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Aqua America, Inc. (NYSE:WTR)

Q3 2006 Earnings Call

November 1, 2006 11:00 am ET

Executives

Christopher Pertel - IR

Nicholas DeBenedictis - Chairman, President and CEO

David Smeltzer - CFO

Bob Rubin - VP and Chief Accounting Officer

Analysts

Michael Gaugler - Brean Murray Carret

Ryan Connors - Boenning & Scattergood

Jim Lykins - Hilliard Lyons

Debra Coy - Janney Montgomery

Ajay Jain - UBS

Selman Akyol - Stifel Nicolaus

Jonathan Reader - A.G. Edwards

Presentation

Operator

Good day, everyone, and welcome to the Aqua America Third Quarter Earnings Release Conference Call. As a reminder, today's call is being recorded. And at this time for opening remarks and introductions, I would like to turn the call over to Mr. Christopher [Pertel].

Christopher Pertel

Okay. Thank you, Jeffery. Good morning everyone. If you have not yet received the copy of the press release you can find it by visiting the Investor Relations section of our website at www.aquaamerica.com or you can call me Christopher Pertel at 610-645-1020. Presenting today is Nicholas DeBenedictis, our Chairman and President, along with David Smeltzer, the company's Chief Financial Officer.

I will remind that some of the matters discussed during the call today 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 description of such risks and uncertainties.

During the course of today's call, reference may be made to certain non-GAAP financial measures and the 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 and after that we will open the call up for the questions as usual. Nick?

Nicholas DeBenedictis

Thanks, Christopher and good morning everyone. After I have been over -- 14 years, I have been here at Aqua, prior sold up as Suburban and if I ever had to describe a quarter when I felt (inaudible) ahead, it was 3Q '06. Usually, some factors work for you, some work against you, but this was one of those quarters where it just didn't work with us except for some rate relief we got, which helped save the day and allowed us to match last year's earnings, but I will describe each of the issues in detail, but basically weather, interest rate, timing of rates and installation all worked against us in this quarter and seems they have all come to vortex this quarter.

Good news is I keep brighter days ahead, and I will try and explain why I see some lessening in some of these inflationary pressures interest rates and then of course let's hope for better weather.

We did match last year's $0.21 for the quarter on 2% more shares outstanding, and that’s due to two equity offerings we had this year in June and then August, which has positioned us very well to hold our equity levels over the next couple of years at the levels we would like to stay at to keep the rating agency guidelines to keep our very good ratings.

For those of you who were involved in our offering, you read the prospectus, you understand the unique forward funding mechanism we used to actually settlements of over 4 million shares, even though we only took a 0.5 million down at this point, and there'll be a full explanation in the Q, which will be coming out in a couple of days. So -- but we will answer any questions you have on that if you'd like, later in the call.

Let me describe the quarter as being negatively effected, three quarters by revenue shortfall and about a quarter by expense increases. And I'll drill down on those, and then you can see what quarter it could have been had we had a better weather.

First of all, in the revenue side, I'm going to say 90% was affected by the weather, 10% by rate timing, and I'll get into each of those. In the past quarters and since we've had the south, which is now our -- the former AquaSource, we've always had one section doing well, while one section did poorly and that allowed us the geographical balance we need. This time around, we had two areas, the north, which is about -- what I call the north, which is the old consumer space plus Indiana, which is about 20% of revenue to the company now; and the mid-Atlantic, which if you combine New York, New Jersey and Pennsylvania is 60% of the company. Both have very, very adversely affected by weather, and I'll give you some details. The south is fine, but with only 20% of the revenue stream that wasn’t enough to overcome the 80% that had just a horrendous weather.

Just a couple of statistics that -- what we look at is rainfall, and the number of days it rained because even if you don’t have a lot of rainfall, if you have a lot of days where it just drizzled that’s enough to keep people from watering lawns and washing cars and that’s our incremental revenue. But actually in this case, both works against us especially in Illinois and Ohio, but in the North we saw 33% more rainfall and 33% more days of rain than normal. In the mid-Atlantic region, which affects our Jersey and Pennsylvania operations, we are about 25% over. And just to take one area where we measured rainfall on our Pickering Water Treatment plant, which is right in the center of our service area in Southeastern Pennsylvania. The nine month average is seven inches above average -- ten-year average what we (inaudible); put that in perspective that’s more rain than they get in Arizona in a year, and we had just excess of seven, just in that one area of our area.

So, unfortunately that really does affect -- is one of the most severe effects on our revenue stream and I am going to say it was between $0.02 and $0.03 when you combine the North and the mid-Atlantic. And it's not -- wasn’t in relation to what we had hoped with growth and rates and everything that would have been, these are actual numbers. We actually sold in the quarter 17% less water this year than in '05 in Ohio, 11% in Illinois just to give you some numbers. And that accelerated in 3Q even though year-to-date, we have been pretty bad too. It's been a wet year completely and that has depressed some of the Q1, Q2 also.

I will break it down by region as we go through because I want to merge it with what we've also got in rates and growth because you have to look at the total picture when you are looking at revenues. The only bright spot, I mean we were down overall in the North about 7% consumption, in the mid-Atlantic we were down about 3.5%, this is a percent of revenue and in the South, the only bright spot, we were up 4%. But as I had mentioned, that wasn’t enough with only 20% of revenue stream.

The other area of course that helps us is the customer growth and that is one of the brighter spots we have. We are moving ahead right on target to hit our normal 4% and of course this year with one large one New York Water we probably will exceed the 4% by a margin. But looking at the first -- this quarter, growth year-over-year has been little over 1% -- 1.2% in the mid-Atlantic area, 6% in the South, and about 1% in the North. Now rates then have to make up the difference when you have a negative consumption and your growth doesn’t exceed that. So if you take a look at that, fortunately we had a major rate increase in Pennsylvania although we did not -- we still have not gotten a rate increase in New Jersey, about two months over due from the usual schedule, but we still are up about 9.5% on rates. South 3% which is lower than we would have liked and I want to go into that with you, and then the North about 5%, the North is more of a stable mature area, so we get normally 4%, 5% rate increases in our divisions each year and this year our Struthers division went up about 4.6%. That was in the March; in January, our other divisions went up about 4.7. And then have the Lake County, which gives us a little higher.

So if you blend that basically, it should take the full -- when you blend all three of those factors with the mid-Atlantic, South and North. Our rates were basically carrying 9% and so our -- if everything else had stayed the same, no growth and no consumption loss, we would have had a 9% revenue increase versus the 7.4, adversely affected by about 4.5% in consumption when you blend the three areas, and then helped by the fact that we grew year-over-year about 3%. So, overall revenues did go up 7.4%, but you can see the majority of it was raised in growth and actually was negatively affected by consumption. Had the consumption just been normalized, you can get a feel for where we would have been in this quarter.

The other factor I would like to talk about, which is maybe a 10% factor in the revenue stream this time, is great timing. We were right on time in Pennsylvania; we were right on time in our core states, Ohio and so on. New Jersey, I think part of it was the fact that commission has been so -- had concentrated so much on the large Exelon/PSE&G merger which did not end successfully that a lot of the smaller cases like ours had to wait in the queue. We are very hopeful that we can get it done by the end of the year, but we had hoped that we were going to get it done by September. It's not a very controversial case, but it is a considerable amount of money for us. I think we are in -- we asked for about 14%, 15% and it is $3 million case. So, it is significant.

We have been -- and we have filed our [disk] in Pennsylvania where we are already earning another 1% or so in Pennsylvania. So, we are right on target with those states. We had some smaller operations in Illinois, which we had not filed in a timely way, and we have been starting on those now, which will help earnings. And to give you an idea, when you deserve it, the rate agencies do allow it. We had a smaller operation, 6,000 customers, sort of a half recreation area called Woodhaven, where we actually got a 60% increase late last year that [technical difficulty] where we got a 50% rate increase. We are now asking -- ready to settle in Kankakee, our biggest division in Illinois, and that should occur hopefully within the next month or so and that is in the 20% range.

So, you can see we had some healthy rate cases, which are -- I don't want to ever call these things routine, but we are working towards those in the more traditional states that we've been around and cleaning up some of the small ones that do have larger cases. Maine went up, again, $0.5 million in rate relief this year at Maine which averages about 6% [soft].

The real issue is little bit of a delay in New Jersey and the South, and I would like to drill down on that and give you an idea on what we are trying to do in the South. First of all, we bought a -- you could argue, we usually buy small troubled systems and fix them up, we do 20, 25 a year and about 4% of our customer base, and we assimilate them very quickly and fix them. In 2 years in the South, we bought the equivalent of 5 years, 6 years of these small systems, thousands of systems, Texas, North Carolina and Florida, and in order to assimilate them, we had to fix them, before you can go in for rates you have to do two things -- manage them well, coordinate the accounting, the customer service, which needed work in all of them, and all that I would like to say is done in the sense that all new management, our whole organization staff, we've beefed up, we now have an operator training, we now have operator benchmarks, and we're paying the people more and getting better quality people and all new Presidents. So, basically it was a complete redo of the whole system in the last 2 years.

The other thing we had to do is spend a huge amount of capital. We have spent about a 100 -- since we purchased this through the end of '06, we've spend about $175 million. To put that into perspective, we only paid 175 for the whole company. Now, the good news on that is the fact that we have reduced the notices of violation, the consent decree issues. Just in Texas alone we were faced with 250 violation notices -- I should say we were faced, we inherited and that is down to now 11 which should be down to zero shortly as we get the final consent order validation back from TCEQ in Texas. But in fairness, you can't go in for a rate increase until you fix things and have the people in place to present the rate case and to give these regulators the feeling of credibility that what they are doing is accurate.

Now because of the fact that we've put so much money in the systems, in some cases the predecessor owners had not been in for rates for years. In Florida as we proceed with our rate case, it's been 20 years in some of these districts since they have had a rate case. What happens is the initial rate request is very high and that adds a little bit more politics versus more of an academic process. So, example, Missouri, where we fixed everything that we've had to fix, we just settled for a 50% rate increase, which sounds like a lot but we still are going to have to go in and get another 50% and we are going to be filing in February. And that will get us to full earnings on the capital we've invested in Missouri.

In Monticello, Virginia where we invested almost $10 million to fix a very, very severe pollution problem in their lake because of the waste water problems they had there, we actually invested $10 million, went in for a two-phase rate increase, and just last week were awarded the first phase of that, which was about 100% rate increase. And we are now going to be going in for another 30%, which will be effective in February of '07.

Now, that doesn't mean the rates are $200 a month or something but it means that in our business the percentage game is very important too in addition to what the final usage amounts are. So, we're getting, I think, it's a couple-phased process and it's mainly through the old AquaSource states and either where we are trying to do catch up so that we can get into the realm of what we have in the North and in the Mid Atlantic, which is we know we file every -- whatever 18 months, 24 months, 30 months, and it's a reasonable rate increase of 10% or less, and usually after nine months you have your reward and your earnings (inaudible).

So, anyhow, that -- I think that's something that we are ready to file in Florida, the next month we are going to be filing shortly in Indianapolis -- excuse me in Indiana, Fort Wayne. We have already received two rate cases in Indiana, and one was for 170%, which is again another one of these small ones that had to be fixed and the people are paying the rates and the commission is going ahead with it. So, that's our challenge and that's what I meant by the rate timing, and that maybe was about 10% of our issues.

Now about a quarter of our issues this quarter were in the expense side. I would like to drill down on those. The escalation in the expense side was really in three areas; depreciation, which is, I guess, good news, because as long as you capture it in rates and the little bit of a lag we are having in rates hurts us but once we get all this depreciation captured it's really good news, but depreciation was up 17% year-over-year, and that's because of all this construction we are doing. The other thing that you get back in rates eventually, but in between you don't is interest. Two factors there -- interest was up 11% year-over-year, but that's slowing down from the 13% if you take the 9 months. So, the good news there is, we are starting to see a moderation in interest rates and as we get them in -- all these in rate cases we will have assimilated all that, but in the meantime obviously it costs you to carry the investment, and just the escalation in the short-term rates of over 200 basis points, we're paying about 5.4 now and a year ago this time period it was 3.4, so 200 basis points. We usually carry a 100 in a quarter -- $125 million of short-term debt, so just if you look at that, it's almost $0.5 million of increase is just because the debt has increased, the interest rates short term raised that much. Now, the good news is we think that is moderating. We think 4Q will be similar to 3Q, but last year's 4Q was already up. It will be about 120 basis points difference, and then it starts levelizing very quickly next year, and we actually think short-term rates may go down, so it starts working for us, year-to-year comparison.

The other issue is of course, when you do this much capital, you also have to put some of this short-term in the long-term, which we did last year and continue to do, and we have 100 million more of long-term borrow out there, and although we're doing very well with our rates, our embedded cost of debt is still going down, it's down to about 5.7 now. But still even if you look at 5.5% on the $100 million, it's still $0.5 million. So I think about a 0.5% of impact from interest yet to be recovered is in these numbers, and we see that diminishing little by little for every quarter until we get in rates, and interest rates have stabilized. Plus, I think our forward borrow will be less as our depreciation goes up, and our -- excuse me, our capitalization for repairs in the South slows down, which it will now, now that we've built most of the plants that were needed to meet the standards.

O&M was up also obviously, and I want to go over some of that with you. The -- when you take the 12%, I'm being a little bit liberal with the numbers, I think the total was 12.3, so I'm trying to round things off, so let's say 12%, almost 3% of it was acquisitions, which you could argue is normal. If you're growing at 3, 4% a year, you have to carry those acquisitions. But the -- subtlety when you drill down on those numbers, there are two factors. One, we expense any acquisition going into -- until we own it, then we capitalize some of those expenditures, because if you don't end up getting it, you have to write it off, and we write it off immediately then we capitalize.

Well, this year we have a large one with legal fees and a lot more of administrative costs and normal small ones and that's the New York Water and that's all being expensed as we move ahead. The other is the fact that we've purchased three or four fairly large acquisitions in non-regulated areas, and we are running those at a profit and we will go into that a little later, but the bottom line is those margins on those businesses, the operating margins, are nowhere near a regulated utility with the high fixed costs and negative cash perspective. The septage hauling business has high variable -- high operational costs, low fixed. So, you know, more traditional margins, we look at 40% margins or 60% less EBITDA and it's just the opposite, probably 80 to 85% expense to revenue and 15% EBITDA, which [of course that] they generate cash, so that you are not supporting high fixed costs one way. So it's just a different business, but that will negatively affect some of our benchmark numbers we always go with, and it did negatively affect our expense ratio this time, because it was all added during the third quarter.

Pension continues to be -- negatively affect us, although we are obviously working to follow all the new pension rules which came into effect this year, the fact that we did and we did get a reward for most of it in the Pennsylvania rate case, we have had to up the amount that we contribute to keep our pension full and it's affected us by about $700,000 in this quarter. And you put the OPEB on there, which is the healthcare it's about a 1% -- actually 1.3%. So, pension was the major hit. Now I want to be very careful to tell you, we are getting it back in rates but there is always some lag and there will be a negative comparison for the next two or three quarters because we're just up in July to the new run rate of 7.3, which you'll see in the -- $1 dollar a year, which you'll see in the Q.

Now here again this is something that most corporations are struggling with. We don’t have obviously the problems that most utilities and most manufacturing companies have like the car companies. But with the assumptions we are asked to make, you do have to put money into the pension plan. We took -- well, I guess, you could have called Draconian measure for a utility three years ago. We said we are not going to put anybody, any new employees into our pension plan and we would give them an enhanced 401(k) instead, which is more portable and I think it’s the way with the future.

But as a legacy company, we're around 120 years, we have a lot of people on the pensions and the healthcare, so our employees now are no longer eligible for post-retirement healthcare or new pension plans, but we still have about half of our employees still on the pension and on the OPEB. They are covered in rates, so it's not an issue that we won't be able to recover those, it's just that there's temporary hits to your O&M as you're trying to get the revenue side and the expense side correlate.

The other thing that hit us and this is really inflationary, was the water production costs, which is about 2% of the 12% increase. And this hit us in this quarter for two reasons. One, because of some problems we had with wells in New Jersey, where we had to put treatment on because of the new regulation. In New Jersey, we had to purchase water during the summer months. And in Texas, where we have had very, very little rain and there's been drought declared in the Austin area, we had to pay extra into the Texas fund, they call it, which will now go away. But for the summer, about half of that increase is based on water purchases that we would not have been able to predict a year ago.

The other half is because of escalation in energy costs, which we obviously use a lot of energy in our work and we are starting to see a return to energy increases after the stable nature of the deregulation over the first couple of years. Now they are recoverable in rates, but once again it's -- you never exactly and think with when the rate increases go up.

And the other is couple of the cities who sell us water, where we don’t have our own plant, raised their rates this year. So that’s another comparison year-over-year that was negative. But most of that was this purchased water that we have to do in order to get through the -- the drought and the environmental issue we had in New Jersey.

The other issue is about six-tenths of a percent is the Texas rate case, which we have explained that each quarter and it has started in a cold way. It is less this time than it was last quarter, but -- this is how Texas did the rate case. They basically awarded us a case, which was in excess of 40% and I say awarded. They put us bonds; we are still negotiating to -- this is the second year, almost into the third year to get it finalized. But the way it was handled was we didn’t get the full 40% in cash, we got 10% a year for four years; we are in our third year now. This July was the third year, next July is the last year. So, they made up the difference by deferring expenses, and as they get less deferred, it looks like expenses are going up. So, every time we get 10% cash on the one side, we can't defer those expenses anymore because you are getting it in actual revenue. Dave and Bob probably can explain a lot better from the accounting standpoint, but it did have an affect and I believe Bob -- he wants to help me. When did this go away, so that won't be sort of an anomaly on the expenses year-over-year?

Bob Rubin

Q4 '06.

Nicholas DeBenedictis

Q4, okay. So, we have one more quarter that’s variable.

Bob Rubin

On the operating expense side in Q4 '06 but then it continues with respect to depreciation for another year or two.

Nicholas DeBenedictis

Right. Now, the other one year I would say non-cash, but expense increase anomaly this year, of course, the stock-based options compensation where we had to write it off -- write-off the option expenses this year. And that was about $650,000 in this quarter or 1.3% of the 12% increase, 12.3% increase, and that goes away of course at the end of this fourth quarter because next year the comparisons are similar quarter-to-quarter starting Q1 next year.

Administrative expenses went up mainly because of one item. We had some IT expense that had to be expensed and not capitalized. We had extra audit fees under Sarbanes-Oxley although we are doing very well with all our testing in these internal disclosures and all that, but it's costly. We had a -- because of all the quarterly true-ups now you have to do with the old reserves that you did this as taxes and insurance had been on the front burner for the accountant. We had a true-up in our third quarter insurance because of the number of small claims that came in, mostly pipe breaks that caused the flooding of the house or something of that sort, but we didn’t have a claim.

The insurance reserve had to be increased by 1.5 million and that was 3% of the 12%, so you can see, it was pretty significant. Now that I understand from the accountants, are going to go up and down every quarter. At this point, it has been looked at much more on a quarterly basis versus I guess we used to do it on a yearly basis, Dave or --

David Smeltzer

We said we need to be very specific now in terms of our reserves at the end of each quarter and yes, this one-time spike in claims at the end of the third quarter developed into a much bigger number than it could have been anticipated.

Nicholas DeBenedictis

And then we had of course our normal increases, salaries, things of that sort and that came about a 1.5% total for everything else that I have already described. So, this was not a very pleasant look when we looked at the amount of the increases, but you can see a lot of them are explainable and hopefully not repeatable as we move forward and ate up most of the rate increase that we got since we had no help from the weather and new sales.

So, that’s basically an explanation of the quarter, both the revenue side and expense side. As I mentioned the good news is we matched last year even with more shares outstanding and we are moving ahead with our acquisition program. We did buy two more of these waste companies, which are working very well for us and we also continued, I think we’re up to 19 small acquisitions, tuck-ins, all over. We've announced a couple the other day, one in Indiana that’s our first nice size in Indiana, about 800 customers -- 800 residents and we have a number in North Carolina and then of course, Pennsylvania, where we always have one or two a quarter.

We are still seeing good growth organically in North Carolina and in Texas -- over 6% in Texas and about 3% in North Carolina. We are seeing some slowing back to I guess more reasonable levels of new housing in the rest of the state, not falling off the table, but nowhere near it was in the late '05, when there was a rush for new housing and so on. So, it is more stable, more like the '04 levels than the '05 levels.

And New York Water is doing well. We have -- we meet every Friday with the staffs, we are hopeful that we will have it on their docket in December. We've worked out the issues; the main ones were pension and we have worked that out; acquisition adjustment, we've agreed to forgo; and we also are working on the -- how they will regulate us versus how they used to regulate New York Water System, which was a holding company of a private company. And we think, we are going to have a good experience in New York, but obviously we have to get it approved first and I am hopeful this year.

Now in the meantime, we are already working on the accounting systems so that on 1/1 it will be after they close their books under their old system, they will be on our system, our [logging] systems. So on, we have people already selected who will be working with the management staff there and we are ready to hit the ground running and it’s a good company. We are buying a good company. We are not looking at an AquaSource where the management and the environmental issues are huge. This is going to be a good and hopefully profitable. It will be absolutely accretive at the price we paid. Business that we see as a good beachhead will be on Long Island, so no fun intended to grow in New York as there are lot of people in New York and a lot of systems in New York and we think we want to be part of that growth.

I think that is about it, open up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question today will come from Brean Murray Carret with Mr. Michael Gaugler. Please go ahead.

Michael Gaugler - Brean Murray Carret

Good morning, Nick.

Nicholas DeBenedictis

Good morning, Michael.

Michael Gaugler - Brean Murray Carret

I had a little problem in the call here, didn’t catch you, did you say the weather effect was $0.03 on the quarter?

Nicholas DeBenedictis

I think quarter-over-quarter probably between two and three if you looked at our budget, over three plus.

Michael Gaugler - Brean Murray Carret

Okay. And just switching back to rates for a minute.

Nicholas DeBenedictis

Let me comment on that because Michael you were with us during the road show, we had a -- mid-Atlantic being 60% of the company. We had a fair July, not good, not bad, right on target may be of off half a percent or something of that grade. And up through mid August, it was hot, dry and we were pumping a lot of water. And we were looking at a very good quarter, even though the north was still getting a lot more rain than they should, it wasn't [pumping us] down. And then it just started raining in mid August, and wiped out the gain in the first part. So we still had a good reasonable shot, and then in September, it was damp and slight rain almost every other day, and just the mid-Atlantic fell off almost $0.02 to $0.03 just in that one area, in that one month. It shows you how variable weather can be, and how it's so hard -- it's hard to project even if you're halfway through the quarter.

Michael Gaugler - Brean Murray Carret

Okay. And just as a follow up, on the rate side of the equation, do you have any idea of what, like a ballpark, total amount that you'll be in for in 2007 across the system?

Nicholas DeBenedictis

Sure. We, of course, will be filing late '07 in Pennsylvania again, and that's the biggest. And just to put into perspective, we received $26 million -- $25.6 million or something in this year, so you would assume the filing would be something similar or more. And then, we also probably will hope to file in New Jersey pretty rapidly. Since they have taken so long on this case, it just eats into your next one. And I'm asking, I don't know if Kathy is there, David, maybe you can come up with a rough number, but the bigger filings are going to be in the south now, and we're looking at Florida, which will be -- Florida will be $4 million, and that will be filed probably before the end of the year, probably another $4 to $5 million in Indiana, and we are getting ready to file on that.

The North Carolina, we are going to have two cases. The first one is to bring the old AquaSource companies in to rates because we've fixed them all now into the North Carolina current rates and that's about $1.2 million. And then after that we are going to consolidate all North Carolina, we now have six entities there into one, and then ask for return on all of this investment we have been making in these small systems that we are fixing up under the agreement we made with the North Carolina Commission, and that could be a $5 to $7 million case, and that's in North Carolina.

Texas, we are hopeful to get a recovery and finalize hopefully in this -- before the end of the year and that will finalize Texas and then we can look at a plan on where we go from here. I mean, it's been 3 years (inaudible) we are already looking into what we need to do to continue the [building] program renewing. Sarasota, which is, I am calling separate from Florida, we got a 10% rate increase this year, and we'll probably be going in for another rate increase for both water and wastewater of about $1.5 to $2 million next year. Pennsylvania could be in the 30s and add another $8 million on the [tax] surcharge. So, I think we could file for as much as $60 to $70 million over the next year.

Michael Gaugler - Brean Murray Carret

That's helpful, Nick. Thank you. That's all I have.

Operator

And moving on, our next question will come from Ryan Connors from Boenning & Scattergood. Your line is open, sir, please go ahead.

Ryan Connors - Boenning & Scattergood

Good morning, guys.

Nicholas DeBenedictis

Good morning, Ryan.

Ryan Connors - Boenning & Scattergood

Couple of questions. First, just following up on Mike's stuff on the rate increases. You talked about some systems where you have to go in for an initial, kind of, massive rate increase and the fact that there is political pushback sometimes there. If you could just give a little color around? I mean, what is that political -- does that political pressure affect the regulatory lag? Is there a risk that in some of the cases you don't get some of those rate increases or if you could just talk about that a little bit?

Nicholas DeBenedictis

Sure. Well, two things. I mean, you are dealing with people who are elected or appointed, so they live in the political arena and everybody likes better service at lower rates. So it starts there as to what the expectations are. However, they are professionals and they understand if you are putting money in and they don't give you a fair return, you are going to stop putting money in the system. I felt having been a regulator, you don't go in and ask for a return until you are managing it professionally and things are fixed and you don't have environmental problems. So I'm probably -- my philosophy is probably one cause of the slight lag is the timing I mentioned.

On the other hand, the amount spent, no one has criticized the prudency of the investment and no one has challenged the fact that we do a good job in customer service, we are doing a good job in our compliance and all that and managing the systems. So -- and I think, we are going to be looked upon favorably for the levels of expenses, because we are much lower than what the smaller companies were, because the overhead -- all the accounting is done centrally, all the engineering is done centrally and so on.

Now having said that, anything that's in double digits is always a scare to regulators. And in some cases, we are talking triple digits. But we decided that where there is a small system and where it was very clear what we had to do, and they hadn't been in for rates for 10 years and they had very low rates, the percentage gain wasn't really as relevant and we had to say, look, it's still a fair price, it's something that they didn't have safe water before or safe wastewater disposal, and we have been fortunate. But I have to tell you, Ryan, it does take longer because people ask you more questions. What about this? Could you do it this way? Sometimes they will ask for phase-ins, which means you don't get your return right away, but you are getting it over a number of years, but at least you are getting it. And it's just waiting a little longer for what you probably deserve right away, but there's a reality factor. But once you get there and I think, we have to remember that Pennsylvania, we have been there and that's -- I mean, we are used to the professionalism of the Pennsylvania Commission and how they do things, I am pretty comfortable that it's going to take probably a couple of years to assimilate and get to the right levels of earnings in south that we are in the north. But South's growth is helping us and the fact that we think this is a fertile area for acquisition growth, which we haven't tapped yet because we are so busy fixing everything that that could help moderate rates, but also help earnings.

So, I think probably realistically, it's a 2- to 3-year process in the South before we get up to getting our full return on all this money we have put in, the 175. And I think probably if you look at ROEs, we are double digits in most of our states, low 10s, and so on, maybe a little higher in certain areas. But in the Southern states, we are -- [digging up] to healthy 6, 7. Some states like Missouri not even -- which we're breaking even now after this rate case, and in Florida as it's starting to grow now and we've got everything in the rate space and all approved by it, now we are going in for this rate case that will finally get our earnings up to where they belonged or we're probably earning couple of percent in Florida right now.

Ryan Connors - Boenning & Scattergood

Great. That's very helpful. And, second question kind of a bigger picture issue, I mean as we speak with other investor-owned water utilities, we consistently kind of hear them saying that they are in a process of expanding their own acquisition programs, and some of them even mention the territories like the Southeast where you guys are now a player. Can you just talk about whether you are seeing any increase and the extent to which you run up against competition on deals and what effect, if any, that's having on negotiations and multiples?

Nicholas DeBenedictis

No, I mean, I have to be very honest with you, we haven't seen it yet, maybe they are starting their development process, but it's very difficult if you are not there and operating to start from scratch. I mean, you can buy something and start building on it, but that's why we bought Heater because we weren't big enough with 10,000 customers in North Carolina to really be a player. And same in Texas, that's why [we went to director officers] knowing that there were 200 violations, we were confident we can fix them and not hurt our reputation or the company. So, there is only three or four of us, I guess, so I guess not as much competition in some industries, but there is 50,000 of them out there and there is 85% market share which is still municipal to go after. So I am not overly concerned. I think the companies that you probably are talking to are professional, they are not startups, they are not -- and I don't want to sound negative on this, but the Europeans didn't understand our rate system, and I hope all these companies you are talking to are disciplined, understand the rate system, so the marker will be more on service than price. Now, I don't want to be naive and think somebody won't throw a few more bucks at something to get it, but I think most of it is going to be the hustle factor more than the pricing.

Ryan Connors - Boenning & Scattergood

Very good. Thanks a lot, good luck in the fourth.

Nicholas DeBenedictis

Okay, thanks.

Operator

And moving on, our next question will come from Jim Lykins from Hilliard Lyons. Please go ahead sir, your line is open.

Jim Lykins - Hilliard Lyons

Good morning, everyone.

Nicholas DeBenedictis

Good morning, Jim.

Jim Lykins - Hilliard Lyons

Sounds like you guys [may have thinking] of rain for a while.

Nicholas DeBenedictis

Right, you got it.

Jim Lykins - Hilliard Lyons

Just a couple of things. First of all with the upcoming elections, are there any states in your footprint where the potential is there to maybe change the makeup of any of the regulatory commissions, and if so, whether the impact would be more of a positive or negative?

Nicholas DeBenedictis

Well, of our large states the only change expected is in, I mean -- I am making the assumption, Governor Perry wins in Texas, the Republican candidate who is trying to succeed Jeb Bush in Florida is ahead. So I am assuming he stays, therefore there won't be major changes in those two. Illinois, the current governor is way ahead in the polls, so supposedly and in Pennsylvania, there shouldn't be any change from where we are now. New Jersey, there hasn't been a change in 2 years Corzine has been in. So, I think Ohio is the only one where the election is up in the air. There will definitely be some kind of change because the current governor can succeed himself, Governor Taft. But Ohio we negotiate local rates, so it's probably more important news at the local level and we had stability at the local mayor level and that's how we negotiate our rates there. I don't think -- I am not too concerned at the state level. If the Congress changes party, the Head of the Environmental Committee will be a person who is much more aggressive, I will call it, in the way of rules, regulations, standards because he was the Chairman during the 70s and -- actually during the 80s when the democrats were in control, and a lot of the expenditures that EPA forced on people were as a result of the Congress passing off these rules. Now I guess you could say that is silver-lining. It's going to be spending more money and whether that's good for the public policy of the country based on other needs these cities have, I’m not going to comment, but whatever it is, it is because if more has to be spent, it may drive some municipalities to say, maybe I don’t want to spend it, maybe I'll sell to a private company and we'll have to spend it because we are private and we are regulated. So, there will be more money to spend versus maybe fixing pipes. We'll have to shift it back to new standards for whatever rate on, name it.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis

That would be my political analysis, but who knows.

Jim Lykins - Hilliard Lyons

Alright. And also regarding your acquisition pace -- I noted Governor Rendell's promoted the consolidation of water utilities and PA and California's new Water Action Plan does the same, I’m just wondering if this might be part of a new trend or are you starting to see more and more encouragement on behalf of the government or in some of the other states where you operate for further consolidation?

Nicholas DeBenedictis

I think two things have occurred in the last I’m going to say four years. Water, because the press and the investment community and the Europeans made it front page news coming over here and in some case it is positive, some case it is negative for us. But it's on the radar screen now. So, when we go to these national meetings of regulatory commissioners, water is no longer delegated till the last day, last meeting of the conference when three people are still in the room, and the regulators really are getting into the public policy nature of it. I rate -- what's the fair rate -- the -- I don’t know if they call true value -- they can call it true value of the system because everybody now knows it's subsidized by taxes and people are paying the true value of the water, and Pennsylvania has really been one of the leaders and now New Jersey is starting to look at water public policy in a big way and now California. So, when you have those big states, which are very influential, North Carolina is another one who will have the Chairman with me at this time. When you see states who are already involved in leadership positions in the neighborhood, all of a sudden water gets more play, if you want to call it that.

So, I think that’s why you are starting to see consolidation ideas, because the staff tells the commissioners, we don’t know what to do with these small system, people don’t even have enough dollars of professionalism for us, [threaten them], because they won't do anything anyhow though we give them the keys, and what do we do then. So, I think you are starting to see states saying, we have got to clean up this mess and therefore clean up is an aggravation factor that the regulators [step] for now. The bigger issue will be how they treat the municipal government. This gives us discretionary enforcement where they are not enforced as much as private and that’s bad. I think you are going that diminish, and I think you are going to see true value cost for water and then the cities will truly make up their mind if they want to be in the water business or not.

Jim Lykins - Hilliard Lyons

Okay. Alright, thanks Nick.

Nicholas DeBenedictis

Sure Jim.

Operator

And moving on we will now here from Debra Coy from Janney Montgomery, your line is open ma'am. Please go ahead.

Debra Coy - Janney Montgomery

Yes, good morning Nick.

Nicholas DeBenedictis

Good morning Debra.

Debra Coy - Janney Montgomery

Just a couple of follow-ups, I think you have hit the highlights, but I am listening and your ROE has been slipping up a bit overall on an ongoing basis over the last three or four quarters. It sounds like it's probably largely been a tough weather year and if we get back to normalized weather that will take care of the bulk of it, but can you give a sense as to whether we're really looking at '08, before you really kick back into gear in terms of where you should be earning across your system? Have you talked about the rates that are pending? It sounds like there's a lot more still in the pipe to be filed than what's pending to get decisions on fairly quickly in the next few months. Is that a fair assessment?

Nicholas DeBenedictis

Yes. I think we have talked about this in '04, or I guess when we bought AquaSource. It has taken us longer to get the things fixed and the management in place and operating than we thought. We are always more optimistic. The systems are in place and the customer service consolidation is going to be done next month, so the whole south will be off the old system they had, which is good as vulnerable. So, every issue, accounting, customer service, engineering, it has all been revamped, and it's now looking like the rest of the company. I think we were overwhelmed with the amount of capital we had to put in to -- overwhelmed from an earlier prediction. Everybody said, we'll get this done for a million and then you put it out for bid during the '05 building boom in Florida, everything came in double.

Debra Coy - Janney Montgomery

Right.

Nicholas DeBenedictis

Just bid out. And I think when you look at, we paid $174 million for AquaSource, and we've already put 175 million in it, 2.5 years just to fix it. You can see that overwhelms rate base, i.e., why we’re having lag. And I think realistically to get from the low ROEs we’re seeing in Florida and North Carolina, we’re not seeing in the Texas because we're able to book it right away, and in Virginia to get them up to the 9%, 10%, 11% that we think is normal for us. I realistically think even if we file tomorrow, you're not going to get the cases completed in case they want to [phase in] over two years, probably until '08. But we'll start seeing some improvement in '07, but it will continue in '08. And then, I think the north and the mid-Atlantic will be just normalized. I think that’s what you call the old company. I think the slippage --

Debra Coy - Janney Montgomery

(inaudible).

Nicholas DeBenedictis

Yes, and I think the weather -- yes, we have had another 3-4% on revenues, that would have gone all -- in the north, we are looking at a 60% EBITDA factor, so almost all of it goes to the bottom line, once you have great weather and maybe 10% variable costs, electric and chemicals are extra, but the rest of them are all paid for [it was write down]. So, that would have helped ROEs had we had a better weather. But, sometimes it's good, sometimes it's bad, hopefully we will turn that around.

Debra Coy - Janney Montgomery

Sure. Can you just, kind of, refresh my memory or is -- in some sort of a range, you mentioned as much as 60 or 70 million in new filings that will come over the course of the next year or so. Do you know about how much you have outstanding now that you would expect to kick in to rate say by the first half of '07?

Nicholas DeBenedictis

Sure, sure. We would anticipate New Jersey getting --

Debra Coy - Janney Montgomery

Jersey says about 3, but I didn’t get any cumulative on the rest of the (multiple speakers) out there.

Nicholas DeBenedictis

Yes, let me go through that or maybe can get back to you after the call.

Debra Coy - Janney Montgomery

Or just a cumulative number, roughly?

Nicholas DeBenedictis

Okay. I will get back to you on that, because we've to add up the surcharges that are in place and the New Jersey and the Illinois filing, which should be done by January.

Debra Coy - Janney Montgomery

Okay. Then I'll come back to [CJ] and back on that.

Nicholas DeBenedictis

Yes. We will get you those numbers.

Debra Coy - Janney Montgomery

My other question then in terms of where you are continuing to go, what are you looking at currently for where do you think you are going to end up the year on CapEx and what you are looking at for '07?

Nicholas DeBenedictis

Sure. CapEx this year we should end up pretty much where we had budgeted, and that would be in the -- cumulative would be about 250. Next year, it drops a little bit, 235, but it's mostly all the drop is in the south, whereas we are actually spending more in the north. I'll give you an example. Our plan for '07 is to move from -- actually move up in the mid-Atlantic, almost 8 to 10% from what we are spending this year. But the good news is depreciation is going to be up 15%, so more of it will be paid for it out of cash. The north will be steady. This year we are going to spend 48, next year about 45, the following year 51, so pretty steady and that’s Maine, Illinois, Ohio. We are basically getting things fixed -- getting everything fixed from the old consumer states and now we are moving more into pipe. So, we can up that or lower that depending on where we are with rates and whether we can continue to do rates, but depreciation once again moves up sharply -- in the north, it moves up almost 20%. Now --

Debra Coy - Janney Montgomery

So, you don’t have any big new treatment projects coming in, in the mid-Atlantic. It's primarily that your depreciation is picking up -- you are picking up the pace on pipe replacement.

Nicholas DeBenedictis

Yes, we have two, three small plants in the mid-Atlantic, but nothing that overwhelms the pipe, and mostly it is pipe. In the north, we have one plant that we still have to fix. We are fixing the one in Kankakee and this rate case will be paid for and we are doing one in Struthers, Ohio, which will be probably a $10 million job. So, of that 50 million, 10 is one plant, which means a rate increase there. But other than that, it's all small stuff. Now, the capital in the south, just the opposite. Although depreciation goes up pretty good, because of the fact that we are going in for rates, this year depreciation run rate is about 14. We are looking at next year 17.5, the following year 21. So, you can say it moves up pretty quickly, whereas capital actually drops from 50 million this year down to 30 million next year.

Debra Coy - Janney Montgomery

But it doesn’t look like we are going to go free cash positive at any time soon?

Nicholas DeBenedictis

No, no, no. Not for the company.

Debra Coy - Janney Montgomery

No.

Nicholas DeBenedictis

But in the south, if you are looking at the earnings plus depreciation, it starts exceeding your capital expenditure needs next year.

Debra Coy - Janney Montgomery

That’s good.

Nicholas DeBenedictis

Yes.

Debra Coy - Janney Montgomery

Yes, okay.

Nicholas DeBenedictis

And then this other -- the other thing that’s going to generate cash is going to be the wastewater businesses, the hauling business. Although it's not as -- the EBITDA to revenue numbers are nowhere near the fixed utility business, it does throw off cash.

Debra Coy - Janney Montgomery

Well, that’s right. And that was in fact my last question is, kind of, roughly where we are on revenue size on that business now, and yes, that should be a free cash and higher return business because it's much more CapEx?

Nicholas DeBenedictis

Right. I mean, when we look at just this quarter where we -- we grew rapidly in the last three months, because we bought four businesses. Now we are consolidating and making it basically two divisions. One, that’s the hauling business, which is trucks and customer service and all that; and the other business is fixing wastewater plants and pump stations and things of that sort, which is very -- much more higher margin, but probably of 10 million projected run rate now on revenue, which is about 2% of revenue, that's probably the answer you are looking for.

Debra Coy - Janney Montgomery

Right.

Nicholas DeBenedictis

We have grown it from $1 million to $10 million quarter-over-quarter, and I would say the 2 -- the 20% of that $2 million is the service business and $8 million is the hauling business, which is lower margin, but both throw off cash. And I think we are going to get more efficient as we continue to grow mainly because you get some economies of scale, same thing in this business as the other. So, it's working very well. Now, we don't know how seasonal it is too, I have to admit that to you Debra because we've never gone through a whole season, and we have only the books to look at from the other companies and there doesn't seem to be too much difference between quarter-to-quarter, but we will have to see with the bigger hauling business we have now. But overall, we are still excited about it, we are still looking for more purchases.

Debra Coy - Janney Montgomery

Okay, great. Thanks Nick.

Operator

And moving on we will now hear from UBS, Ajay Jain for our next question. Your line is open, please go ahead.

Ajay Jain - UBS

Hi, good morning or good afternoon I guess at this point.

Nicholas DeBenedictis

Good morning, Ajay.

Ajay Jain - UBS

I just had a quick question since weather was kind of the defining issue this quarter, how are you feeling about the comparisons, and so far in the December quarter, are things completely normalized?

Nicholas DeBenedictis

October was not a great month. I mean October is the only of the three months that really does have a little effect on weather, nowhere near like September, August or July, but some people in the Northeast, especially mostly in the beginning of the month do some plannings and do their watering, [disposing] plant new trees after the hot weather is over. And unfortunately, the weather patterns didn't get any better in October, although I don't think we are anywhere near the drop what we saw in September. Dave, what were you down, 1%, in Pennsylvania, do you remember in October on [Sundale].

David Smeltzer

Couple of percent.

Nicholas DeBenedictis

Yeah. So, I wouldn't say it bounced back, but on the other hand it's not as bothersome too as it's dropping 4%, 5%.

Ajay Jain - UBS

So it's a slight overhang for the quarter, is that?

Nicholas DeBenedictis

Yeah. Just slight -- just slight.

Ajay Jain - UBS

Okay. And just on the O&M ratio, you talked a little bit about employee benefit costs, and I guess there is some variability in margins for some of your non-regulated businesses, but have you had any kind of material integration issues or unexpected cost pressures with some of your recent acquisitions? I know that you mentioned AquaSource was a little bit (inaudible)

Nicholas DeBenedictis

Yeah, AquaSource, I think probably the fact that almost everybody, I could tell you even down to the operators have been changed out over 2 years. And in some cases, they were paying $12 an hour and getting $12 an hour-type professionalism. So, we've had to increase salaries so we can keep people and not have some turnover and get them licensed and all of that. So, there has been some startup expenses that probably have now stabilized. I think that's what you are asking.

Ajay Jain - UBS

Yeah. So that's all part of the cost base now?

Nicholas DeBenedictis

Right. We had to add people and pay them more and start training programs. Now that's all been assimilated. I think our run rate going forward will be driven more by growth if we continue to buy systems, we will obviously add people at the same levels and so on. The benefits have not hurt us in the South and that's where our biggest growth is because the benefits there are no retiree OPEB, there are no defined benefit. We give them a better 401(k) than we give our union employees in the North. And, we've had some tough negotiations with three of our unions and we are on our fourth one now, where we are asking for giveback of healthcare and pensions.

Ajay Jain - UBS

Okay, great. And just lastly, I know that you typically don't give any explicit earnings guidance, but would you say that I mean -- can you comment on whether 10% earnings growth is still representative in Q4?

Nicholas DeBenedictis

I think if we can -- I think what hurt us this time was really weather; had the weather -- I mean we would have had the 10 had the weather just been normal. On the other hand, the expense side, Ajay, to be very honest bothers me because I saw the size of it when I started to drill down in each piece, a lot of anomalies, as the insurance goes away that really helps us if we have a normal quarter next quarter on insurance.

The pension will continue to be a negative on quarter to quarter O&M, but we are getting a lot of it back in rates, if not most of it. So I mean it will show up on the revenue side, but you have sell water to get it, right, that's the problem. And then, the acquisitions, I think, the big jump this quarter over last year probably continues for two more quarters because we bought -- basically we are now a $10 million revenue company versus $1.5 million revenue company, so you have extra expenses. And then, the Texas rate case goes away, that was almost 0.5% and I do see some lessening in the pressures on interest, which is a big issue. And as soon as we get into rates in the South, we pick all those carrying costs up in the rate cases. So I do -- I see some light at the end of the tunnel when the stock-based compensation for options goes away next quarter, so I think probably next quarter we're going to have to hope for good -- reasonable weather and we're trying to take in every expense we can, so that we can show -- get back to our normal. But next year the comparisons on O&M should be better and then we just need to get some good rates and reasonable weather.

Ajay Jain - UBS

There are still some residual cost pressures into the fourth quarter?

Nicholas DeBenedictis

Yes. Pension will be still there, probably 450,000 of pension year-over-year. The O&M on the acquisitions will still be there, we won't reverse New York Water for until after that we buy it and it could be the fourth quarter, but it might not be until Q1 and then we have the extra expenses, although we do have extra revenues coming in too on the wastewater side, which is running at the -- the operating margins there are 20%, not 60%. And it is just a heavier business from the standpoint of expense to revenue, on the other hand it's very little cash. Accounting fees are starting to lessen year-over-year because we are not at the new run rate and stock-based goes away in the fourth quarter but its still there in the fourth quarter and that's 1.5%. So I don't think we get back to the [5.6] range again until we get rid of some of those issues.

Ajay Jain - UBS

Okay, great. Thank you very much.

Nicholas DeBenedictis

Thanks.

Operator

(Operator Instructions). We will now hear from Selman Akyol from Stifel Nicolaus for our next question. Your line is open. Please go ahead.

Selman Akyol - Stifel Nicolaus

Thank you very much. I appreciate all the detail, I am just trying to follow-up

Nicholas DeBenedictis

Hi, Selman.

Selman Akyol - Stifel Nicolaus

Good morning. First, of all, can you just say what the CapEx was for the quarter?

Nicholas DeBenedictis

Well, I always look at it for year. Bob, would you have that, what we spent for the quarter during the Q.

Bob Rubin

Yeah, we can -- we can dig that out. Sure, it looks like the CapEx -- we will dig that out, why don't you get on to your next question.

Nicholas DeBenedictis

The year is 250, so you can use that as a comparison when you get the quarter.

Bob Rubin

The quarter cash flow for CapEx was $61.7 million.

Selman Akyol - Stifel Nicolaus

Okay.

Nicholas DeBenedictis

61.

Bob Rubin

61.7

Selman Akyol - Stifel Nicolaus

Got it. And then also Nick, if you -- in your opening comments you talked about rates were up 9%, your customer growth was up 3.3, and then it was offset by consumption or weather, was that 4.5% there?

Nicholas DeBenedictis

4.5%, yes.

Selman Akyol - Stifel Nicolaus

4.5%, okay then I got that right. And then just a last question, just to follow up a little bit on ROE, can you say how much is in your rate base that's currently earning less than, lets say 9.5%?

Nicholas DeBenedictis

Sure. Just so I can clarify that, 4.5% wasn't, I guess, the mark that we set for what we hoped the weather would be; that was actual less sales than the prior year. I mean that is the real number. I mean that is basically we sold 4.5% less water, and that's really rare. Dave, how much, I mean I guess you could argue that Pennsylvania, I don't know how much Pennsylvania and New Jersey, we will have to get you that number, what we should do is see, the companies that are earning between 9.5 and 11%, and how much rate base that is, and then how much of the rate base is earnings less than that. That's a good enough breakdown Dave?

David Smeltzer

That would work perfect.

Nicholas DeBenedictis

Okay, good.

Selman Akyol - Stifel Nicolaus

Alright, thanks a lot.

Operator

And at this time we have one question remaining in the queue and that comes from Jonathan [Reader] from A.G. Edwards. Your line is open sir. Please go ahead.

Jonathan Reader - A.G. Edwards

Good afternoon Nick. Most of my questions have been answered.

Nicholas DeBenedictis

(inaudible) celebrating Jonathan over the Cardinals, or --

Jonathan Reader - A.G. Edwards

Yeah, we're still recovering from the big victory in the World Series, it was fun times. Just real quick, could you just define what the north is again? I missed that as far as the states.

Nicholas DeBenedictis

North is Maine, Illinois, Ohio, Indiana, and Missouri.

Jonathan Reader - A.G. Edwards

And New York?

Nicholas DeBenedictis

No, New York, New Jersey, and Pennsylvania are mid-Atlantic and then the South is North/South Carolina, Virginia, Florida and Texas and it comes almost, if you look at revenue, not necessarily net income but revenue almost 60-20-20.

Jonathan Reader - A.G. Edwards

60-20-20?

Nicholas DeBenedictis

Yeah.

Jonathan Reader - A.G. Edwards

Okay.

Nicholas DeBenedictis

South has [only] grown in revenues and profits in the last 2 years.

Jonathan Reader - A.G. Edwards

Okay. And then real quick for 2007, you may have already addressed this, but the septage hauling business, like what are you expecting as far as percentage of consolidated revenues and net income from that line?

Nicholas DeBenedictis

I think at this point 2%, I think our run rate we expect unless we (inaudible). As what we have now and what we think we can grow it's about $10 million revenue, which would put it at less than 2%.

Jonathan Reader - A.G. Edwards

Okay. Thank you.

Operator

And at this time it appears there are no further questions. I would like to turn the call back to Mr. Pertel for any additional or closing remarks.

Christopher Pertel

Yes, thanks Jeffery. I think it concludes the third quarter Earnings Call. We appreciate everybody's participation.

Operator

Thank you everyone for your participation. That does conclude today's conference. Everyone have a great day.

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