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Aqua America (NYSE:WTR)

Q3 2013 Earnings Call

November 08, 2013 11:00 am ET

Executives

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

Analysts

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Stewart Scharf - S&P Capital IQ Equity Research

Operator

Good day, and welcome to the Aqua America Incorporated Third Quarter 2013 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bryan Dingerdissen, Director of Investor Relations. Please go ahead, sir.

Brian Dingerdissen

Thank you. Good morning, everyone. Thank you for joining us for Aqua America's Third Quarter 2013 Earnings Conference Call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com or by calling Fred Martino at (610) 645-1196. There will also be a webcast of this event available on our site.

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America; along with the 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 up the call for questions.

Nicholas DeBenedictis

Thanks, Brian. Good morning, everyone. Despite weather challenges this quarter, Aqua generated another record quarter thanks to the efficiency of our operating model and our meaningful capital investment program. We should produce our 14th straight year of income growth this year. And equally important is internally generated cash is now in excess of our increasing capital investment in needed infrastructure.

As a result of our strong earnings and financial position, during the quarter, we enacted our previously announced 9% dividend increase. This is our 23rd in 22 years and our seventh stock split in the last 20 years in the form of a 5-for-4. So therefore, all per share numbers I'll be using today are adjusted for that split. One other note: Even with our aggressive dividend program, which has averaged between 6.5% and 7% CAGR over the 20 years since I've been CEO, our payout ratio is still well below our stated target of 60% to 70% of earnings. Now I'd like to provide some details on the quarter's results and strategic activities we have in place to maintain and grow on our industry-leading positions in operating efficiency, financial strength and our string of increasing profits.

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

The quarter's unusual revenue decline is the fact that the recovery of capital investment in Pennsylvania is now taking place through our flow-through of repair tax deduction and, therefore, not normal revenue growth through rates. And that's, of course, also depressing the revenue stream, not the profit stream. So basically, our growth was about 1.2% between acquisitions and rates and surcharges and about 6% loss on consumption from our normal numbers of last year. And therefore, we had a 4.8% drop in revenues.

Now to address the drivers behind the positive net income results, let me start with a status report on our customer growth and portfolio rationalization program. Through the end of September, we did 9 acquisitions and grew customer base by 1.1%. This included 4 in Pennsylvania, 3 in North Carolina and 2 in Virginia. So you can see all our states are working on this growth-through-acquisition strategy. We do anticipate we'll pick up in the activity in the fourth quarter, and we project closing a total of 14 acquisitions by the end of 2013.

We're seeing some positive trend in organic growth this year, and to date, we've added 5,000 customers just through organic growth as compared to about 3,500 through the third quarter of last year. So we're projecting a plus of 1% this year, whereas in the past couple of years, we had not hit that 1%. It was from '09 through '12. We had pretty flat, just under 1%, but we're projecting, for this year, closing in on closer to 1.5%.

Now management is also dedicating a great deal of time working on 2 transactions that are important to the completion of our portfolio rationalization program, we called it the pruning program initially, that began in 2011. It's been a real reshuffling with the trades with American Water and had some actual pruning of some states that were not making any money for us. It's now -- it'll be 3 years to completion, but we have 2 left. One is Sarasota, Florida in early September. The county commissioners did vote to move forward with the purchase of our water and wastewater operations. This purchase is scheduled to close late in '13 or early in '14 for a price of $36.8 million, and once the deal is complete, we'll conclude our presence in Florida. And although we really never earned a operating profit until we went discontinued in Florida, we will exit the state with a gain on the sale of an asset. And that will affect, hopefully, our fourth quarter numbers a little bit. And we'll talk about that later in the call.

Second transaction is in Fort Wayne, Indiana. At this point, we've signed a letter of intent with the city to sell our water operations, not our wastewater, to them for a price of $50 million in addition to the $16.9 million that has already been paid, so a total of $69 million -- $67 million. The letter states that we will also obtain wastewater treatment flows from the city. So we will be expanding our wastewater operation there under the current plan. Now this transaction will require numerous local and state approvals, and at this point, we're projecting that the transaction will not close until the summer of '14. And you can find more detailed information on these transactions in our 10-Q.

Although the nonregulated portion of our business remains small at 2% of our revenues, there was a significant event that I'd like to talk about that occurred in October. Our partner in a joint venture pipeline, PVR Partners, will be merging with Regency Energy Partners LP out of Texas. And this will basically triple the size of the company and give the new company a lot more capital base for the needed infrastructure expansion that's occurring in the Marcellus region in Pennsylvania and Ohio and West Virginia. I contacted the respective CEOs, and I am very comfortable that our Marcellus Shale business opportunities will continue well into the future.

Now as previously reported, the first 9 months of '13 have shown sluggish Marcellus well drilling activity due to low gas prices. There is really restrictive infrastructure. They can't get the gas out, and that's ironic because the wells that are -- have been drilled are actually producing more gas than had been anticipated. So I guess it's a blessing in disguise long term, but short term, it's provided some temporary setbacks.

Now activity in the third quarter did pick up from the presentation I made a quarter ago, and the joint venture did yield an EBITDA of $1.3 million of cash. Development is expected to occur in '14 in the completion of additional infrastructure to handle Marcellus gas to get the gas out. We're starting to see direct lines going into New York City and south to Baltimore and Philadelphia.

We expect the pipeline project that we have already invested in to see improved performance in '14 and beyond. We remain committed to the project and believe our water source, due to its reliability and lower cost, is the water that will be used when frac-ing picks up again.

Now let me turn our -- to our capital program, which is also driving growth. Through September 30, Aqua has invested $216 million towards our $325-million-plus capital budget. To date, spending is on track according to our budget, and we expect to end the year plus or minus 2% or between $5 million to $10 million of our goal, up or down. The detailed professional management of our capital program is something that I'm very, very happy with and is crucial as we time capital-driven rate proceedings in New Jersey, Illinois, Ohio, North Carolina, Virginia. And also we now have DISC programs with the recent addition of North Carolina and New Jersey.

We now have surcharge programs in all our states except Texas and Virginia, and we're currently working with the ICC and Texas PUC, which will be our new regulator to explore such "state of the art" regulatory programs can be adopted in those states. The timing of infrastructure capital investments is crucial to maximize the effectiveness of all these surcharge programs. So it's not just building it. It's how you time your use of capital and your filings.

Since the beginning of the tax repair flow-through program in Pennsylvania, and that was the result of the Pennsylvania PUC June 2012 rate order, we've managed our capital budget in Pennsylvania at a very detailed level, in line with regulatory expectations. With the additional filter now of repair tax qualifications, such as certain larger main replacement service lines, hydrant installations and so on, certain aspects of our capital program are eligible. Others aren't. And we're trying to, obviously, maximize the use of the program for the benefit of our customers and our shareholders.

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

From our customer's perspective, the Pennsylvania mechanism is also working very well. Our DISC surcharge, had we not adopted this tax flow, would have been over 7% this quarter, so our rates would have been 7% higher. And that would have brought in $30 million in revenue. Now we're getting the profits through the tax flow lines, so in the comparison of revenue growth, that $30 million would have been in the -- in those numbers this quarter had we had a traditional DISC. But we would have had higher rates, too, which I'm sure our customers are happier having work done and not have to pay higher rates.

As we continue to earn a fair return in a number of our jurisdictions, we have entered what I'll call the post-Aqua source era, for those of you who followed us for a while, where the need for the large catch-up rate cases is now over, and it's lessening our exposure, therefore, to unfavorable rates rulings, such as the one we had in Florida about 3 or 4 years ago.

As discussed earlier, the repair tax election enabled the company to stay out of rates in Pennsylvania, and it's actually allowed us to reduce rates for our Pennsylvania customers because we eliminated a 2.8% surcharge when we started the program. In 2013, the company has -- we're still active in rates in every state but Pennsylvania, and 2013, the company's already received rate awards and infrastructure surcharges in New Jersey, Texas, Illinois, Ohio and Virginia and is estimated to increase its annual revenues by about $12 million. And the company has $10.4 million of rate proceedings pending, as we speak, in Virginia, North Carolina, Texas and New Jersey. And additionally, Aqua America state subsidiaries are expected to see rate relief by following requests in surcharges of approximately $7.7 million by the end of the year. So you can see we're still very busy outside of Pennsylvania, building and getting fair return on that through surcharges and needed rate cases.

The company continues to get stronger financially by every metric. We're now generating more cash than we need to spend for our expanding capital program, which is a first time for us, at least since I've been here. It turned in 2012, and we'll continue in '13 and '14. The cash flow from operations exceeded, in my memory, the first time in '12, and that delta will actually grow a little in '13 especially with the sale of the Sarasota and Fort Wayne.

As a matter of fact, we intend to reduce the dilution, which is current -- we don't see any -- because of the cash, obviously, we see reduced financing activities needed as we move forward. That means slower growth in interest costs to almost 0 and no new equity needs. Now we haven't had any equity or major dilution for years, over 5, 6 years, even though we've increased our capital program, expanded it greatly. We intend to reduce the current dilution, which is now over 1%. That's a result of our DRIP programs for our shareholder purchase programs, where our shareholders can buy the stock without going through a broker and many do, and then the employee stock distribution programs, either options or the employee stock purchase plan. That creates about a 1% dilution. As of December 1, we have converted our DRIP program from original issue shares to market shares that we're buying back, so ensures no further dilution from the DRIP. And that was about half of the 1%. Also, at our last board meeting, our previously approved share repurchase plan, which had had no activity for a number of years, was reapproved, providing the company the opportunity to purchase about 700,000 shares of stock on the open market as management deems it appropriate.

And the biggest reason for our new cash surplus is the fact that in 2010 and '11, due to federal policies and state policies on bonus tax depreciation, we were able to generate -- or grow our cash position. In those 2 years, we didn't actually surpass what we were spending, but then we accumulated the tax losses, which grew substantially in 2012 due to the repair tax deductions. At present, the use of our NOL is expected to last until 2017, and that provides, for the next 3, 4 years, additional cash for our expanded infrastructure rehabilitation program, again, without having to worry about floating new debt and new equity.

Our debt position. Standard & Poor's reiterated our A+ credit rating in September. Out of all 227 electric gas and water utilities rated by the Standard & Poor's, only one utility has a higher rating than Aqua Pennsylvania. Over the years, we've worked diligently to drive down our borrowing costs, and I'm proud to say that we project our weighted average cost of fixed long-term debt to be below 5% by year end, which we believe is the lowest in the utility space. Keeping our borrowing rate low has helped control interest expenses, beneficial, obviously, both to our customers and shareholders.

Further reinforcing what it means to have good ratings like this, our Pennsylvania subsidiary closed on an issuance of $75 million of first mortgage bonds, $25 million at 4.39% and the average maturity about 28 years, so pretty long-term debt at 4.3% -- 4.39%, excuse me. Now we used the proceeds to refinance some higher coupon bonds in the 5s, pay down short-term debt and, obviously, to pay the cost of issuance, which was minor in this case.

Aqua management is especially proud of our ability to continue to be the industry leader in profit margins and efficiency of operations. This, of course, goes a long way into our good numbers. O&M expense control has been very important. As you know, we stressed it over a decade and is treated in our company as such in internal meetings or regular financial reviews and even in our compensation structure. This focus has allowed us to achieve the lowest O&M ratio in the industry while maintaining a very competitive level of O&M expenses per customer, which is what counts with the regulators. During this period of minimal rate activity, we're placing even more emphasis in this area, and we expect our continued ability to hold down expense increases to be a key driver in our results over the next couple of years. As an example, we controlled our growth in O&M expenses this quarter to just 1.1%, and if you assume we -- or if you acknowledge that we had 1.1% customer growth, you really adjusted for that, O&M growth was 0. In 3 of our states, O&M expense was actually down from last year, New Jersey, Ohio and Illinois. And I'm sure that'll be well received when we present these results in upcoming rate proceedings because it'll mean that the rate request will be almost entirely for capital, which is beneficial to both the shareholders and the customer.

One of these expense-saving initiatives is our electric demand response to ensure lower energy costs during peak use periods. So rather than paying up when it's -- energy is tight, we actually pay down because we turn on our alternate generators and also some peak shaving and pump deduces and so on. Very, very engineering driven program operationally, and we actually were selected as the winner of the NAWC Management Innovation Award this year at our industry conference due to the program we put to side -- put on due to electric demand response. Now this complements the solar power investments we made a year or 2 ago that now power 4 of our water plants. And obviously, the capital is being recovered, but the cost is 0 when you're dealing with the cost of power versus buying it.

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

Labor, of course, is our biggest cost. Our labor and benefits are the biggest costs in our operating expenses. We had 5 labor negotiations to complete this year. All are now completed. There was no work stoppage. We were able to obtain what we needed in the way of flexibility in our health care programs. Our pension programs reinforce the fact that all new employees are no longer have an OPEB or a defined benefit pension plan, which we started back in the mid-2000s. And the settlement, the labor contracts, the shortest contract was 2 years. That's our biggest union here in Pennsylvania, and that was 1.5% and -- no, 1%. And let me make sure I have this right. Pennsylvania was 1% and 2.15%, and the other 4 were all multi-year, 4-year contracts at 2% a year. So we're very pleased. We think it was a fair agreement, and of course, our workforce is why we're as efficient and productive as we are.

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

Purchasing. Interesting that as we continue to grow and now prune, we now have established organizations in each of the states, a lot of the presidents are new and the staff is -- a lot of the new staff has been hired over the last 5 years. And we've really grown from a single-state operation when we were [indiscernible] suburban to our current footprint, which is in 9 states. And we had never have centralized our purchasing. We're currently in the early stages of an initiative to take care or take advantage of our buying power and purchase more of the products and supplies we need on a national contract. We see considerable savings when we do that.

We also set up a program for operational, and that is our Aqua tab program where our operations team is in the midst of a rollout of tablet devices for our field employees. While our field people will have tablets, we'll move -- it'll include movement of paper-based work orders and time-consuming and costly to electronic work orders, replacement of more expensive laptops for cheaper, more user-friendly tablets and will result in better reporting of the work that we do in operations, customer base, maintenance on our assets, et cetera, and regulatory work. And of course, it gives management a whole new analysis potential as you look at all the statistics.

We're really trying to liken ourselves to the FedEx and UPS operational model. Obviously, we're about 1/100th the size of them. It's the idea we got from them, and we're trying to adopt it here.

All these programs were made possible by the upgrading we made over the last 2 years in our IS Systems. W believe we have "state of the art" systems. Obviously, it meets all the SOX and accounting requirements, but we've been able to utilize these systems by minor modifications in order to do the purchasing work and the work we're doing now with the operational tracking. All this is done well under $10 million. So it's not a huge cost to get these efficiencies.

It's been a little lengthy and a little granular, but I want to tell you why we're proud of these numbers. Had the weather cooperated a little bit, it would have been a blow out quarter, obviously.

We did exceed first call by $0.01 in the third quarter, and we are comfortable with your first call estimates for the fourth quarter and for the full year. I want to remind you that next year's -- next quarter's comparison of '12 to '13 will not be as positive as the first 3 quarters have been because last year, we took the entire year's repair tax credits in the fourth quarter, and that was about $0.18 post split. And although this year, with all the enhancements we've made in the efficiency in our capital program, we're probably close to double the benefit of the flow-through because of catch-up and the efficiencies. It's been spread over 4 quarters. So we're not going to able to match an $0.18 quarter last time. But you've all picked that up in your first call estimates, your earnings estimates, so I'm comfortable, if you just stick with what you've seen in there. But I wanted to make sure there's no surprises next quarter.

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

We've looked back and over the past 14 years, we've had a CAGR of over 10%, whether you do a 5-year, 10-year, 15-year, or 20-year look-back, the net income CAGRs have always exceeded the 10%. I think if we're able to perform well in this quarter and do the Sarasota sale, we'll see that same net income expansion this year. And we're hopeful for next year. And we think that with a return to some weather, it makes -- reasonable weather, it makes that achievable.

Stop there and answer any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to Jonathan Reeder with Wells Fargo.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Nick, just kind of one question for you. You touched on a lot of my other questions already, but where do you see next year's CapEx budget coming in? I know previously you outlined about $300 million annually from '14 through '17. Is that still accurate, that you kind of see CapEx decreasing assuming the bonus depreciation is not extended?

Nicholas DeBenedictis

Well, the budget appreciation, we're not calculating in our current numbers, but where I gave you those cash numbers and so on. The 50% is supposed to expire, David, that's correct, at the end of this year. And unless there's a macro deal in Washington, of course, the worst case, as you know, Jonathan, is don't do anything and then 9 months into the year, they do it retroactively, and so -- but our capital budget next year should be consistent with this year. It's a run rate of -- we want -- I think the timing and the capacity, companies do it right. We don't want to get ahead of ourselves in making sure everything we do is going to last 100 years. So I'm comfortable with if you want to use in your model about same as this year. We gave you $325 million plus. It could be as much as $340 million. It could be as low as $315 million this year, depending on how much closes by the end of the year, and that depends on weather and everything else. If it stays warm through December, you can pave some streets and close them. But if you can't, it flows into next year.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. So kind of $315 million to $340 million next year is fair for the CapEx budget?

Nicholas DeBenedictis

Absolutely.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

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

Nicholas DeBenedictis

Well, all of the above. I mean, and since it's a situation we've never had before, now we still have a healthy dividend and that has to be paid, sent over -- the cash is compared to CapEx, but we still have to dip in and pay the dividend. But of course, your buyback could actually be accretive because we pay such a healthy dividend the same sense, cash wise. So if we're going to put it in the bank and keep it as cash, you're not going to get any interest on it versus you're paying almost 2% or whatever our yield is right now on the stock pretax [indiscernible]

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

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

Nicholas DeBenedictis

Yes. I would say my personal, and this is a board decision, my personal feeling is that dividend reward is, especially for a utility that's trading above book, is a better thing for the shareholders because it's immediate and ongoing. And it's real cash coming at you. It is a better way to go. But the board will make that decision. And I don't want to imply that 700,000 shares that we've activated to -- for buyback is really for a major buyback program. We have 175 million shares outstanding. It's really to fine tune any dilution from option exercises or if there's a huge buying of our employees, which has never been -- it's pretty steady on the employee stock purchase plan.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Right. So are you...

Nicholas DeBenedictis

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

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. From an external use of the cash, external growth opportunities, anything you're seeing there, any pickup in terms of deploying that in an efficient manner?

Nicholas DeBenedictis

Well, the -- I think our capital budget does not include any acquisitions or any nonregulated. Not the nonregulated has actually, after we -- our initial investments, actually thrown off cash. So it not an -- there's no demand. If we get into a second pipeline, that would be use of it. Acquisitions would be a use of it. So yes, that would be our first, I think, growth area [ph] will be our first call on it. But we don't budget that because we've never had a trouble -- first, it's hard to estimate, and second of all, with our A+ rating, we can get money right away if we need it.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Right. Are there any near-term opportunities that you're kind of getting excited about that would be substantial?

Nicholas DeBenedictis

Well, we have a good pipeline in the 9 states we're in. I mean, we're every day out knocking on doors, and we'll do 4 or 5 in the next quarter, and we'll probably do 15 to 20 again next year. We'd like to see some bigger ones, but they come when they come.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

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

Nicholas DeBenedictis

Yes, our goal is to get back to -- close to where we were in the mid-2000s when we were averaging 3% to 4% growth a year, which is probably triple what the old electric growth used to be. It's probably now infinity because there's not much growth in the electrics, and there has been -- as I remember back, there hasn't been great growth in most of the other water companies. We were doing most of the small system acquisitions. Now everybody's looking at it, and we all are chasing the same ones if we're in the same state. But I think with organic growth coming back, that hustle factor that we provide, we're hoping to get from below 1 where we've been for 3, 4 years. And that's depressed earnings, obviously, and made us more dependent on rates. We're hoping that we can get that up -- closer to the 3% to 4% where we've been.

Operator

[Operator Instructions] And we'll go to Stewart Scharf with S&P Capital.

Stewart Scharf - S&P Capital IQ Equity Research

First, regarding weather, as you go into the fourth quarter, rainfall has been below normal levels, but I assume that would have less effect based on the season or what we would expect to continue to see...

Nicholas DeBenedictis

Stewart, you're not coming through on the -- on our speaker.

Stewart Scharf - S&P Capital IQ Equity Research

Can you hear me?

Nicholas DeBenedictis

That's better, yes.

Stewart Scharf - S&P Capital IQ Equity Research

Okay, a loose wire I guess. So just regarding the low average rainfall so far this month, does it have much of an impact in this quarter based that it's not the typical spring season? People would [indiscernible] ...

Nicholas DeBenedictis

No, we can -- you can absorb a little bit of extra rain, but it was like we had it -- almost a year's rain in the first -- in the summer of this year. We usually get to 35 to 40, and we almost had -- I think we had 27 in the summertime this year. So this is just -- this was absolutely, I think, an abnormal year. I don't know how the other companies were reacting unless it was all just in Pennsylvania and South Jersey. But we were a little less affected by weather in the Midwest, although we had a terrible second quarter, but the third quarter was just slightly below 1%, 2%. And Texas had a blowout year. They're continuing to have dry, arid weather. So it's what the portfolio being a little diverse helps us with. But I would say the fourth quarter shouldn't be any negative surprise, at least from what we're seeing through October. That's why I was comfortable with all the first fall estimates.

Stewart Scharf - S&P Capital IQ Equity Research

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

Nicholas DeBenedictis

No, we're where we want to be now. Now if there's somebody who wants to do a trade and it makes sense, we would definitely look at that. But at this point, every one of our states, other than North Carolina, is doing very well with its ROEs. We're investing money. We have surcharges in every state, except for one is being adopted in North Carolina but every one except for Virginia and Texas. So we have the mechanisms to invest the capital and be able to get the non-regulatory lag recovery that you need if you're going to be a huge investor of capital. And of course, Pennsylvania has always been a state that this is at the forefront of unique regulatory mechanisms that help everybody. And that's what we see in those flow-through tax repair issue.

Stewart Scharf - S&P Capital IQ Equity Research

Okay. And [indiscernible] ...

Nicholas DeBenedictis

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

Stewart Scharf - S&P Capital IQ Equity Research

Okay. And when you [indiscernible] . Could you hear me?

Nicholas DeBenedictis

Yes.

Stewart Scharf - S&P Capital IQ Equity Research

Okay, it seems like there's a loose [Audio Gap]. Regarding the repair tax and the -- when you go back in for rates, would that be the normal 9-, 12-month lag? Or will it be a longer lag just based on the transition between the end of the repair tax and implementing the rate hike?

Nicholas DeBenedictis

That's an excellent question because the timing of our next -- and of course, it's only in Pennsylvania. The other 8 states are normal DISCs. If you have it and then when you -- your ROEs start deteriorating, you're going for a rate case, and by keeping expenses down in all these states, which we've been able to do, the rate request is less, but the shareholder doesn't get hurt because you only really get your benefit from the capital investment, and the operating expenses are just passed through as our interest. So in Pennsylvania now, that whole thing is flipped because we're not getting rates. We're getting it through the flow-through of the tax benefit. And in Pennsylvania, our first step would be to enact a DISC because we, obviously, are eligible. So all the capital we're doing is not deferred. It's going into rate base, so it's building rate base. It's just that the revenue coming in through the tax line is -- I call it revenue, but it's probably not technically correct. But the net income, the money coming in through the tax line is replacing what we would have asked for in rates. The minute our earnings go down to a point where there is a lag, your point, we would first initiate a DISC. That would be -- could be as much a 7.5. At which point, then you would file a rate case, but it would eliminate that lag. And that was all part of the thinking of the OCA and PUC when they did the order. They asked us to stay out of -- to eliminate our DISC in '13 and to not file a rate case in '13. We, obviously, have lived up to that and plan not to do anything probably for another year.

Stewart Scharf - S&P Capital IQ Equity Research

And regarding the grant for the CNG, what percent of the cost grant covers the cost for CNG?

Nicholas DeBenedictis

That was I think 30% of the slow fill . These are not expensive. What we're doing, Stewart, is putting these -- and this could be adaptable to homes even if the car manufacturers want to push CNG. Right now, there are very few gas stations that you could pull up to and, in 1.5 minutes, get your tank filled with compressed natural gas because they're expensive. It's high-pressurized device, maybe $1 million and so on. But there's a very inexpensive and very -- not very complicated slow fill where you push the gas into your tank, and it compresses while it's being put into the tank. But it takes an hour or so to fill your tank. Although no consumers going to wait an hour at a gas station. But for us, we bring our fleet back every night. It sits idle for 7, 8 hours, so we have plenty of time, downtime to fill the tank up. The $85,000 was -- let's see, this was for -- oh no, this is for purchase of new vans. A van's difference is about 28,000 for traditional gas fuel demand and high 30s for compressed natural gas until they start manufacturing them in numbers that they can bring the price down because, I mean, the extra tankage in the vehicle can't cost $10,000. But in order to get some first movers, the state has these grant programs, which we're taking advantage of. And they like the fact that a company like of our size and reputation is seeing CNG as a future. Did I answer your question?

Stewart Scharf - S&P Capital IQ Equity Research

Yes. And just a couple of quick ones. On the organic growth and acquisitions, is that a normal mix you're looking at were about 50-50 organic and acquisitions for additional customers? And just regarding the shale lease, still looking at the same of doubling of earnings over the next year?

Nicholas DeBenedictis

Yes. I would say up to 2%, 2.5%, it would be pretty equal organic and acquisitions. If we can exceed 2.5%, get up to 3%, 3.5% growth, the delta will probably come from acquisitions. It would mean we have to do more acquisitions. The -- where we're growing organically fast is in North Carolina and in Texas and certain parts of the suburbs of Philadelphia. I mean, it's not that -- I don't think the country's population is growing 1.5%. I mean, for us to think we're going to grow that much faster than the country's population. But we are in better areas of certain states, and they do grow faster. Your second question was on Marcellus. If a deal comes up that makes sense, we'll do it. We're never going to grow that business to 10%, 20% of our net income or our revenues but -- because it takes time any how. But I'm a true believer that Pennsylvania and Ohio and now West Virginia are going to benefit long term from an energy renaissance. There's more gas than anybody ever thought. It's brought energy prices down, electric prices down because of the abundance. And it's a great way to look at your national defense problems and get off everybody else's oil by switching gas, oil heat. And I hope no oil heat dealers are on the phone, but oil heat should be gas, and cars should be gas. So I think there's a great future for the gas industry in Pennsylvania and Ohio and Texas as always has been.

Stewart Scharf - S&P Capital IQ Equity Research

And you still see many -- any this year and into next year?

Nicholas DeBenedictis

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

Operator

[Operator Instructions] It appears there are no other questions in the queue. I'd like to turn it back to Nick DeBenedictis for any additional or closing remarks.

Nicholas DeBenedictis

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

Operator

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

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