick, I'll turn it back to you.

Nicholas DeBenedictis - Chairman, President and CEO: Thanks Dave for an understandable explanation of a very detailed subject and Chris will be available after this call for specific questions on this very detailed but unique process which I deemed as a win-win for both from regulated standpoint and from the company standpoint. I'd like to wrap up the call with a general outlook regarding '13. We are confident that we've reached a new base in earnings from which we can grow as we continue to invest needed capital in our water systems and wastewater systems. We intend to continue to grow both the regulated and now the new unregulated businesses through acquisitions or capital development and we continue to have one of the strongest balance sheets in the utility industry, which we intend to capitalize on and maintain our standing as the country's most efficient utility from both an operating costs and on EBITDA standpoint.

Obviously with the large but sustainable jump in earnings in 2012 even though we just raised our dividend 6% in December our payout ratio has now dropped to 50%, which is below our normal range that our shareholders have been accustomed to. Our Board will review this in 2013 – our dividend policy for 2013 and clearly this is a Board decision involving many difficult choices as to other uses for the cash; however, our projection show that our 2013 earnings and cash increases will exceed the normal $0.04 a share increase of recent years and so we have plenty of room for looking at the dividend.

Also I'd like to give some guidance regarding the first quarter of 2013 as there was a lot of moving parts in the first quarter of '12s earnings. First quarter of '12 was $0.27, but that was enhanced by $0.08 from the profitable sales of our main properties. So if you take an operational standpoint it would be obviously lower than the $0.27. We expect on that basis, the operational basis, the type of gain from operations that we experienced in 2012, and in addition, you should impute a quarterly portion of the 2013 tax repair benefit which in 2012 was all taken in its entirety $0.22 in the fourth quarter. So clearly that should be spread among your quarters this year and would be additive to the base amount less made in the first quarter of '12 as you'd project '13.

Sorry, for the length of this the conference call, but we'll take any questions now.

Transcript Call Date 02/25/2013

Operator: Leslie Rich, JPMorgan.

Leslie Rich - JPMorgan: So you expect the tax repair benefit in 2013 to be at a similar level as it was in 2012.

Nicholas DeBenedictis - Chairman, President and CEO: Yes.

Leslie Rich - JPMorgan: Then as you amalgamate all of the factors that you said would go into 2013 for example postponing your rate case foregoing the disc, continuing to spend but then getting the benefit of the tax repair accounting is it, does that all sort of wash, as you think about that pluses and the minuses for Pennsylvania sort of lot.

Nicholas DeBenedictis - Chairman, President and CEO: I mean I'm going to give you a very simplistic non-lawyer, non-accounting answer is simply we're replacing what we would've gotten through rate increases and the disc to give us fair return on the capital through the repair tax method and letting the taxes that we're collecting right now to be flowed through even though we are not paying them which we don't have to pay because of this new guidance from the IRS. I mean, it's a very unofficial way of saying it, but yes, it's a comparable and that's I think your basic question is from an earnings standpoint.

Leslie Rich - JPMorgan: So as you think about 2014 and beyond, this tax repair benefit continues in perpetuity or does it need to be reviewed for renewal or sort of how does that work?

Nicholas DeBenedictis - Chairman, President and CEO: It does continue in perpetuity. Sooner or later, we will have built up so much new capital additions that there could be lag and we don't know when that will be. We are analyzing it right now. It all depends on what projects you do that are tax eligible. Not everything is eligible for this plan. So if you have to build a new water plant that may or may not be eligible to the same percentage as a pipe. And therefore, the amount of the tax repair may or may not cover a significant portion of '14, '15, '16's capital, at which point, we would then go in for a rate case and go back to the normal process, but we will not have been hurt during that time period is really the issue.

Operator: Angie Storozynksi, Macquarie.

Angie Storozynksi - Macquarie: I have two questions. The first one is could you comment what was the average rate base for 2012 and also what's the projected rate base for '13?

Nicholas DeBenedictis - Chairman, President and CEO: For the whole company?

Angie Storozynksi - Macquarie: Yes.

Nicholas DeBenedictis - Chairman, President and CEO: It's $2.7 billion, but you have that. Can we get to you right after the call. It's in there, but we'll get right to you. I mean, I just…

Angie Storozynksi - Macquarie: How about your long-term earnings growth expectations given that there was just step up in earnings in 2012, how should we think of the 10% EPS CAGR, is it still sustainable off the 2012 level of earnings?

Nicholas DeBenedictis - Chairman, President and CEO: Well, it's difficult for me to project that. We'll be up in my mind. We're projecting an up year in '13 over '12 even though we really hit our 10% CAGR three year's early as I said earlier in the case. I would not project 37% increase next year because it's now – the repair tax is now accumulated in, but we don't see our operational programs slowing down. So, we're still on a bigger base now and part of that is a state amount which is the tax repair.

Angie Storozynksi - Macquarie: And also on unregulated earnings, you said they contributed $0.02 this year and I am assuming so it's – so we're assuming $0.04 in 2013 and based on the projects already announced how much would you expect in 2014?

Nicholas DeBenedictis - Chairman, President and CEO: Divide the unregulated revenues, or I should say net income, because revenues only come in through, that's the resources, that's the one that's septic tanks and services to the people's homes for pipeline insurance and things of that sort. I will not say that would double each year, because it's more of a stable state business. On the other hand the startup business, which already earned a penny in '12, even though it's a startup, most startups don't make money for years, that when we just looking at our projections and contracts we have. We think that one will double in '13 and double again in '14, because it’s a huge investment we've made that now more and more drillers are asking for water supply.

Operator: Leon Dubov, Luminous Management.

Leon Dubov - Luminous Management: Just to follow-up on Lselie's question. So you expect to benefit from repairs has to be about the same in '13 as it was in '12 and then on top of that there is another step up from the new 10 year amortization of those taxes that's coming in is that the right way to understand it.

Nicholas DeBenedictis - Chairman, President and CEO: It's a 10 year amortization so it's not all in one year like the '12 and '13. So it's a smaller amount but yes we would expect that to increase and we can give you the how much, it's actually in the balance, 25% to 30% I think is what we said in the release. Perspective but what we can do for you is give you how much we ask for and the balance sheet you can divide by 10 and figure it out.

Leon Dubov - Luminous Management: Effectively the way to think about that is that the total benefit from this policy in '13 is going to be about 125% of what it was in '12, 125% to 130%.

Nicholas DeBenedictis - Chairman, President and CEO: Yeah, right. And we can give you exact numbers and you could fill it out yourself. The variation – I don't want to make it sound like it's just you put a dot on the wall and that's a number. It all depends on what type of projects we do during '13. If we did all water plants and no pipe, we wouldn't do as well as we did in '12. If we do more pipe and less water plants, we do probably better than we did in '12, but I can't predict that until we get all our permits and know where our capital is all being spent to the penny. But I am giving you clear clarity that we were not going to cut back on capital because of this tax thing. We are actually going to stay right at the same levels of an excess of $325 million a year, which basically is three times depreciation.

Leon Dubov - Luminous Management: Do you think the Board will take up the dividend discussion kind of at the next meeting here?

Nicholas DeBenedictis - Chairman, President and CEO: You asked me that a couple of weeks ago I think.

Leon Dubov - Luminous Management: I did. I just want to know if there's either any movement or any movement the either way.

Nicholas DeBenedictis - Chairman, President and CEO: Our Board meeting isn't for a couple of days, so I can't say what they'll say, but yeah, it's something that is Board level review and the fact that we are normally a 60% payout. Most utilities are in that range, some are much higher now, but we've been always healthy keeping our balance sheet intact by staying around 60% and of course we've dropped now because of this big jump in earnings, which although some people think it's one time, is not, it's sustainable. So that's how the Board is looking at it what should be the dividend policy on a company that's earning $1.40.

Operator: Jonathan Reeder, Wells Fargo.

Jonathan Reeder - Wells Fargo: Good morning Nick and Dave. Nick, could you please clarify your comment you said about no new debt, is that just for 2013 or what was the time horizon around that?

Nicholas DeBenedictis - Chairman, President and CEO: If we stay at the 325 and look at our cash from operations and obviously the cash from not paying the taxes, which in my mind, Jonathan, is nothing more than if we've gone in for rates it would have been from operations. This means we don't get rate, but so the rate payers are happy, the customers are happy but we're still getting get through the tax line. If that holds, plus the increasing depreciation each year, which obviously helps cash but hurts earnings because we're putting a lot of capital, three times depreciation in it that the cash generated from let's call it operations, give me the luxury of going to tax benefit operations exceeds both the amount we spent on our small acquisitions each year and exceeds the amount of capital that we're spending even at these elevated levels. Therefore, for operational purposes we wouldn't have to borrow any debt. Now, obviously, the dividend has to be paid so on but at this point in time we see very little need for new debt other than refinancing the debt we have that comes due each year, which is a positive because of the fact that we're probably going to get at lower rates at least currently than what's on the books where.

Jonathan Reeder - Wells Fargo: Right, for the next few years you are kind of see interest expense pretty much staying flat maybe even decrease in I guess once you kind of roll that $60 million of short-term debt in to long-term for Ohio?

Nicholas DeBenedictis - Chairman, President and CEO: Exactly. I think this year you'll see it actually went down on a continuing basis that's because we did a lot of short-term debt usage. We saw plenty of room on our lines, but Dave, I think we're barring short at one.

David P. Smeltzer - EVP and CFO: Right. So obviously we're using that as much as we can to cut down lag in between cases and we have to. We are going in for a case in Ohio. So obviously we are capitalizing that with long term which is proper way to do it. So that will add to the overall interest, because it's going to be I think hard than 1% if we go 30 years. But not so much that it still looks flat. I mean the days of our 10% to 12% increases in interest because of the ramp-up in our capital seem to be behind us it's much, much lower numbers. Depreciation will stay up there which obviously is non-cash earnings but, because we are doing so much capital.

Jonathan Reeder - Wells Fargo: I know you are not going to file the Pennsylvania rate case this year do you anticipate a filing in 2014 or when do you think that next one might come?

Nicholas DeBenedictis - Chairman, President and CEO: Well, when we have all kinds of models, again depending on the amount of the pipe versus plant we have to do keep in compliance and everything else there's a point where crosses that the lag starts exceeding the benefits of the tax repair. And at that point the first thing we'd probably do would be to file a disc versus filing a base rate case. We don't see that '13 and we're analyzing '14 and '14 is still up in the air.

Jonathan Reeder - Wells Fargo: So I mean I guess in '14 if you do anything it sounds like you'd probably file for disc stuff and then. You wouldn’t see a natural full blow rate case until maybe as kind of end of the year with new rates sometime in '15 is that kind of fair. That would be kind of I guess the earliest you might see that?

Nicholas DeBenedictis - Chairman, President and CEO: I think that’s a reasonable assumption

Jonathan Reeder - Wells Fargo: Then, I mean, just overall conceptually, is it…

Nicholas DeBenedictis - Chairman, President and CEO: I mean, why I'm hedging is inflation starts roaring and it comes back at 5%, all bets are off, right. But inflation stays down because our operating costs are key part of rates too, but we've been really holding operating costs down which is how we can stay on our rates, and of course, the regulators and the customers like that.

Jonathan Reeder - Wells Fargo: So is it fair to say then that essentially, I guess, Pennsylvania's earnings contribution is essentially going to be flat until I guess the next disc filing or whatever that this – the repairs tax deduction essentially just pulls kind of earnings forward, is that the right way to think of it?

Nicholas DeBenedictis - Chairman, President and CEO: Well, I mean, look at it this year, the huge part of the $1.40 percentage wise is Pennsylvania because of the one-time infusion of the repair. I don't think Pennsylvania can – we could expect that to maintain going forward as the other ones catch up, but I wouldn't call it flat, because we have the repair coming in, we have the remainder of the 2012 rate case. We have cost cutting that we're looking at, so – and maybe rather than take everybody's time, recall Dave and I, we can explain to you how much more the tax has benefitted this year, but obviously it can't keep growing. It has to – but it's still faster than probably your model showed without it.

Jonathan Reeder - Wells Fargo: Then just bigger picture, I mean, where do you see I guess the growth initiatives going forward? I mean are you still looking at further pipeline opportunities around shale? are you seeing an increased activity on the M&A front? Can you just kind of talk bigger picture?

Nicholas DeBenedictis - Chairman, President and CEO: Sure. This is one of hopefully many pipelines. We're looking at couple opportunities in Ohio, another one or two in Pennsylvania. Obviously, the drilling with gas prices where it is has not slowed down and that's probably is good for the industry in my mind, so it catch their breath, still steady, but especially in Pennsylvania where we have dry gas. This is not a flash in the pan industry, this is going to be around long time and the administration even acknowledged that during the State of the Union speech by the President. So, this is the first of hopefully more that we'll be doing in the raw water I guess you could call that area. We're also capital ventures is also looking at other type pipeline projects where we may team it up we call it regulatory light where we team it up with our regulated side, they sell the water at a retail rate, but we build the pipelines so that cities could get the water and have a joint venture with us, public-private partnerships things of that sort. I do think, although you've heard this before from every water company, that privatization will become a little bit more of a rule versus an exception going forward, but it's just inevitable, I just can't predict the timeframe on it and of course the core of the earnings will still be built by the capital infusion of needed capital in all these states that basically we have to fix the water systems infrastructure and hopefully get fair returns and that's what generates a lot of our future growth. And then the small acquisitions, you saw a little bit further than that take this year, housing came back a little bit this year. Who knows how to project what's going to happen with interest rates if they do go up, but at this point we are at least stable. We are not dropping anymore and it came back in '11. So it started to come back from '11 to '12 and everybody is optimistic at least with homebuilders in '13.

Jonathan Reeder - Wells Fargo: I guess as far as the 1.9% customer growth you cited is that including I guess the benefits of the Ohio or is that just the smaller tuck-ins in organic?

Nicholas DeBenedictis - Chairman, President and CEO: It's Ohio probably if you took the Ohio out it's still less than 1% but healthier than almost zero was in '10 and '11.

Operator: Tim Winter, Gabelli & Company.

Tim Winter - Gabelli & Company: Nick I was wondering if you could clarify your comments about the base share earnings for '12 I think you said $1.40 I guess that includes the $0.09 of discontinued and are there any other gains in there. Then what you expect as far as growth in '13 you are expecting growth from the $1.40 level is that correct?

Nicholas DeBenedictis - Chairman, President and CEO: If you want to the $1.40, I'm we've been doing pruning for five years so I felt gap is the best way to measure this. Because how do you take one year versus another, and it's been steady gap for the last five years. Now next year's we'll have Florida hopefully. So having if you want to go off gap yes we are going to grow I believe from the $1.40. I'm not going to give guidance we never give guidance, but we've become predictable in the past and part of it will come from the repair, part of it will come from maybe the sale in Florida, part of it will come from organic. And I'm sort of saying clearly we are not going to stop or go backward. Some people thought this was a one-time. It's not a one-time. And additionally, it's not flat, because there's some issues that will allow it to grow. And it will in my mind definitely grow faster than the need for the dividend which is normally the $0.04, $0.05 dividend. For '12, if you want to go to and take Maine out, Bob I think – or Dave I thought it was - $1.33 was continuing ops.

David P. Smeltzer - EVP and CFO: Continuing ops was $1.32.

Nicholas DeBenedictis - Chairman, President and CEO: $1.32. so if you want to take that out, we'll grow from that if you don't want to count Florida.

Tim Winter - Gabelli & Company: Then if you could talk a little bit about the regulatory treatment of this as far as rate base growth in Pennsylvania, will there be rate base growth? How they look at returns and what have you -- I was just following up on Jonathan, how do you grow?

Nicholas DeBenedictis - Chairman, President and CEO: That's the beauty of the flow-through. We are getting paid for it. It will be in rate base. We are getting paid for it until we go in for our next rate case through the tax flow-through method, and when we go in for our next rate case, that – all that capital we've done and been paid for through the taxes will be on the table for fair return, but we won't probably get the flow-through anymore. That's why I said, it's a real win-win regulatory-wise for the customers, but also for the Company, because we don't want to stop our needed capital program, but in addition, we couldn't afford just to not go in for rates.

Tim Winter - Gabelli & Company: Will there be a one-time rate shock as a result?

Nicholas DeBenedictis - Chairman, President and CEO: No, our projections are that it will not be. Obviously, the disc – you'd have to figure the disc in there, we probably start with the disc, it would probably be in line with our case that we just got, which was 4% Dave?

David P. Smeltzer - EVP and CFO: Right.

Nicholas DeBenedictis - Chairman, President and CEO: Around 4%, so not rate chart.

Tim Winter - Gabelli & Company: So then one more question on that. So the Pennsylvania regulators will likely change the way they treat this in the next case?

Nicholas DeBenedictis - Chairman, President and CEO: I don't know. I can't say for sure, because everybody likes the idea of putting all those capital and then not raising rates. So I don't know how they'll treat it but I gave you in my example a disc followed by a single-digit rate case, the worst case from a rate standpoint. Now again, barring no rapid inflation Tim. I think it was a very unique agreement. It's hard to understand and it took us weeks of negotiation, but I think it was creative on our part and creative on the OCAs part as a win-win for the customers, but also letting the company get paid back for all the capital we're putting in and obviously not filing rate cases which costs money and therefore saves everybody's time and money.

Operator: Stewart Scharf, S&P Capital IQ

Stewart Scharf - S&P Capital IQ: Could you expand a little more on the M&A and is there any the environment and any direction that what types of deals you are looking at, the municipal systems they were just a few out of the 18, is there any trend or what you are targeting just depends on market?

Nicholas DeBenedictis - Chairman, President and CEO: Well, obviously we're concentrating first and initially in the nine states we're in, except for Florida where obviously we're not expanding in Florida, and we're looking at small medium privates. There aren't many large privates other than the 8 or 10 that you know about that are publicly traded and then the municipals. Last year we saw a little uptick in municipal activity. We got, I think three of our deals were municipal deals and that's good, because couple of years in a row that we didn't. I think the growth – there's only, as I mentioned eight of it, so you can calculate as well as I could the chance of an M&A with those, but I think the cities are the biggest pressure mark and opportunity, Steward, going forward. Many of them have come up with unique ideas of never selling and leasing and you get so much money and we're not going to get into in a situation. We get into a negative possibility. Our goal is obviously build and own. In some cases we're looking at like maybe we don't want the whole system but just a piece of it that they want to sell off or maybe a water plant or a waste water plant where they we know how much it will cost effect and they give us a set amount, it's like a contract. So, we're looking at all those different things and we have it now a department – one of our senior executives, Karl Kyriss who used to run Pennsylvania is in charge of that, and I think we owe you a visit or you are going to come down here. We'll get you with him, so he can give you an idea of some of his plans.

Stewart Scharf - S&P Capital IQ: On the efficiency ratio, is there way to quantify the improvement based on solar farms or reduced purchase of water, fuel expenses. Can you break that down?

Nicholas DeBenedictis - Chairman, President and CEO: You were fading out, but you said the O&M ratio and how to qualify it?

Stewart Scharf - S&P Capital IQ: Yeah, the improvement was like 150 basis points, is there a way to breakdown the percentage of where that's coming from? The electricity and fuel expense saving, the reduced purchase of water?

Nicholas DeBenedictis - Chairman, President and CEO: It's interesting, and we will break it down, because it's across the board. A lot of it was in employee benefits which we're still very fair with our employees, but we've changed some of the long term legacy programs and that helped us. We'll break it down the employees' benefits, electric and give you that. I just don't have it right here, but it's across the board.

Stewart Scharf - S&P Capital IQ: Just again on the tax repair, just to clarify, is that continues to be non-GAAP or going forward, are you including it in your guidance or your – but you are looking at when you're comparing it to the $1.33 or $1.40, that just consistently looked at as you are referring to it is GAAP earnings?

Nicholas DeBenedictis - Chairman, President and CEO: Well, it's both in the GAAP from continuing and it's also in the GAAP, it's in both. And it will continue and whether you want to take the continuing, which is $1.32 I think you said Bob, or the $1.40 it will be in those numbers next year and I would anticipate either of those numbers being higher next year. They'll move it parallel I guess is the best way to describe it.

Operator: Spencer Joyce, Hilliard Lyons.

Spencer Joyce - Hilliard Lyons: I'll try to keep it pretty short here for you. First question, I know we're still several months removed, but did Sandy windup having any kind of impact for you guys I guess from a top-line standpoint not necessarily damage or capital spent?

Nicholas DeBenedictis - Chairman, President and CEO: Yeah, I'd say less than a penny. We had some over time, we had lot of diesel fuel used to run generators to keep everything going, but I don't have an exact number, it is $0.05 or…

David P. Smeltzer - EVP and CFO: 350 in Pennsylvania alone.

Nicholas DeBenedictis - Chairman, President and CEO: Okay. So that would be less than a $0.05. That's significant – was noticeable, but I wouldn't say it was significant.

Spencer Joyce - Hilliard Lyons: And also just to clarify, you said most of the capital spend not in Pennsylvania will be focused in the Ohio, Illinois and New Jersey which all are now have a disc or disc eligible, is that correct?

Nicholas DeBenedictis - Chairman, President and CEO: Absolutely.

Spencer Joyce - Hilliard Lyons: As far as a breakout there, I think I picked up you guys were mentioning around 230 spend in PA and then if I'm kind of back in the napkin calculating here that should be about $100 million in capital spend between those three states, is that right?

Nicholas DeBenedictis - Chairman, President and CEO: Not far off. Yeah, all the other states would be $100 million, right, because 230 we're going spend three and a quarter and I'm going to say 10, 20 probably about 70 in those states. We'll get the exact numbers. We have five years of expected spending in each of those states will give you the projections in those states.

Spencer Joyce - Hilliard Lyons: Then one I guess more bigger picture question. You touched on it a little bit pertaining to Aqua capital ventures. I know you mentioned the current program or project is one of hopefully many. I'm assuming there hasn't been any kind of structural decline in the attractiveness of those projects either based on low gases, which are probably always going to be a bit of an issue, but also maybe any sort of increased completion from other firms or companies trying to be creating in that line of business, it still is attractive there. Is that a safe assumption?

Nicholas DeBenedictis - Chairman, President and CEO: Yes, they're still drilling even with gas prices where they are, but you see what happens as soon as you get little cold weather. in New England the gas prices shot up two weeks ago when they had their storm. Electrical prices followed the suite. I know you follow the electric industry Spenser. So, I would anticipate it's not going any lower and they're still drilling, but I think if it goes higher you may see a little bit more intensity in the drilling programs. Either way, we are told now, I mean, remember it was – three years ago, it was a one, two year industry. They are going to get lot of gas immediately and then it would all be over. They are talking now that it could be around for 50 years. So I mean, I don't know which geologists you want to believe, but we are betting on the –we are betting it's going to be around for at least five years.

Operator: Angie Storozynksi, Macquarie.

Angie Storozynksi - Macquarie: I have actually one question and one request. So, for the question, if I look at the $1.42 in earnings - $1.40 in earnings for last year, was there any gains in those discontinued operation portion, so the $0.08 differential between ongoing earnings and GAAP, is there a gain from asset sales there?

Nicholas DeBenedictis - Chairman, President and CEO: Yes. That was the Maine properties which we sold in the first quarter and it amounted to $0.08, and…

Angie Storozynksi - Macquarie: But is that a gain or is this earnings of those properties?

Nicholas DeBenedictis - Chairman, President and CEO: No. it was – I'm sorry, yes, it was a gain. The predominant $0.08 was from the gain on the sale in January of 2013 and '12, and that's why I wanted to make sure that when you look at the '12 first quarter earnings of $0.27 that you understand that $0.08 of that was a one-time gain. Now, it still was profitable. Lot of companies say, oh we have discontinued operations and then you see all kinds of losses. In our case, a discontinued operation is part of our pruning strategy which we only sell if it's profitable. So, I think GAAP for us is probably a better measurement, but we'd give you both. The continuing is $1.32, the GAAP is $1.40, and the difference is the asset sale of Maine in 2012, which hopefully when you do your quarterly looks you'll remember that the $0.08 was in there and not in there this year.

Angie Storozynksi - Macquarie: But I am trying to figure out, because you mentioned that you expect growth from either of the numbers in 2013 assuming inclusive of the Florida sale doesn't mean that the gain from the sale of assets would be the comparable number while the earnings plus the gain on asset sales in Florida would be compared to $1.40 EPS?

Nicholas DeBenedictis - Chairman, President and CEO: Yeah, I think the gain from Florida would be comparable to the $1.40 which included the gain in Maine, did that help? And we anticipate in addition to the gain in Florida, operationally we're going to have input to that $1.40 that will help it increase.

Angie Storozynksi - Macquarie: But Florida on its own is EPS positive without the gain?

Nicholas DeBenedictis - Chairman, President and CEO: Yes. Florida will be EPS – assuming the sales go through we don't have deals signed up yet, but assuming they go through we would anticipate that we'll sell them for bit more than rate base. And by the way rate base is $2.7 billion.

Angie Storozynksi - Macquarie: So, I mean this is of lease hour request, could we going forward have actually a rate base and CapEx schedules maybe not state-by-state but at least for the next say three or five years? It would be so much easier for us to go through the numbers and project your earnings power because I feel like we are going to spill out our notes and I am trying to match the numbers with our model and a couple of slides would make a big difference for us?

Operator: (Hika Dor, Baird)

Hika Dor - Baird: Two quick questions. On the Marcellus opportunity, I believe we had been expecting Phase II to be completed at the end of the year, maybe I'm mixing up my Phase II, Phase III. Can you give us a quick update is that project going as planned? I thought that there was talk of an additional phase to that project, where are we in all of that?

Nicholas DeBenedictis - Chairman, President and CEO: Phase II is done and water is pumping through it. Phase III will be done by March and that was the third phase we had talked about, which extends in another 20 miles north.

Hika Dor - Baird: Is there a Phase IV?

Nicholas DeBenedictis - Chairman, President and CEO: We are looking at maybe a Phase IV.

Hika Dor - Baird: But nothing that…

Nicholas DeBenedictis - Chairman, President and CEO: Phase III is Board approved, PVR's Board approved, it's under construction and the recipient of most of the water for Phase III will be Shale. The earlier phases I and II, II is to get to the river, which is now working and everything is permitted and it's pumping water, and phase I and II combined are Range Resources and Exco I think is the other company's name in Southwest. I mean, all of these companies, Hika, have different areas where they're drilling. So that's why we call it the pipeline phases, but it's just where is it going next and who is drilling there.

Hika Dor - Baird: On the Florida divestiture, I believe I saw something that FGUA wasn't interested in buying all of the assets. Can you share with us if you're planning on piecemealing some of this we're going to see it as one single transaction to a single buyer?

Nicholas DeBenedictis - Chairman, President and CEO: No, I think you're going to see multiple transactions. FGUA is the furthest along. They have signed agreement with us to purchase 56% of the assets. The deal is for $49.2 million.

Hika Dor - Baird: So as we think about how we'll see this on the income statement. We'll see this piece announced as a sale, but then we'll continue to see the earnings stream from the other 44% until buyers can be identified for those systems?

Nicholas DeBenedictis - Chairman, President and CEO: I would anticipate late first quarter, early second quarter close for FGUA and all the rest in the second or third quarter.

Operator: That concludes question-and-answer session. Mr. DeBenedictis at this time I will turn the conference back over to you, for any additional or closing remarks.

Nicholas DeBenedictis - Chairman, President and CEO: Nothing more I think we've covered everything and thank everybody for all their time.

Operator: Ladies and gentlemen this concludes today's conference we thank you for your participation.