Essential Utilities, Inc.

Brian Dingerdissen - Director of Investor Relations Nicholas DeBenedictis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Member of Disclosure Committee, Chairman of Consumers Water Company, Chairman of Pennsylvania Suburban Water Company, Chief Executive Officer of Consumers Water Company and Chief Executive Officer of Pennsylvania Suburban Water Company David P. Smeltzer - Chief Financial Officer, Executive Vice President and Member of Disclosure Committee

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division Leslie Rich - J.P.

Morgan Asset Management, Inc. Heike M.

Doerr - Robert W. Baird & Co.

Incorporated, Research Division Stewart Scharf - S&P Capital IQ Equity Research Timothy M. Winter - Gabelli & Company, Inc.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division Angie Storozynski - Macquarie Research

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 underway to a 14th straight year of consecutive earnings growth.

Net income for the quarter rose to $53.6 million from $41.4 million of -- in 2012. That's 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 '12 that were taken entirely in Q4 '12.

And this year, the tax repair benefits are being spread proportionally over each quarter. Having said that, still a very healthy quarter.

I also want to acknowledge that 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 stock will 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 multiyear program to rationalize our utility portfolio. We have called it pruning, but it's really portfolio rationalization.

Most of the properties we have profitably disposed of. Actually, we're 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 8 years until the final year when we sold them.

And I think the new assets that we're being invested in are running at a higher margin than the ones we've disposed off, so I think that's a very positive. Although O&M does not appear to have risen, well, I'm sure exactly -- 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 onetime 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 taking off the expense line.

While this year's second quarter O&M was just the opposite, adversely affected by a write-off of all the rate case expenses in Texas, the $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% to 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 4 years of subpar growth of 1% or less, first 6 months we've completed 8 system acquisitions, 2 of which were municipal, and are seeing an uptick in organic growth, the first time in about 3 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 '13 from our nonregulated 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 hasn't been for 2 decades, is our continuing substantive investments in our water and wastewater systems in all our states. In the first 6 months, we invested $135 million and still expect to, by year-end, spend $325 million plus, continuing the record of our past 3 years where we've spent that plus, that was 2010, '11 and '12.

The difference is the cash generation from operations for the first 6 months was actually higher than our capital expenditures. $159 million providing a $25 million delta above our CapEx needs for the first 6 months.

This is shifting cash generation, which started in '12 and now continues in '13. 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 1 more debt this year, refinancing some Pennsylvania debt in the 5s. We expect to get into the 4s here, too, in the private placement.

After that we see minimal borrowing and no equity issuance, except for the minimal amount for the -- that we used 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 we should -- 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 -- 2.5x, excuse me, to our 50% 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 our states, except Pennsylvania. This year, we've successfully completed cases in Virginia, Texas and Ohio.

We're implementing DISC 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 and rate cases.

They're coming in through lower effective tax rates. Now this visionary process by Pennsylvania is proving 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 ratepayers 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've been asking for rate cases in '13 in Pennsylvania.

And if you just assume we kept the DISC in place that was in place on 1/1 when we dropped on 12/31 when we eliminated it under the order, the -- 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 DISC would have grown a lot further than that.

But I'm just giving you that as a sort of 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's always difficult rather, we believe earnings could've been affected by as much as $0.02 this quarter.

The management has been spending a great deal of time to finalize 2 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 will occur in '13 or '14, but have provided great detail as to the progress in our Q, and I'll refer you there and we'll answer any questions, obviously, you have. We're pleased to have exceeded the first call by a couple of pennies and are still comfortable with what will be a slightly -- obviously slightly upward revised first call based on this quarter for the year.

Comparisons this year, quarter to quarter, remain difficult, as you all know. From the fact that we took all the tax repairs under the accounting policies when we announced it in the fourth quarter of '12.

And so fourth quarter of '12 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, so we're bringing 1/10 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 enhanced '13's tax benefit over '12, which we've told you that would be more in '13 than '12 but being spread over 4 quarters.

The benefit's currently running 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 '14, 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 Thompson because we'll make up many a drop, I believe, in tax repair through growth in the rest of our regulated and nonregulated operations and continuing our operational efficiency.

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.

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 kind of, I guess, default instituted in Pennsylvania.

And I guess, 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 kind of 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 sort of conditions the ratepayer and the consumer advocate to sort of believe that, that's a new rate reality and maybe that makes it tougher to get the rate increases that presumably you'll ultimately need down the road? Just at a high-level kind of 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 is 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 DISC and also to not file a rate case in '13.

Okay. And is there any update?

I know, obviously, you can't tell us too much about this, but any updated thinking on when you might be able to be back in with your next rate case in Pennsylvania?

At this point, the only commitment we've made is through '13.

Okay. So in other words, it's reasonable to assume there it there could be a rate case filed in '14?

I'm not saying anything until we look at '14.

When you said for 2013, it's $0.10 per share gross for the tax repair. Is that relative to 2012?

Or sort of how does that number relate to the 2012 when you had $0.22?

If you take in 2012 and spread it over the quarters, it would've 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 0 repair tax eligibility because you're not really repairing it, you're expanding it or improving it. So that the -- we've had 2 of the big 4 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 '14 and beyond? Or...

Well, that's a gross number now because, as the previous question from Ryan was, when are you going in for rates? Because your regulatory lag sets in.

It's still in rate base. We're still paying for it.

We still have to borrow a little bit money, not as much as we used to, to keep and maintain it. So you have the regulatory lag from all the investment in Pennsylvania with no rate.

So it's not a just an 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 at this point, we know we're not going into '13.

That's all I can really tell you at this point. Now I hope that clarifies it a little.

I don't want you just adding $0.35 to last year's earnings, though.

And then in the Marcellus, any update there? You said the 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 a delta.

It's not an additional, it's the delta between the $0.35 and $0.40 and the $0.22. Yes.

Basically the drillers are producing out of the wells that they already have. They drilled something like -- they've tested and have permits and have exploratory drills for hundreds more than they're producing out of.

And until they get the market demand and the price up, they're -- 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 pickup in late -- mid-July and through August it's been a steady sales.

So hopefully that -- we're going to see a brighter second half than the first half. I think it's still inevitable.

I mean, 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 at $3.

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

No. We spent most of the CapEx and that's already in the numbers for 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 was expended last year. So this is about $10 million we finished up, it's done.

So it's $10 million this year. We have a couple 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, and unlike a utility business where you're used to quarterly timing to perfection, except for weather.

This one has a competitive market edge to it.

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 2 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, it 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 we'd 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 than $0.02 than $0.04. I think it's all delayed now 1 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.

It's just that they need sales and almost every electric generator is talking about building gas. So it's going to be demand driven in the electric industry alone, let alone the automobiles, which you're going to see, and generally everything else.

But you need the pipes to get it out.

And who are your major customers?

Range, EXCO's another one, Shell. There's one other one, Southwest, yes.

They're the 4 that has been taking water this year.

Okay. And you provide water to all 4?

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 necessary approvals for right of way?

Right now we're not proceeding with buying the full rail. We're talking to a rail operator who may buy it and then will work on the right of way.

The thing we wanted out of it was not to be in the railway business. We wanted to be -- to have access to a right of way along the rail line.

That's still a possibility, but we're not -- we've decided not to buy the railroad to get it.

And now is that $3 million, that was if you had bought the whole railway?

No. The big cost though, Heike, was not the $3 million to buy it, it was the x million dollars to fix it because you have to have repairs.

And we just decided that until Marcellus now, and there it would be not Marcellus, but Utica. Until Utica really took off, which -- it's where Pennsylvania was 2, 3 years ago that there was no need to run a railroad for 2 or 3 years while you waited for the pipeline.

That was the decision we made just in the last month.

Okay. And a final question on this repair tax that we're all struggling to understand.

Can you kind of talk us through how we should think about the seasonality of this? The -- 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 4 quarters. But now it sounds like you're saying that seasonality, we'll see some swings.

Well, the reason there was a swing is we do more -- you have to book the tax when you do the capital. And also, your projects in any 1 quarter could be more eligible or not eligible.

So it's very difficult. I wouldn't call it weather seasonality other than the fact that it's easier to construct capital during the springtime, in summertime than in the fall and then 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 may be 30% eligible, a water plant might be 15% eligible and until the accounting firms look at it and say, "This is the number," that's where 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?

Well, yes. In conjunction with Nick's comments relative to the different deductibilities of project, we do look at it on an annual basis and calculate our effective tax rate, right?

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 -- the 2014 benefit would be lower than the 2013 benefit?

Yes. I think slightly.

I mean now, 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 that to get the investment in Pennsylvania, 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 the effective tax rate difference because we're not eliminating capital expenditure and calling it "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 -- why would you cut capital? Well, because there's too much lag.

Well, at that point, you're going 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 because if you don't spend the capital, you don't get the tax repair.

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

Well, 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 about 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're 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 areas in the southeastern Pennsylvania basically fill in. North Carolina has had a tough economy.

They're still in the 10% unemployment. So I think that's a future hope for us if that's going to start up again especially with the retirees go towards the North Carolina versus all the way to Florida.

And then Ohio, surprisingly, is strong. 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 strength in Ohio than we have seen over the last 3 or 4 years.

Okay. And did you say the weather effect was roughly 2% -- $0.02 impact in the quarter or -- and how much was it?

I think, was it mostly, I guess, June, the heavy rain month?

Yes. It was mainly rain because we figured the structural decline as steady state.

But the -- but it is part of why revenues dropped year-over-year. But the weather, we think, was the $0.02 impact based on the fact that what sales used to be adjusted for the structural decline in the past than what they were in this time.

And the only thing we could attribute that to was the record amount of rain, so people are not watering their lawns. Well, we haven't had a great July, either, but hopefully August will turn around, but if you're hearing that from all the water companies who are reporting.

Okay. And could you just spend a little more on your borrowing strategy, rates are low and your return on equity?

As well on the 10% to 11% range that you might be paying that and what you're looking to sort of maintain the very low rates for borrowing, and now planning to borrow as much and refinancing, bonds and so forth. Just can you explain the strategy a little more?

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.

Let's see, this year, it would be -- it will be $84 million, $85 million comes due And remember where interest rates used to be back then. 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 in 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 I'm 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% over, so I mean, that's a very simplistic way of looking at it. That's where we were for 10 years.

And now that borrowing is probably -- and that's including for the dividend, and that borrowing now is maybe $10 million to $20 million a year. So it's a much lower demand.

We think interest rates stayed lower than they used to be, and not maybe as low as they are today. So the impact on future performance 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 '90s and 2000s. We were diluting probably in the range of 3% to 5% a year.

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

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 the S&P rating of A+, which ranks us second or third out of all the utilities rated by S&P. And everything is leaning towards getting stronger versus weaker is maybe another way to characterize it.

I was wondering if you could talk a little bit more about the strengthening financial position and cash flow generation. I guess, maybe first question would be what kind of cash are you expecting from these 2 pending sales?

And then longer term, are you rethinking the dividend policy, the payout ratio, may be a special dividend at the end of the year? Or share repurchase, but your stocks trade in at 3.5x booked.

Equity ratio, you already got the A+ credit rating. Just what's your thought processes there?

Well, but you're pretty astute. The -- obviously, the equity ratio, we don't want to go higher than what we are getting in rates.

So definitely is one that you can always moderate by giving it away to shareholders as dividends, right? The part about the cash coming in from the 2 big sales probably between $75 million and $100 million.

I'm not counting that in the numbers that I gave you in the press release. The $25-or-so million looks like it holds this year, probably next, in a 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. No our 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 5-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 may be, like, leaving a special dividend at the end of every year or something of that nature?

Well, it's a board discussion. And we've been always more to the consistency.

I think a lot of our investors, especially the 55% for the retail. I mean, 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%. I would rather have that kind of, me personally, the board makes the decision, I'd rather have that kind of consistency to be predictable in the model then to give it all away at 1 time and then maybe not be able to afford it the following year.

We are very comfortable saying there'd be no reason why the board couldn't continue at its current policy over the coming years. Based on what we're seeing with our cash flows and our balance sheet, 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, how do you address the ability to do that should you file for another rate case in Pennsylvania?

Is there any rate for that?

Well, no, I think the next rate case should -- the repair tax stays. Most utilities are taking a 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 until late -- was it late '11, Dave, or early...

December '11.

December of '11.

Temporary rates.

And then they came out with electric, and 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 4 that's 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 4, 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 that PUC gave us was if you are allowed to flow through the benefits and avoid rate increases, you can't raise rates.

So that's what we did. We only committed to 1 year, i.e., what Ryan's question was.

If it still works, we'll do it in '14. And when it stops working, we have to go in for a rate case.

So if we went for 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 we're -- our depreciation is already included in rates, a lot of it.

So it just shifts the whole mechanism, but 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 a different way is getting.

Right now, we're on electric. They're getting the benefit of the cash, but are just treating it differently in the way they're getting the rate base.

Did that help a little bit?

Not to belabor the repair tax. I mean, we'll see a DISC before you go in for rates formally.

So that would be almost like a precursor and we -- or a warning sign to get ready. Okay.

Exactly. Because we've build up enough DISC eligible capital.

But we -- just like if we had not taken the repair, Gerry, our DISC would probably be close to 5% right now.

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. As long as cash and profits are coming in, there's the rationale to file for rate case.

I mean, that's the comparison. It's balancing a that when it's time, you would go in for rates.

But in the meantime, you've avoided all this rate increase for all the capital that you've done. So I think it's pretty visionary.

I realized 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 2 accounting firms.

I believe it's -- I'm a utility analyst. Sometimes, getting outside that box is challenging for me.

Now and then one other question on the Marcellus. I know the assets, the pipeline is a good asset when drilling is more active.

But I mean, the one, I guess, negative thought I've had on it was Aqua America is known for consistency in earnings. And then you're moving into a business that is less than consistent, if not rife with volatility.

I mean, is this a business that you still want to stay in longer term? I mean, it's a good asset but maybe now you see it developing, you take a look back at things and say, "Hey, maybe this isn't exactly what we want to be in."

Any thoughts on that front?

Well, of course, all the investments have been made other than starting a whole new line. The run rate -- the consistency in earnings, I agree with you, it's not traditional the way we do things.

On the other hand, on a dollar, I guess, first call's $1.40 something and we're talking last year, it was a $0.01. So I mean, if we went away, it's not killing us on the consistency.

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 1 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, yes, so -- and I don't see it really hurting our consistency in 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.

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

I wanted to go back to that repair tax accounting because I do cover a lot of utilities and many of them actually do have this tax treatment in play. Now utilities is a cost plus business, right?

So if you go through a rate case, right, and you pass the -- 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'll retain that benefit for the foreseeable future regardless of rate cases.

Did you get it? I don't understand the question yet.

The -- yes, when Nick said we will 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, right?

So from that perspective, just as today, we're giving some of it back to customers through not filing a DISC 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. But at the time we file that rate case, we'll also trade that off for a recovery of a return on all the capital we've 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 were to file a DISC -- for a DISC in '14, what happens to the repair tax reduction in '14?

If we do file a DISC, did you say?

Yes, yes. If you do.

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

What would impact the repair deduction would be the completion of the 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 that next revenue requirement calculation.

Okay. And then separately, I might have missed that.

The assets that are being sold, were they -- would they be actually earnings accretive this year? So if you're excluding them as discontinued ops, would've -- they would have had a positive EPS contribution this quarter?

Yes. The assets that are being sold, our remaining assets in Florida, were our key profitable asset in Florida, and certainly, that would've had a contribution.

And the assets in Indiana certainly make a contribution, as well. So whether you're speaking of a contribution from a continuing operations perspective or you're speaking of whether we are going to get to 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 those asset -- that the assets sales actually contribute to you on your earnings?

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

Just talk to 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 DISC in Illinois.

We're in our third of 4 phases on a DISC in our Ohio operations. And we just filed for a -- 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 is 3, 6, 9, 12. We're on 9 in one of our Ohio operations and we're on 3 on the American.

We also intend to file a statewide case in Ohio for all but the 2 facilities that are locally negotiated rates, which are Struthers and Stark, where we've got a 4.75% rate increase in 1 and 3, I think, earlier this year and the others. So those are in a multiyear plan.

Almost like a SIC.

That statewide Ohio case, you expect to file before year-end?

Yes. We're filing -- we just filed a small wastewater 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 good a DISC in North Carolina.

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. And first of all, we do not have SIC risk, 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 the legislation and talking to the regulators, the ICC.

Regarding legislation, or I think, it's more interpretation of policy. You've heard the presentations we've given at the [indiscernible].

The way that the staff in some states calculate the drop in consumption has tended to be averaging at over the past if you have a declining consumption any average is bad, right? So we're trying to find new ways of getting realistic future test year, addressing projected revenues 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, oh, New Jersey.

And 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 in rates out of the system. And as you know, some of their accounting isn't always as perfect as the PUCs would want them and they have to take their books and readjust them.

I think that's about it.

I appreciate everybody's understanding. I know it's difficult in some of these new accounting -- new ways of accounting policies.

Of course, they're not new. But I think I'd like to restress it was a pretty good quarter and appreciate your listening.

Thank you.