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Aqua America, Inc. (NYSE:WTR)

Q3 2011 Earnings Call

November 2, 2011 02:00 pm ET

Executives

Brian Dingerdissen - Director, IR

Nick DeBenedictis - Chairman, President and CEO

Dave Smeltzer - CFO

Analysts

Michael Gaugler - Brean Murray Carret

Christopher Purchill - Janney Montgomery Scott

Michael Roomberg - Ladenburg Thalmann

Stewart Scharf - S&P Equity Research

Jonathan Reeder - Wells Fargo

Operator

Good day, and welcome to the Aqua America Inc. third quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Dingerdissen. Please go ahead.

Brian Dingerdissen

Thank you, Alicia. Good morning, everyone. Thank you for joining us for Aqua America's third quarter 2011 earnings conference call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at aquaamerica.com or call Fred Martino at 610-645-1196. There will also be a webcast of this event available on our site.

Presenting today is Nick DeBenedictis, Chairman and President of Aqua America along with Dave 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. Nick?

Nick DeBenedictis

Thank you, Brian. Good morning, everyone and this morning I am going to try and explain what is a complicated GAAP non-GAAP, continuing non-continuing and hopefully put some clarity. Dave can help us to put the numbers, but in my mind after looking at all the numbers, it was a very solid quarter and really the thing that was the biggest challenge this quarter was the most erratic weather in over a century in our area.

On continuing operations basis, net income and EPS were up 13%, 33 versus 29. The net income from continuing operations eliminated the operations of two of our states, Maine and New York starting in the third quarter because we announced the sale of Maine to Connecticut Water and the sale New York to American Water early in the quarter. So the quarter had to assume both the accelerated depreciation and remove their results from the continuing operations.

In addition because of another accounting policy, we have to assume these deals will go through and assume which they will both be, the one will be profitable, the Maine, the other one is being traded at book value. But we have to declare what tax will be paid on them ahead of time and that came to $0.05. So there is a $0.05 deduction in the GAAP numbers, in the total GAAP numbers based on this taxes we will pay when we sell.

Now something that’s very understandable. The board is very confident in the future of the company, in future cash flows and profitability and declared that December 1 dividend will go up 6.5%. They did this in August, but this will be the record date. For the December 1 dividend, it will go from $15.5 to $16.5 and that’s our 21st increase in 20 years. So we’re keeping our eye on shareholder value. It was a very strong quarter for both capital spending and cash generation and most of that was due to the bonus depreciation that is being allowed for companies who are investing in America and Aqua is definitely doing that.

Through nine months we spent $230 million on plants, pipes, pumps, meters and so on. And we are on our way to another record capital investment in 2011. I anticipate we will exceed 2010’s record of $226 million by 5 million to 10 million on the pace we are going. Now to put this in perspective, our 2010 depreciation was a $108 million and our net income was $124 million. So we are basically spending three times depreciation and 2.5 times our net income as we invest in our systems and you can see we believe in the future and that’s why we are investing and we are taking rightful advantage of the federal tax and state tax policies which are rewarding companies who are willing to invest.

Now that’s why with all the spending we are not suggesting any new equity offerings or major long term borrowing due to the internal cash generation from the tax policies of the bonus depreciation. And just to give you some numbers. If you take our net income depreciation plus deferred taxes we are very close, the total of that was 260, then 310 and 330 this year. Next year in excess of 300, so you can see we are able to basically have enough cash to handle our entire capital program, which is a real anomaly from where we were 15 to 20 years when we said we had a lot of capital spend but we had to borrow and float equity every time, every year to afford that capital.

Now this is all coming in because we jump $45 million in 2009 upto $75 million in 2010 in deferred taxes and we are staying there based on the fact and this does not include by the way the state tax that was a separate issue. But next year, you should anticipate in your modeling that we’d go back to a normalized number which is in the 30, 35 range, unless the Federal tax is extended and then, hopefully, the Pennsylvania tax is extended then we stay at these levels of the 75.

Now, all the spending is a lot of numbers but the capital spending is truly paying off to our customers. We had, as I mentioned, erratic weather, tropical storms, hurricane and on early October snowfall. And I'm proud to say all our customers had service at 100% reliability and I think that’s because of all the capital investment we’ve been making. We realized that the electric service was interrupted because of downed wires and so on, but none of our customers felt that because we had a diesel generator, standby generators, solar at some of our plants, which were in service even without the electricity being in service.

Now, the increase in cash from tax policies has also reduced us the pressure to get range to pay for all these capital and it has also, of course, reinforces our S&P rating which is A+ for Pennsylvania, our biggest operation and where most of the capital is being infused and that was the S&P rating was reaffirmed this quarter and we have a 1+ recovery policy, which I think is a significant factor for those who want to lend money to the companies.

Now, although the pressure is not as great because we give back because of the bonus depreciation, some of this in rates because we didn’t have to borrow and float equity obviously. We still had a very busy rate year and continue to be busy. $21 million is already been awarded to us through this month. In fact, we just got a decision for about $0.5 million annualized awarded this week in Indiana. The cases that has generated this $21 million are, as I mention, Indiana, Ohio, North Carolina and Pennsylvania and some were surcharges, which is called [disquibs] and something else. I can’t remember the other name.

We still have significant rate cases totaling $15 million ongoing in Florida, Texas and Illinois. They’ve all should come to conclusion late this year or early next year. Therefore the benefits would be through ’12.

And in the fourth quarter, we expect to file over $50 million of rates and surcharges in Pennsylvania, Virginia, New Jersey, Texas and Ohio. And most of these returns will be felt somewhere in mid-to-late 12.

We are seeing some pick up in our acquisition program. Despite the new housing malaise and the current state of the economy, I am always the eternal optimist, half full glass, but organic growth, which is base growth of just people hooking on to our system by building a new house, has moved up slightly but ever so slightly from a little less than 0.4 to a little more than 0.4. So, think about a 0.5% we are looking at as a projection and then hopefully, it gets better in ‘12 and then better again in ‘13 as the economy recovers.

And acquisitions have been bringing in over the last two years, three years, again a reduced amount but about half a percent. This area we would like to see in the 2%, 3%, 4% range but at this point, I think it’s affected by the economy.

Now, we just announced one small one this morning, a 1.5 million acquisition, that’s gets us up to about a dozen or about 10 for the year. There is at least four or five, we think, we can do by the end of the year. We have – and looking at my sheet here, 15 under agreements. So the pipeline is still active. We hope to increase it and that's going to be one of our initiatives for next year.

Now, this year however we spent a lot of time on rearranging our portfolio with American Water being our key partner in doing this. Both of us have been rearranging and managing our portfolio to stay in this stage where we have economy scale, and where we have the best chance for return on our investment.

The readjustments we did just as a quick reminder in states of Texas, Missouri, Maine, New York and Ohio. We are now completely out of Missouri. That our last transaction occurred, I think in the late, in the second quarter. 3,700 customers, we never made money in Missouri. We understand Americans doing better than we did. They are making money already because of their economy scale and in return we got 5,300 customers in Texas where we understood American was not making any money and we are actually doing better than expected profit-wise on these assets because of the synergies we brought to the table. So that's a trading a loser for a winner on both of our portfolios, ours and American. So it truly was a win-win.

The Maine sell to Connecticut Water is going very smoothly. We had booked the taxes on a significant gain this quarter. That's the bulk of $0.05 that hit the GAAP earnings this quarter but we don't pay them again. I hope we don't pay them again. No cash went out of the door, its all non-cash, but when we eventually, actually paid the cash forward that we’re booking now. But the accounting method would be showing only the gain and that will be probably first quarter of next year.

And we’re working very closely with the American management now and hopefully both of us hope that we’ll get the approvals to trade our Aqua New York’s 51,000 customers for our Americans 57,000 customers sometime in the first quarter. Now as a refresher, these are book value trade, so there should be no significant tax issue involved when we do that trade.

Talking about the revenue and the expenses for the quarter, revenues were up 2% clearly lower than you are used to and we’re used to and I am going have to blame most of that on the weather. We had 30 inches of rain versus a normal eight inches in August and September. A hot July where we did very well in the East Coast properties and I thought it was going to be a record quarter and then August and September were just basically devastating.

Just to give you an idea, Pennsylvania sendout year-over-year was down 4%. New Jersey and New York where there is a lot of more lawn watering ordering was down 15%. That’s actual gallons sold in ‘10 versus actual gallons sold in ’11, so significant. Now the good news is, Texas and North Carolina were extremely hot and it didn’t rain a lot until the hurricane came up the coast in North Carolina and we did pretty well balancing it and that’s why overall we think there was about a 3% hit to revenues due to weather.

So you can take the two and say it should have been five and that five would have been zero from weather and hopefully sometimes weather and rate and growth you get some. So to dissect the 2% grew 4.5% from rates probably 0.5% from acquisitions and 0.5% from organic growth less 3% and that would have been a normalized growth pattern for the quarter without a good comparison on weather obviously.

Now the good news is that although revenues were only up $4 million, 2%, expenses and taxes, local taxes, real cash out the door only went up 1.6% or about $1 million. So we did keep a pause by being efficient we were able to actually even with only a 2% revenue growth actually help the bottom line because of our expenditures.

Just as a refresher, we track rather than net margins we track O&M to revenue which is the part that we really can control. Depreciation of course is non-cash. Taxes, we can’t control, meaning the local taxes and the assessments. So, O&M to revenue, just as a refresher, ’09 we were at 40.3%, $0.40 out of every dollar revenue were now in cost and didn’t go towards capital or profits. We took that down a 170 basis points; we like to say we can do 50 to 100 a year. We had a spectacular ‘09 through ’10, brought it down to 38.6, we anticipate about again 75 to 100 basis points this year. We already are showing almost that in our trailing 12 months.

And then, it should levelize off or may be go a little less, I mean there is asymptotic relationship here. We can’t go to zero, I would like to, but I don’t think we can make it to zero. So I don’t know where it levelizes out in the mid-30s or whatever, but our hope is that the Ohio synergies will help us bring it down a little more, may be a little better weather next year which is revenues without expenses will help us and so on. But I don’t want to predict that, so I think here in the 37.5 to 38 range that’s probably the right range.

Okay now and looking where we’re, with continuing and discontinued in GAAP and the state tax adjustment, because it’s one-time and so on, let me start by saying I am going to project that in 2012 we will obviously complete all the sales, so therefore diminish the taxes issue and so on from the discontinued operations. And complete the sale of Maine which will book a gain on. We anticipate obviously doing a little better on acquisitions and organic growth, but that is almost completely dependent on the economy.

We’re hoping to a return to normal weather. If you look at this year’s $0.32 non-GAAP last year’s what I would call operating earnings last year was about $0.32, is that correct I mean that was without any GAAP and all that. Yeah, Q3 of…..

David Smeltzer

You know what we reported last year, because there was no noise last year’s income statement. It’s 32.

Nick DeBenedictis

That had about $0.02 and because it was up significantly from like $0.26 a year prior and that had about $0.02 in good weather if you remember last year. So $0.30 would have been a real number but, and we projected 33 without noise I’ll call it number, none of this is accounting lingo. So I am sure the lawyers are fainting. So that $0.33 would have been a normal operation 10% over a normal year. Unfortunately it wasn’t a normal year and I’d argue we lost at least $0.02 from weather. And remember you always lose a quarter or half of percent, so that’s quarter of a cent, a half of cent at a buck earnings from conservation that you have to make up along the way and you make that up through either rate adjustments or selling a little bit more and getting more acquisitions.

So we had a real swing this quarter of $0.04 between this just because of the weather 4 plus and last quarter this time three months ago, I said look I think 33 is a reasonable number from pure operations because well if you took the $0.02 out of the, extra out of ten that would have been 30.10%, it would have been 33%.

Now I remember this was August I think we did our call and we had just had a record July. So I was very, very conservative in that 33, not knowing what was going to hit us in August and September which wiped out July plus.

I said the 33 would be positively effected by what we are considering a one-time tax plus but it’s real gap and it’s real money in Pennsylvania and that would get us to 35. Many companies are just putting it in there, not mentioning it to you and we are doing it. We are seeing basically, that $0.02 is not going to be around we don’t think in 2012.

So that would have gotten us to 35 and then I said expect because of tax policies, accounting policies regarding discontinued operations up for sale, i.e., you have to pay the taxes before you sell the property on any gain. So knock off $0.05 and that's about where it ended up which would have been the $0.30 GAAP which is what is basically what's reportable $0.30 and that is against the $0.32 of last year.

And that's including now the weather cost us $0.02, so clearly we made that up somewhere along the line by better operations and less expenses whatever. So I would like to take you from GAAP earnings, which is the $0.30 for this quarter and therefore $0.79 versus last year's $0.69.

The fourth quarter last year was a continuing trend. In ’08, we earned $0.19, in ‘09 we earned $0.20, in ‘10 we earned $0.21. So the $0.21, the $0.69 was the three quarters’ GAAP earnings, so that was $0.90. If we take this year's projection, I am very comfortable with current first call which is $0.23 to my understanding.

So if we have $0.79 GAAP plus the $0.23, that would be $1.20. Now if you want to take that $1.20 and try and figure out what's really the core operations of the company, if you look at the full year, we've picked up probably $0.09, real earnings, real cash, but $0.09 that may not repeat next year if the Pennsylvania tax bonus depreciation doesn't come through again.

So of course that brings you to $0.93 versus $0.90 in ‘09. But that $1.20 that I gave you also included $0.06 of discontinued write-offs for taxes, that were one time and it avoids the gain obviously, so that’s about $0.99 for the year, assuming we hit the first call number GAAP $0.23. 90 versus 99 is right on target with what I think we project and you all expect which is a 10% growth rate.

Very comfortable with next year’s first call which is a $1.4 in my understanding now what’s the next year’s first call? $1.8, I am sorry, the (inaudible) numbers. Okay which gets us right back into that range of what we’ve been able to produce over the last 15 years which is a 10% cager on EPS.

So hopefully that clarifies all these different charts and number we gave, but so far the first nine months has been a very solid performance. I am very optimistic that we’re going to be hitting and transforming the portfolio and getting that accomplished, so there should be no surprises and I think both companies, American and ourselves are going to benefit from the reshuffling of our portfolios.

And I am also hopeful that next year the weather returns to more normalized weather. We anticipate spending another 300 plus million in capital. We anticipate continuing to try and get rate relief, but our rate cases now are much lower percentage wise than they were in the past thanks to the surcharge picking up most of the capital needs in most of our states.

So it’s a much more predictable model and predictable look going forward. And we have one thing that I mentioned in the release. I don’t want to over emphasis its relationship to the core business, but it is something I am personally excited about because it’s in our states, Texas, Pennsylvania and Ohio and that’s the rapid development of the deep horizontal drilling type gases that I have just seen a dramatic change both in the electric industry and also our industry based on the fact of the water aspect of the drilling and also the fact that it’s causing a surplus of natural gas which is keeping electric prices down.

And many of you analysts understand that direct relationship with gas prices to electric prices. It is booming in Pennsylvania, having been up there quite often seeing our little towns that were, houses weren’t painted and stores were vacant. Little towns now are thriving. You can’t get a hotel room and some of these motel rooms I should say in some of these towns and it’s exciting.

It’s exciting for Pennsylvania, it will be exciting for Ohio, it’s always been exciting for Texas, and it will help our general company because we are in those three states. But we also looking at an unregulated opportunity which is in its embryonic stage right now, and that’s putting in pipelines to replace the thousands of trucks that have to be brought for every well to be pumped and this is unregulated.

They are individually negotiated. We have already built close relationships with four or five of the big drillers which will be dominant in that area and obviously we think we know what we are doing. We know how to move water, whether it’s for wells or for domestic or industrial usage.

So I mentioned that in the release mainly because it’s something that’s exciting to me and I think could have some real potential going forward.

Thank you for your time and we will open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll go first to Michael Gaugler from Brean Murray Carret.

Michael Gaugler - Brean Murray Carret

I think I want to follow up on kind of your closing comments on the Marcellus Shale opportunity, I saw in your release that you mentioned, the first stage of that pipeline that you’re working on currently looking to open up and I'm wondering what kind of returns are you expecting on your investments out there?

Nick DeBenedictis

Well, here again it’s economy of scale. If we have just the one customer that we have locked in now at the amounts that they anticipate needing now, it’s not guaranteed because they could stop drilling the Mar, but as long as they’re drilling they’re going to need the water. The returns will be and this is in 100% equity, so obviously it could be leveraged. The returns are in excess of the regulated return. At a 100%.

Michael Gaugler - Brean Murray Carret

I like that math. No wonder you’ve been up there a lot? So what else are you seeing up there I mean now you’ve kind of made a broad stroke that you know it’s kind of going gangbusters there, but I mean for Aqua in particular, are you working on other pipeline opportunities or you’re just kind of focused on?

Nick DeBenedictis

No, no we’re talking to other, see the people we’re dealing with, are what they called the midstream gas gatherers. They are not Shells, the Exxons and the Chesapeakes and the Ranges and the Atlases and so on. There are customers in the end, but the pipelines are put in a conjunction with a gas company, midstream collector already putting in line though it gets it from the well to the transcontinental pipelines which is Tennessee and Transco that runs across Pennsylvania.

So some of these names you have never heard of, like I don’t know how many people have heard of PVR, they are publically traded but they are resource developers. But there are other companies like them that we are talking to who are already planning the pipeline and we are just basically saying, let us partner with us on the water side. So that as you are putting one line, we will build you two.

If you have time, I would love to show you how we are boring under streams and showing you the sophistication of the construction and the pumping process and so on. And this is all mountainous terrain. I don’t know how the trucks get up the hills, but it is going to be much more efficient for these drillers.

So they have the water when they need it versus waiting for the trucks and if it is raining, they have plenty of water in the streams to get, but they can’t get the trucks up the road because of the mud. So this avoids all that, it gives them reliability which is really what they are paying for.

Michael Gaugler - Brean Murray Carret

I might take you up on the offer for the tour. The other thing on the acquisition you made this morning, kind of valuing that off of a per connection basis, is that about what you typically paying these days or was that one a little bit more?

Nick DeBenedictis

This one was a little more, an arm’s length transaction because this was not a troubled water company. So it wasn’t forced to sell, but it is going to grow to a thousand homes, it’s a very nice development. I rode around and looked at it. Up near the Mountaintop Golf Course and very nice area between Hazelton and Wilkesboro. This one, this one we paid for some of that growth because there will be no payment back as the houses hook up. We get all the revenue.

Operator

We will go next to Christopher Purchill from Janney Montgomery Scott.

Christopher Purchill - Janney Montgomery Scott

Thank you also for the thorough review of the quarter. There are a lot of moving parts, but I think you did a great job in kind of clarifying things for us.

Nick DeBenedictis

And the world hasn't healed that yet.

Christopher Purchill - Janney Montgomery Scott

You kind of mentioned this a couple of times on the call. I am just curious, you know, if you are hearing any discussion out of Harrisburg or out of Washington on extending that bonus depreciation --

Nick DeBenedictis

I am glad you brought that up. The Jobs Act Bill that has not moved too well. Now they are talking about doing it separately, absolutely has an extension of the 100% bonus depreciation factor for ’12. So if there is any section of the Jobs Bill that's passed, I think there's a shot that the bonus depreciation will happen.

Regarding the state bonus depreciation, I have talked to key administration officials and they are, I don't know, what the right word is, they are saying when they are willing to look at doing, if the Feds do it the state would do it. Now having said that, the state budgets are very tight and this is really a hit on the state budget in the sense that its real cash that's not coming in, they get it later but it’s a question of whether they want to spur investment or take the cash now and be able to balance the budget better or whatever. We’re hopeful that with couple months to really convince the administration because they don’t write the budget until December, January is proposed, to see if the Feds do it that the state will follow suit.

Christopher Purchill - Janney Montgomery Scott

Okay.

Nick DeBenedictis

That would obviously -- the Fed would not change first call for 2012, but if we picked up the bonus depreciation again that’s another $0.08 or $0.09.

Christopher Purchill - Janney Montgomery Scott

Right. Okay, but regardless of what happened there, you don’t see yourself in the secondary equity market for the foreseeable future?

Nick DeBenedictis

No, looking at next year, even with all the tax policies disappearing, we’re closing in almost funding our whole capital budget with just internally generate cash because of the profit increased just and the depreciation increases.

Christopher Purchill - Janney Montgomery Scott

Okay, great. And then just quickly on the efficiency ratio. You’ve talked in the past, I think it was on the last call we talked. You know, in two years you can get that number down 36%, 37%, I am talking about you know mid-30’s on this call.

If you were to look at that improvement and kind of break it up in to its core pieces, how would kind of allocate it between improvement in the south and general assets swaps? I don’t know if you are seeing any specific expense your lines where you have reductions, I would kind of doubt that but how would you break out the expected improvement, I guess over, the next two years?

Nick DeBenedictis

Four areas to get granular. First, the south still has some room to go and is Chris Franklin, as you know, is working on that. As you grow, not grow your expenses, as fast as you grow your revenues and/or its customers. So that is the biggest potential and we think Ohio has big potential now that we are going to be a 200,000 customer system or 150 versus 80 or whatever it is now. 110 now it’s going to 170.

The second area is pensions and this is really a north issue not the south. And I think if you look at most of the utilities that you and your colleagues on the phone are following, you are going to see big hits, the pensions next year.

So anybody who has a large unfunded pension plan is really to going to get hit pretty hard, because interest rates are so low on the treasury that the accounting rules say you have to discount it at a rate that’s tied to the treasury, and where we were discounting the pensions, let’s say 5, 7, 5, it could be below 5 this year. That is a huge jump even as the market does well and the other end of your asset return.

That’s going to affect everybody including us because we have a pension plan and some are older states, although we have frozen new entrants to the pension plan. We still have probably a third of our older state employees on it. In other words, all the south is no pensions, but an enhanced 401-K to find contribution. But the north still has about a third of the Union employees on the plan of action more than assuming anyhow.

So the pension is going to be. Now, I guess, it doesn’t affect P&L but it does affect cash and it does affect risk factors in case if the rules ever change because we’re able to book that as a regulatory asset and then try and recover it in future rate cases. I think this the way you write up in the [Cal Water] said, I mean that’s where they have a tracking account but they still have to mark the market.

So I anticipate it being a bigger issue with some larger electrics and may be even some of the water companies then they will be with us, but those expenses will be affected by an increase payment into these plants even though it’s a regulatory asset we’ll recover in rates. So very similar to what you heard from [Cal Water] the other day.

The third area is purchased power. Our second, or actually third area is the other part of benefits, second area is the healthcare. And by changing policies around anything else 20% contributions, we’ve at least limited to 12 over 11 growth in healthcare to about 4% or 5%. It was almost 13% and over 11 over 10. And I think healthcare is something we have to look at it what’s doing to all these companies.

The next issue is power and it’s been one of the fastest rising cost. The solar is having an impact for us and we’re starting to look now at may be natural gas versus diesel on the generators and may be producing our own power, becoming our own (inaudible). Obviously we’d have to look to what Feds – what the regulator say about that but I think if you have a lot of gas which we too, that sort of starts to making sense rather than build new generating stations..

The other area that we’re cutting into is purchaser water. We just signed a contract to get off of one of our larger suppliers in February of ‘12 and we’re looking at another contract that we’re hopefully going to be able to get out of by 2017 or sooner, which will cut our purchased water which is now in the $11 or $12 billion range or more, probably cut in half. So those are the things we are looking at that will cut the expense side and that’s why I am optimistic we can get a little lower.

Operator

We go next to [Hydra Dor].

Unidentified Analyst

Thank you. Nick, I wonder if we can talk a little bit about the CapEx budget for this year. I believe we had been talking about $325 million and now we are talking about $300 million can you tell us?

Nick DeBenedictis

This year 2011, I said we will exceed last years $326 by $5 million to $10 million. So we are talking about 330 to 335.

Unidentified Analyst

And how should we think about 2012?

Nick DeBenedictis

In excess of 300 because we haven’t really developed the whole plan here, pretty much a basic, we are at a 320 run rate now.

Unidentified Analyst

Got it. And do you have an update for us on how spill 1294 and Pennsylvania and if that goes through, how you would you think about implementing a forward test year?

Nick DeBenedictis

Yes, really Pennsylvania almost has a forward test year now. I mean we don’t call it that but Pennsylvania allows you to look forward labor contracts, healthcare benefits that are signed on. So it wont be as big A+ as some of the electrics are making it. It passed the House overwhelmingly.

We are supportive of it. It does have one provision for combining water and waste water rate base, which will help us and Pennsylvania American because we have small amounts of our over all rate base is waste water. So that will take away the risk of never earning fair amount on your waste water and the other thing is it will allow us to develop because the legislation will be needed a waste water disk. I do think though it has much more potential. I am being very honest with you. It’s a plus for us, but it’s a big plus for the electrics and gas. They will get a disk where they don't have it now.

Unidentified Analyst

Alright. Are there any other efforts like this to change larger regulatory policy that you guys are undertaking in some of your other larger states?

Nick DeBenedictis

Well, we proposed legislation and they got at least through committee but they didn't break through and get it passed, in Texas, North Carolina for a disk. And the disk would be broadened beyond pipe, because pipe isn't the problem.

It’s wells and tanks and small and in Ohio, we are working right now on legislation, which would mimic the gas legislation, which allows for a future test year and a disk, which we already have but broadened amount of things that could be included in the disk and how its implemented in a future test year method versus a historic test tube method. So if that is approved and it’s already been approved for gas, that will be a very, very positive thing for our Ohio operation.

Operator

We will go next to Michael Roomberg from Ladenburg Thalmann.

Michael Roomberg - Ladenburg Thalmann

Just a couple of questions on the asset sales, just in terms of the financial impact in the fourth quarter and the first quarter of next year. So you booked the tax implications of the gain on the sales. Can you quantify what the gain would be and what the timing of that would be for Maine?

Nick DeBenedictis

1Q and I am going to say $0.06 to $0.08.

Michael Roomberg - Ladenburg Thalmann

Got you. And also kind of looking backwards so that we can get a better understanding of how this continue actually affect the fourth quarter of 2011. Can you quantify the impact of the New York and Maine on your financials in the fourth quarter of 2010?

Nick DeBenedictis

There will be very little tax implications. We will have stopped depreciation because we accelerated all the depreciation into this quarter that was part of into this quarter’s earnings because that’s the rule and Bob I think its pretty – we pick up maybe a $0.05, yeah probably $0.05.

Michael Roomberg - Ladenburg Thalmann

Okay. And safe to assume that the revenue contribution from those assets was around $10 million, just in terms of getting a top-line number from continuing ops?

Nick DeBenedictis

We’ll look that up and give you the exact numbers from last year’s fourth quarter for those two states and you can anticipate what they would have been this year; it’s very little movement in Maine and New York. The only time they really sell a lot more or lot less is from May to September. This is the lawn watering, so it probably should be pretty, pretty basic.

Michael Roomberg - Ladenburg Thalmann

And then with respect to the I guess more aggressive CapEx budget is that 330 to 335 range that we are now looking at; is that inclusive of this pipeline JV project?

Nick DeBenedictis

I am missing.

David Smeltzer

Just wondering if there are capital budget includes may be contribution.

Nick DeBenedictis

No, the JV is 100% -- both of us are doing a 100% equity right now and it’s off balance sheet.

Michael Roomberg - Ladenburg Thalmann

And with respect to that project, what is the impact if any of the bonus depreciation on the cash flows that you could realized from that project in years one and beyond?

Nick DeBenedictis

Well, it will be eligible for both the state and federal. Now there is no state taxes yet paid, because we don’t have – it’s not operating yet still so. And if there is no tax increase in the – there is no bonus depreciation next year then we won’t get any benefit. On the other hand bonus depreciation for this year, we are going to take. Dave?

David Smeltzer

Yeah.

Nick DeBenedictis

It will be completed by year end. And you just remind me, I mean I’ll be on the phone call with the engineers this afternoon, because we’re trying to get the all the solar projects done by the end of the year too. We have two in Georgia and one in Pennsylvania so that we get the bonus depreciation and the ITC.

Michael Roomberg - Ladenburg Thalmann

Got you. That’s all I had, congratulations on a nice quarter.

Nick DeBenedictis

And this tend to have 11 million, Bob just looked it out.

Operator

We’ll go next to Stewart Scharf from S&P Capital.

Stewart Scharf - S&P Equity Research

I was wondering if you can add color to you know you were talking about with the sales drilling and the water systems and in the past you mentioned about the stations on the highway to make it easier and little bit and just the comparison of what your – how that will affect these systems that you are stalling, these pipelines and then what the potential is, the timetable on the growth rate going forward?

Nick DeBenedictis

Sure. Well, first of all the evolution of this industry is very interesting to watch. It was a lot of talk five years ago because the technology was so new and they were still saying we think there is a lot of gas in Pennsylvania. I am pretty sure that’s now been confirmed and actually the first of wells out produced any projection.

So the second is everybody thought gas prices would be at $7 an Mbtu and they are around $4 and they are still drilling so that tells you something. Third is the drilling has started the land accumulation and the royalties and all that and its still happening but not a frantic pace it was, because a lot of the land has already been garnered for the drilling.

And what we saw that a year and a half ago was an increased usage of our fire hydrants in our small towns up there, big tanker charge to command and pay for it, they pay tariff rate and what we’re getting was complaints from the town officials, we don’t want all these trucks filling up at the fire hydrants.

So we started looking at how can we get them out, still sell them water but get them out of the little towns that we set up and we now have five already located stations right on highways that are the trucks still – they went to the town, they pull up to the highway, we’ve run a pipeline to that filling station and they pay, we pay tariff rate to the water company and the trucker pays are unregulated entity. The fare going rate on what they pay anywhere else, when they do it.

Now, we’re still looking at stations and places to put more because it will be always be trucks, because the drill count, the drill rate count is probably only one-tenth of what it’s going to be eventually. So times tend the number of trucks that are there now which are already aggravating people and clogging up the highways and clogging up the small towns.

A typical tanker truck is 4,300 to 5,000 gallons. A typical well is 4 million to 5 million gallons of water for one drill, one time, one drill, so if you’re going to do 500 wells, 1,000 wells a year, you can multiply the number of trucks that have to be on the road just to service those. So what we thought was, if we did a pipeline, to give you an example, the one we’re doing now is 3 million gallons of water a day. So we’ll be set 24/7 whenever that driller wants to fill the impounded pond they have right next to the drilling rig, they can turn (inaudible).

In any one day, we think we’ll pump as much as 3 million gallons and we’re going to charge them for the price that we think that we deserve to get and they deserve to pay to get that convenience and it’s clearly cheaper than the trucks less environmentally damaging to the roads and to the streams because all the run off from the trucks and they come up the hill and dig it up a little dirt and rocks and all that coming up the hills to these rigs.

So we really think it’s a win-win. We won’t replace, we won’t have pipelines all over, we won’t replace every truck, but it’s such a common sense economy of scale move, but you need money to do it and that’s why the drillers are not going to put the money up and that’s why we think this is a great investment, an up front investment that will pay off for years to come.

Stewart Scharf - S&P Equity Research

Is there any way to multiply timetables of how much you could actually and apparent over the next say three or five years?

Nick DeBenedictis

Why don’t you give me a call on that, I can give you what -- we are not allowed to give you because these are all independent confidential contracts and then we can calculate it for yourself.

Operator

We will next go to Jonathan Reeder from Wells Fargo

Jonathan Reeder - Wells Fargo

Just try to read through the weather noise, would you characterize overall 2011 as a normal given the favorable June and July and then really the wet August and September or does that more than offset it?

Nick DeBenedictis

A bad winter; that was more of expense; we have lot of breeze of cold this winter for some reason. A good June, great July and terrible August and September and October is flat. A great year in Texas, because it’s been hot and dry in Texas all year and so balance of it out. So I would say taking into account the good year in Texas and North Carolina and the bad years elsewhere, I think $0.02 to $0.03 negative versus last year which was at least $0.02 positive.

Jonathan Reeder - Wells Fargo

So I guess if last year was $0.02 positive this is $0.02 to $0.03 negative, so maybe a penny lower than normal I guess?

Nick DeBenedictis

Right.

Jonathan Reeder - Wells Fargo

Okay. And then on the O&M efficiency ratio, is there any reason Q4 would go up from I guess where the trailing 12 months ratio is right now where there any kind of sales gains recorded last year Q4 that helped I guess lower it?

Nick DeBenedictis

No, but remember fourth quarter if you just look at as a quarter is always higher; first and fourth are higher because your revenues drop and your expenses are fixed. So really like if we took just the third quarter, sometimes they are low as 35, 34 something like that, so fourth quarter usually doesn't help, but that's why I gave you trailing 12. All we have to do is beat last year's fourth quarter.

Jonathan Reeder - Wells Fargo

Right, I mean relative to the trailing 12 you would think for the full year we come in around there maybe a little better even?

Nick DeBenedictis

Yeah, may be 10 basis points. But there was no one-time sales that go into reduction of expense or anything like that last year's fourth quarter.

Jonathan Reeder - Wells Fargo

Right, that's what I was trying to get at. Okay, and then I guess last question assuming the Pennsylvania bonus depreciation is extended for 2012, what's the expected effective tax rate?

Nick DeBenedictis

Well, your federal tax rate….

David Smeltzer

It would be much more in line with last years. Standard minor flow through right, I mean probably around the 40% mark.

Operator

And at this time we have no further questions.

Nick DeBenedictis

Okay, thank you very much everyone.

Operator

And that does conclude today’s conference. We thank you for your participation.

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