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Aqua America (NYSE:WTR)

Q3 2012 Earnings Call

November 02, 2012 11:00 am ET

Executives

Frederick Martino

Nicholas DeBenedictis - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chairman of Consumers Water Company, Chairman of Pennsylvania Suburban Water Company, Chief Executive Officer of Consumers Water Company and Chief Executive Officer of Pennsylvania Suburban Water Company

Robert A. Rubin - Chief Accounting Officer, Senior Vice President and Controller

David P. Smeltzer - Chief Financial Officer and Executive Vice President

Analysts

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Stewart Scharf - S&P Equity Research

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

Spencer E. Joyce - Hilliard Lyons, Research Division

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good day, and welcome to the Aqua America Inc. Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Fred Martino. Please go ahead, sir.

Frederick Martino

Thank you, Deborie. Good morning, everyone. Thank you for joining us for Aqua America's Third Quarter 2012 Earnings Conference Call. If you did not receive a copy of the press release, you can find it by visiting the Investor Relations section of our website at www.aquaamerica.com or call Emily Herman at (610) 645-4271. There will also be a webcast of this event available on our site.

Presenting today is Nicholas DeBenedictis, Chairman and President of Aqua America, along with David Smeltzer, the company's Chief Financial Officer.

As a reminder, some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements. Please refer to our most recent 10-Q, 10-K and other SEC filings for a description of such risks and uncertainties.

During the course of this call, reference may be made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the company's website.

At this time, I would like to turn the call over to Nick for his formal remarks. After which, we will open the call up for questions.

Nicholas DeBenedictis

Thank you, Fred. Good morning, everyone. I'm pleased to report another solid and up quarter for Aqua America. Couple stats. Revenues are up 12% for the quarter, 10% over the last 9 months. Net income is up 23% for the quarter, 20% over the last 9 months

[Audio Gap]

versus $0.30 and $0.93 versus $0.79 for the 9 months. Obviously, we're very pleased with the financial results.

We're equally pleased that our shareholders of record on November 16 will be rewarded with a 6% dividend increase to $0.70 annualized rate. This is our 22nd dividend increase in 21 years. And with a compounded annual increase over those 2 decades of 6.5%, we believe this ranks us the most consistent dividend payers on the New York Stock Exchange.

I'd like now to acknowledge what the mid-Atlantic went through the last week which -- this week, excuse me, I'd like to forget it, with Hurricane Sandy. And we sympathize with the many people in our region, especially New Jersey, which are still suffering [indiscernible] with the hurricane. But I want to give you an update as how it affected Aqua America as a corporation.

I'm pleased to report that we survived the storm with no damage or employee injury. That was the most important. Equally important, thanks to the investments we've been making in infrastructure, new water treatment facilities, flood proofing, standby electric generators, et cetera, not one of our customers was without water during or after. So we -- going back [indiscernible] August, September and October for water sales due to weather. After a strong July and we reported in early August last time, and I remember saying we had had a strong July but we didn't know how August would fare, it didn't fare very well. And the remainder of the Q3, actually deteriorated in 5 of our 9 states, and we had -- where we had less gallons delivered in 2012 versus 2011.

So it really wasn't a very good summer, and we were up against last summer, which was, again, the same solid June, July and then August, September, it just never stopped raining. So very similar this year. The -- thanks, however, to our cost controls, the new acquisitions we made on the trades and rate awards given early in the year, that's what allowed Aqua to achieve the revenue and net income increases that we had not -- had we not had, we wouldn't have such solid results. So I'm very pleased with management's ability to curtail costs.

And although if you look at the balance sheet -- or I'm sorry P&L, you'll see O&M is up 7%, $4.7 million. Almost all of that, to the penny, is from the 57,000 new customers in continuing ops that we absorbed in Ohio from the trade with American in May. And to put that in perspective, it produced $11.3 million in new revenues, so healthy, healthy profits coming out of Ohio.

So if you take the O&M and adjust it for just the Ohio new customers, O&M is actually flat. And I feel confident that we're going to continue to show that type of improvement in our efficiency ratio when we adjust for all the ins and outs. And as I mentioned earlier in the year, we thought, even though we had a very good year last year where we brought the ratio down 70 basis points, I said I thought we could do that again this year. I think now, we probably could bring it down as much as a 100 basis points between last year and this year when we compare year end '11 and year end '12. And the reason is that we are really getting now structural improvements, it's not just G&A.

Our electric usage has been reduced through the use of our solar and all the investment we made in solar and also the energy-efficient pumps, the VFTs that we've replaced, that we're now going to use 4 million kilowatt hours less this year than we would have without the solar and without the pumps. And that's a considerable savings. We pay a pretty good rate on electric because of our shopping, but, I guess, you could put anything you want on that. Certain states are $0.10; certain states are $0.08 and so on -- but considerable saving. And that's without the $0.5 million or so on in what we call SRECs you get from the electric companies for installing solar RECs.

You'll see about a $5 million reduction in our purchase water costs year-over-year, '12 over '11, in Pennsylvania because of our development of the new water sources that serve our Bensalem area.

And you'll also see a continued success controlling of our company's defined benefit pension plans, which is becoming a much bigger issue with many corporations. We've taken steps over a decade ago to handle it, and it's starting to now show the constraint that we expected it to show.

And I think one of the largest future benefits is going to be the conversion of our truck fleet over the next 5 years to clean-burning, less expensive CNG fuels. The economics alone, let alone less maintenance in the clean-burning engines, but the economics alone with current price of gas is almost a cut in fuel cost of 1/2. So we're very, very cognizant of our needs to continue to control costs, and we're very pleased with what's happened to date.

Again, we're investing $325 million plus capital investment program this year in water quality and infrastructure and, therefore, it will match last year's record. That pace is about 3x depreciation, so it's a healthy pace but it also helps future value of the company. In our 2013 plans, as we're developing our next year budget, we expect to continue to invest at this pace and all this without incurring any new equity infusion in our plans. And that's because of the growing internal cash generation from our operations.

Another bright spot is this year's improvement of our customer growth picture. We've already completed a dozen acquisitions so far this year in 6 of our states so it's not just 1 or 2 states, it's all over. And we should return to 20 acquisitions by year end. We had dropped below that in the last couple of years due to lack of just interest in anybody selling.

Our organic growth, just normal growth on our systems, has also shown an uptick. So the combined net total growth from acquisitions and organic, we think in 2012, could reach 2% or about 19,000 customers. And that's up from 1% in '10, and then it dropped to 0.6% in '11. And we're hopeful to see it back to the realm of where we always used to be, which was the 2% to 4% range.

We, once again, have maintained our S&P rating. Another write-up just came out a couple weeks ago, as one of the highest ranked utilities by S&P. Of the 227 electric gas and water that they follow, only one is ranked higher. And I have to acknowledge that this probably helped us do a refinancing just last week of $80 million, and we got 31-year length at 3.8%. And that saves us on the $80 million that we took down of about saving annually of $1.6 million.

Our unregulated unit is growing in both services and the Marcellus Shale water delivery area, and I continue to be comfortable with my earlier estimates. I think on the last call, when somebody asked me to project what this is going to do, I told you I thought we could earn $0.01 this year, which is pretty good when you do a startup and earn money right from the beginning. And I think we'll now be a little bit in excess of $0.01, and I still anticipate that it will double each year over the next 3 years as we complete the second and third phases of our successful rural water pipeline.

Our pruning program and that which then morphed into a trading program when we worked with other sister -- our fellow company, American, when Jeff Sterba and I just started talking about trading rather than selling outright. And they've both been successful for both companies, and we continue with that. And our execution on the integration of the new customers in Ohio to date and, of course, Texas last year has been flawless and financially successful.

We also work with another colleague company, Connecticut Water, and disposed of our main properties. They're doing very well with it, and we are, too, because we reinvested the proceeds into investment capital, building infrastructure throughout our states. And that has added in excess of $0.01 annually to earnings starting in '12. We sold this on January 1. And we'll continue each year and, of course, with no risk. It's already locked in.

The Missouri-Texas swap we did last year continues in '12 to be $0.005 accretive, so that transaction was very positive for us. And, of course, Texas is one of our growth states.

And the Ohio for New York trade, which occurred this May, this year will add in excess of $0.01. It will be $0.01 accretive over what it would have been if we just stayed there. I think when we get all the rates through and the capital infusion over the next 2 years in Ohio, it will probably end up being $0.03 accretive and, more importantly, open up new areas for growth in both our regulated as we're now the largest, by far, water company in Ohio and unregulated as the Utica Shale matches the Marcellus Shale for development in the energy-rich areas of those 2 states.

We also, in our pruning area, have decided to sell our Florida operations. From our initial purchase in 2003 through 2011 when we finally started turning a profit, we've absorbed $8.5 million in losses and had invested over $55 million to improve the system. We've now turned the corner. We're making money. Service-wise, it's meeting all standards, and we think it's quite an achievement turnaround. And we're meeting all environmental standards. It's just we don't see any strong growth potential in Florida for us, and we have never been able to achieve the needed economy of scale to make it a long-term investment for us in Florida. We're talking to some viable opportunity -- people who have viable opportunities to take on our Florida operations.

Despite the poor October weather, I'm still comfortable with first call for the fourth quarter and, therefore, for the year, which although it's even with last year's fourth quarter results, which were $0.24 GAAP, those -- that $0.24 included a onetime $0.03 gain, nearly $0.03 gain in '11 from the PA bonus depreciation tax treatment, which did not reoccur in 2012. So it's up against a onetime tax benefit we got last year. So if you want to take a look at it, if you give us the adjustment for that onetime tax, I still think revenues are going to be up almost 10% year-over-year, and net income adjusted would be up a similar 10% to 12% regarding the normal process of the company.

I think -- I'm sorry for the granularity and -- but you can see a lot is happening with the company and a lot of positive things for Aqua. So I'll open it up for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Ryan Connors with Janney Montgomery Scott.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

First off, thanks for the detail on the structural cost improvements. I thought that was a really interesting part of your remarks. Can you just clarify, when you're citing numbers like saving 4 million kilowatt hours and $5 million on purchased water, those are annualized numbers you're giving?

Nicholas DeBenedictis

Yes. Between '11 and '12, we will have used -- had we not done the solar and the VFTs, we would have used 4 million kilowatts more.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Okay. Okay, good.

Nicholas DeBenedictis

Now we always grow so, therefore, you're using more electricity. But I put it on the same-store basis.

Ryan M. Connors - Janney Montgomery Scott LLC, Research Division

Got it. Okay. Yes, that's helpful. And then just to kind of a bigger picture question for you and your take on -- one of the takeaways for me from the NAWC event early last month was sort of I got the sense that ROEs just broadly nationally will continue to kind of be under a little bit of strain and that it's not really an ideal environment from a regulatory perspective in that sense. And the reasons for that, we'd like to get your take on what the reasons for that are. But so -- anyway, do you agree with that kind of takeaway? And then I noticed that the rate case pipeline is a little bit light relative to your normal run rate. You have $9 million in rate cases outstanding today. I mean, is that in any way a function of sort of recognizing it's not a great environment to be in for rates? Or is that just happenstance?

Nicholas DeBenedictis

Well, I think a good utility can control when and if it needs regulatory relief. And part of what you reward management for is timing. Right? So I think, I can't argue that when we just borrowed 31-year money at 3.8%, that interest rates are not probably their all-time low, and that has to have a reflection on ROEs. They were 14%, 15% when I started so -- started, meaning with Aqua. So I think they have bottomed out. I think you've seen them start coming down over the last year probably. They're in the high 9s, low 10s now where they were mid-to-high 10s. And what we're looking at is mostly infrastructure, so we don't need to go in for as many rate cases versus try to control costs and use the infrastructure surcharges to continue to pay and get rapid return for our investments.

Operator

And we'll take our next question from Jonathan Reeder with Wells Fargo Securities.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

I was wondering, has the Florida operations been moved to discontinued ops?

Nicholas DeBenedictis

Yes, we did that as of 3Q. We don't have a deal yet. We're talking with one party, which we put out in our release, Jonathan, but that doesn't limit us to that party. And we've actually made it a fairly public process in Florida. I don't know if anybody else knows about it but -- so we put it in discontinued, and you'll see that in this Q.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. And then, I guess, just going through that process a little bit. I guess, what's the process if FGUA doesn't end up buying the system? Or conversely, if you do reach a deal with them, I think it was the end of November you mentioned in the release, when would you expect it to close?

Nicholas DeBenedictis

Okay. If FGUA is successful as the total or partial acquirer of the systems, I think we have like 70 systems, the -- I don't believe it will close much before the first quarter of next year. And the reason we went first to FGUA was because we felt, like on with a nonregulated unit, it may be quicker. And whenever you decide to sell something, speed is important because employees want to know what their future looks like, you just want to move on. We gave them a deadline, which they agreed to, of November 30 to say yes, no, so that we weren't negotiating for 6 months and then deciding. And so I would anticipate -- first of all, I have no reason to believe it won't be successful, but there are other people who have already implied that they're interested. And we're not going to wait around. It's basically, if we don't have a deal with them by November 30, then we'll move on. But if we can do something with FGUA, I'm anticipating first quarter.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. Do you happen to know what the like rate base and debt associated with your Florida operations are? Is that something you're willing to discuss?

Nicholas DeBenedictis

Yes. If you can call Dave our Bob Rubin after the call, I don't want to give you just numbers off the top of my head. I don't have them right here, but we can you all the detail.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. And then the other thing on O&M ratio. You said you expect to be 100 basis points better this year. Is that just for the regulated operations or consolidated? Or maybe the better way to phrase it is, how should we look at the cost structure of the water utility -- or not the water utility, but the shale water pipelines once they're fully operating?

Nicholas DeBenedictis

Yes, that's a good point. Because as it gets to be bigger, it could influence either up or down the O&M revenue. Bob, is the O&M revenue strictly regulated that you gave me or is that...

Robert A. Rubin

Nick, that's Aqua America. We do have the total for the regulated segment as well. It will appear in the 10-Q eventually when we file. But we do have the regulated available, if you want it.

Nicholas DeBenedictis

And I'm going to guess that the regulated would even be lower. Because I think at this point, the services business and the Marcellus, because of the startup cost, probably have a higher O&M to revenue. But the revenue stream is so small, Jonathan, that it hasn't really -- the delta, the variance on it is -- doesn't really move the needle. And the other part, just for technical reasons, Jonathan, we're getting paid through an equity distribution. So that's not revenue. So it's all expense. Right?

The equity distribution, when you look at our P&L, is not on the revenue line, whereas the expenses are on the O&M line. That's actually hurting us.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. That helps.

Nicholas DeBenedictis

Because it gets bigger. As it gets bigger, we're going to have to readjust that.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. But it will be continued -- so I guess, the equity will be realized separate from the revenue line on a continued basis?

Nicholas DeBenedictis

We'll have to add the 2 together, because it's all commits. That's the way we get revenue from the Penn-Virginia partnership. And then they distribute it, and it comes in as an equity distribution. But all the expenses that we incur on our side to run this new business are in the expense column of the O&M.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. And then -- so you're -- I guess, once the pipeline is up and running, is the expense ratio -- if there would be kind of a revenue line, is that pretty marginal? I mean, is it -- once the pipeline is in the ground, the associated expenses are pretty minimal with operating the pipeline?

Nicholas DeBenedictis

Yes. I think if -- when it gets to full flow, and that's going to be the biggest judgment factor. This is a commodity business versus a regulated business. If we could fill the pipeline 100% everyday, your EBITDA to revenue is probably going to be in the 80s. If it's -- 30% of the time, it's probably going to be -- the EBITDA to revenue is probably going to be in the 40s and 50s. And our regulated EBITDA to revenue is in the high 50s. That's a good way of looking at it. We can give you all those numbers, and you can make your own assessment as to what it makes the O&M. But my comment now would be it skews it one way or the other depending on capacity in the pipeline. Right now, it's skewing it upward. But it's so small, we didn't decide to take it out yet and give you a different number. And we're confident even with that upward skewing, slight upward skewing, we're going to beat O&M, their revenue by 100 basis points.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Okay. Yes, I appreciate all the detail you give on it. Because obviously, it's growing a portion of the business and one where there's potential additional upside be it in Ohio and Texas for you so...

Nicholas DeBenedictis

Yes.

Jonathan Reeder - Wells Fargo Securities, LLC, Research Division

Just trying to wrap our hands around it, so all the little incremental details certainly helps. So I appreciate the call today, Nick.

Nicholas DeBenedictis

What can I say, Jonathan, because I know you had a lot of questions we talked about. What I'm confident on, we're only done Phase I so the maximum is 0.5 million gallons a day. We have been hitting almost capacity in the pipeline, which tells me that when they're drilling, they're using the pipeline water because of the reliability and the lack of environmental issues with using trucks.

I'm sure there's trucks still being used in areas that aren't close to the impoundments and to get from the impoundments to those wells. But we're not -- I don't see us competing with the trucks too much. I think once they buy our water, the pricing is right, I think it's working.

Operator

And we'll take our next question from Stewart Scharf with S&P Capital IQ.

Stewart Scharf - S&P Equity Research

Regarding -- can you just walk through a little bit of the process of selling the Florida operations and why you decided after all these years and your losses and what brought you to that decision at this time?

Nicholas DeBenedictis

Well, first of all, the -- very honestly, the regulatory climate, we have not been able to get along like we do in the other states. I think there's a compact, and we know what to expect and the regulator knows what to expect from us. We just haven't had -- been able to develop that in Florida. So that's, probably for a regulated utility, one of the most important things. And second is, we we're not seeing any growth in Florida, and the reason we got in Florida was to grow. And Florida isn't growing, at least in the water part of it. Third, was the fact that it was our small -- one of our smaller states and it's 3%, and the economy of scale just wasn't there if you couldn't grow. Therefore, you had never -- you didn't have the potential to be able to refine numbers like we just talked about with Jonathan, getting your own end of revenue down and so on. And we didn't see the potential for that. So why did we stay so long? Well, because we wanted to try and make a college try out of it. Also, to be very honest, we didn't feel we could ever excel [ph] It at a reasonable price unless it was environmentally compliant, service was better and that we we're starting to make some money. It was hard to sell something that's losing. But we're at that point now, and we just made a tough decision. Is this our better future? Or should we put the money that we'll get out of Florida reinvest it in other states and do better? And that's where we ended up. And to be very honest, just because it was small didn't mean it wasn't taking as much attention from management. And with all the other things we're looking at, like the unregulated and everything else, it's the old 80-20 rule. 80% of your time is going into 20% of your problems. And it just was taking too much time. So we just made the tough decision about 6 -- 3 months ago that maybe we should see if there's some people out there. And the first person we talked to had interest, and that was the FGUA. And that's why it's now public.

Stewart Scharf - S&P Equity Research

Okay. And you mentioned that the boiled water -- I noticed that there were some counties around Jersey and the places where they were requiring or even suggesting boiled water, the hurricane. And how did you manage to kind of avoid that impact of the hurricane in your areas?

Nicholas DeBenedictis

Well, we didn't. I mean, maybe we were lucky in the sense that some of our areas aren't right on the barrier islands. And if you're right on the barrier island, if we were there, we'd have the same problem. But we are throughout New Jersey, which got hit. We're in 4 different areas. We had standby generators ready. Our systems are in fairly good shape. We flood-proofed our well areas. So we avoided some of the traditional problems you get, a little bit of luck but a little bit of preparation. And the standby generators really make the difference. When the power is out and you have a well, you're not getting any water out of the well unless you have your own generators, and that's really made the difference. We invested in those about 3, 4 years ago.

Stewart Scharf - S&P Equity Research

Okay. And regarding the housing market. Are you looking for just continued gradual improvement over the next couple of years or you think this is just more of an aberration?

Nicholas DeBenedictis

No, no. I think it's -- and I'm not just spinning as a Chamber of Commerce guy. There has been so much -- I mean, first of all, probably, the overheated 1.3 to 1.5 housing starts a year was overheated. And everybody was buying a house and not everybody could afford buying a house. But we're talking about an increase in housing that's off a base that is ridiculously low, 400,000 housing starts a year nationally. My gut reaction is 750,000 to 1 million is where it's going to settle out over the next couple of years as people get more confident. The banks start getting more confident in loaning money. I don't think we're going to see the heydays where anybody who wants a house is going to be able to buy it. On the other hand, the used housing market, existing housing sales, pricing has firmed up, so people who were trapped in their old house are now looking at new houses and, therefore, their house will be up and so on. So it's a psychological issue, a bank issue, but it's also a demographics issue. And I think there was just -- I think a lot of people are still living in apartments that don't want to be there and they did a lot of apartment building over the last 3, 4 years. And some people who are living at home may be moving into apartments, which will free up that to go to a home. So I think it's long term. I don't think it's going to zoom up, but I think it's going to be nice and steady. Now not all that 2% story, and I don't want to mislead you, came from organic growth, new houses. A lot of it came from the difference between how many customers we absorbed in Ohio and sold in New York.

Stewart Scharf - S&P Equity Research

Okay. And you said there were 12 deals completed and you're looking at 20 for this year. Is that right?

Nicholas DeBenedictis

No, we think another 8 in the fourth quarter.

Stewart Scharf - S&P Equity Research

Yes. And with those, I assume they would be in your core regions of critical mass, Texas?

Nicholas DeBenedictis

Oh yes, yes. They'd only be -- I can tell you where they are. They're in Pennsylvania, 2 in Texas, 3 in Illinois. They're in the regulatory phase now, where the regulators are ready to approve them. But we can't announce them or close them until we're sure that we're allowed to, and that's with the regulatory process.

Stewart Scharf - S&P Equity Research

Okay. And we're starting to see some activity there, too. I guess of the 12, 2 or 3 of them are municipal, and we're starting to see the municipal governments realizing that maybe they don't have the economy of scale. These aren't big municipal governments. These aren't New York City or anything like that, but Kidder was one we just did. We did one, Mifflinburg. So these are 2,000, 3,000 customer systems, but they're municipal versus private.

Stewart Scharf - S&P Equity Research

Okay. And the guidance to '13, you said pretty much continuing in that 10% growth range?

Nicholas DeBenedictis

Yes. I think we're back to that 20% a year versus dropping to 10% like we did, and that's built to our plan in the sense that we expect our corporate development people to be coming up with deals. So they're -- every day, they're working on them. But you don't get one every day but that's -- unless you knocking on somebody's door, it doesn't happen.

Stewart Scharf - S&P Equity Research

I mean, the earnings growth for '13.

Nicholas DeBenedictis

Oh, oh yes. We've always been a consistent -- I don't want to talk about 20% earnings growth. But we've been very consistent that over the long term, 10% is achievable.

Stewart Scharf - S&P Equity Research

Right. Okay. And I thought you mentioned in the past, you're looking more at doubling for the shale project over 5 years. You mentioned 3, but you still see it doubling over -- for a 5-year term.

Nicholas DeBenedictis

Yes. I'm actually -- I was a little bit more aggressive in today's call. I said, I didn't -- I said we could earn a $0.01 in '12. I think we're going to in excess of a $0.01, and I think it will double every year over the next 3 years, so not double over 3 but double every year, over the next '13, '14 or '15. Because we're building Phase II now and that should be in play in '13, we started Phase III, which should be in play in '14. So that's why I'm saying as we put more pipe in, we're going to be selling more and it's profitable so, therefore, it hits the bottom line.

Operator

And we'll take our next question from Gerry Sweeney with Boenning.

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

I wanted to bring up a question. I know you guys are towards the forefront and very much looking forward. Wastewater, I think, what is that, at the end of this year, you can start doing combined rate cases and adding in wastewater in Pennsylvania. I mean, this would seem like there's certainly an opportunity there; it may be developing over the next couple of years. But what's your take on this?

Nicholas DeBenedictis

Yes, there were 2 key regulatory decisions made this year and then a third one that we're anticipating before the Ohio legislature go sine die. The Ohio one is a future test year and an expansion of the surcharge so 2 very, very positive things for regulated water in Ohio, if it passes. The -- Pennsylvania passed a law earlier this year to combine rate basis to allow a sewer disk to be applied for. And of course, I mentioned in our rate case that the OCA negotiated a -- if we decide to do any kind of election of the repair tax credit bill when the IRS puts the final numbers out, they've allowed that to happen in our company because we've negotiated in a settlement. The third area was New Jersey where, last week, we got approval of the New Jersey DISC, which is a 5-year program. So that's very, very exciting in New Jersey, and we've already doubled our capital outlays for '13 based on what we were going to do and what we will do now with the infrastructure surcharge. And believe me, after you've seen New Jersey's situation, you can see the infrastructure bill is the right thing to do. Regarding the specific question you asked me, we would have to file our next water case with sewer in it so -- and that's not going to be for a couple of years.

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

Do you look at that as an opportunity, I mean, obviously, from the acquisition front? And is it going to be a focus? Is it as profitable in terms of buying some of the smaller systems out there? If you could provide any detail or what your plans are.

Nicholas DeBenedictis

Yes, sure. So sewer is more challenging because it's a different law, Clean Water Act; different type of employees, from a standpoint of technical skills. But as a sanitary engineer, we -- you're trained if it's coming in or going out. Right?

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

Yes.

Nicholas DeBenedictis

It's that simple. And hydraulics is the same. Municipalities are the same, and your rate base is the same. Somehow, they never did it that way in the regulatory field or even in some of the water companies never wanted to get into the wastewater. We saw no different. We got into it. And now this law in Pennsylvania recognizes that why should there be 2 separate rate basis, 2 separate rate cases. It's all the same. And we're excited about it. So I think it will help us because the sewer is a little more expensive upfront, because most of the plants have not been maintained as much as they should of. That's why they want to sell them.

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

Okay. And I imagine there's probably less opposition from public? They don't want to sell their water, but they don't...

Nicholas DeBenedictis

It's interesting. The polls show water is some -- it's like selling your firstborn, whereas wastewater doesn't have that same emotion.

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

One's in and one's out, so I guess that's clearly what you said.

Nicholas DeBenedictis

Yes, right. Yes.

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

And then just one other point. You were talking about, I guest, your acquisition and just overall organic growth. And I think Stewart mentioned it but I'm not sure if I heard it clearly. But would the safe assumption, are you planning on essentially 2% growth going forward on like maybe on a combined basis on those? Or is that still a little bit of a wait-and-see approach in terms of the organic and the acquisition front?

Nicholas DeBenedictis

Yes. Well, our 5-year planning for the Board, which is what we do in order to do the dividend, was more conservative than it had been in the past. In the past, we had always looked at a 2% to 4% normal growth period. But after '08, we dropped it to 1%, which we didn't even hit last year. But I'm anxious to get it back up because then you don't have to depend on rates as much.

Operator

And we'll take our next question from Spencer Joyce with Hilliard Lyons.

Spencer E. Joyce - Hilliard Lyons, Research Division

A couple of questions here. First one, to touch again a bit on the hurricane. I know you mentioned doubling the capital outlays toward New Jersey for next year. Do you think that some of the damage or trouble in certain areas where you don't operate may present any acquisition opportunities there?

Nicholas DeBenedictis

Well, I hate to even speculate because, right now, it's recovery. But I assume if it's a small system who doesn't have the capital to fix it correctly and doesn't want to make the investment, a sale to a bigger company like ourselves or America, would be a viable option.

Spencer E. Joyce - Hilliard Lyons, Research Division

Yes, I know. Still a bit of a touchy subject there.

Nicholas DeBenedictis

Yes. I mean we're not knocking on any doors. We're knocking on doors to help people at this point. But if something falls out of it, obviously, we want to -- New Jersey is one of our key states, and we want to grow in New Jersey.

Spencer E. Joyce - Hilliard Lyons, Research Division

Yes. And to switch gears a little bit. Looking back at the pipeline joint venture there. Once it's up and mature, do you expect the earnings generation there to be pretty stable across quarters? Or do you expect to see a bit of a seasonal uptick there possibly?

Nicholas DeBenedictis

Well, no, no, no. I don't think it will be seasonal maybe dead of the winter. It's tough to -- just because of the snow getting the rigs up there and all that. I think it's really going to be contingent upon gas prices as to how much drilling. And I think what we found over just the 2 years we've been really following it in depth is that the reserves are higher than anybody thought, and the gas is -- the dry gas is clean coming out. And I think part of it is going to be how many cars are converted to natural gas? How many pipelines to feed New York are going to be built so you don't need the Southwest to Northeast lines as much? But there has been -- there's been so much gas produced that the flow of gas has actually gone the opposite way now in many of these pipes, which is very, very -- nobody would have predicted that just a year ago. So the exciting thing for Pennsylvania is 2 things. One, one of the refineries that was going to be shut down in Philadelphia has now been turned into a place where the gas is going to come down, and they're going to refrac the gas. And in Pittsburgh area, the governor announced that Shell is considering locating their ethane cracker, which should be similar to what they did in Houston 25 years ago, right outside of Pittsburgh, Beaver County. So that would be a huge economic boom and demand pull for the gas. So I think you're -- I think we're in the embryonic stage of another oil and gas in the 1850s started in Pennsylvania. I really -- of course, I'm a Pennsylvanian, but I really think this is a game changer in Pennsylvania.

Spencer E. Joyce - Hilliard Lyons, Research Division

A final follow-up, to switch gears again here. I know last quarter, weather was a bit of a tailwind for you guys. I think it was around a $0.015 you guys estimated. It may have been attributable to some drought conditions. And I know going into this quarter, we were looking to replace some easier comps, I think, due to some heavy rainfall last year. Is there a sense there what that normalization may have contributed to this quarter?

Nicholas DeBenedictis

I'll get you a number but not much. I would have said a lot after July. I think were up almost $0.02 just in July, but we didn't have a very good August and September. And it was similar to last year, and we had normalized our projections in our budget, feeling it would be a better August. Because last August, it was terrible, too, but it wasn't much. And the actual numbers for the 3 months, taking in July's effect, in 5 of our 9 states, we're actually down in actual sales. They were up in revenues because we had rate cases and other things but -- So no, it wasn't a great quarter percentile-wise.

Operator

And we'll take our next question from Michael Roomberg with Ladenburg Thalmann.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Sorry, I jumped on the call a little bit late. So if you've already answered this, I apologize in advance. I noticed the CapEx was running at a faster clip than last year. Last year, you were a bit back-end loaded. I think fourth quarter it was over $100 million. Can you kind of update us on where you stand with your program this year and what you expect for the balance of the year?

Nicholas DeBenedictis

Yes. We are a little ahead of what we told you earlier in the year, which was $300 million. We think it's going to be $325 million plus. Part of that is because we've been getting, first of all, good prices; and second of all, because we had a warm winter. '12 winter was very warm. We got an early start, and that's why you're seeing it not all back-end loaded. It looks like it's almost perfectly 9 months is 3/4. So we're comfortable. And next year, as I projected, would be about that same level, which is about 3x depreciation.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Got it. And then with respect to the dividend, it's nice to see the increase. And I'm just wondering if you could kind of take a moment to update us on the policy of the thinking around the dividend, whether it's a target payout ratio that you see over the next 5 years or so or a nominal increase rate or a percentage increase rate?

Nicholas DeBenedictis

Yes, sure. Well, first of all, as you know, we're still a retail stock so 60% -- 55%, 60% of our investors are individuals. And many of the funds who hold us are value and are very happy to see the dividend increased. And we've had it since, I think, 1968 or something, but it's something like that. But we've been increasing it since we got back into the water business 20 years ago, and it's gone up 20 years in a row. And I would say, a significant 6.5% compounded. The rationale is we don't want to get into the -- just for paying the dividends so we can say we raised the dividend, do the $0.005 or something like that and then be paying out 95%. We're down in the 60s now. We think it belongs between 60% and 70%. We're in the lower end of that range now, so we felt very comfortable with the amount and the fact that it will be consistent, But I think it's the board's intent, and you can argue 20 years in a row, shows it, that they really do want to continue to increase the dividend but not get to the point where it starts hurting our need. Now the other factor we always look at, will the dividend increase cause cash deterrent to a -- and then have to issue more equity. And our 5-year plan has no equity issuance. And I've said earlier on the call, clearly, we're saying that with the $325 million this year and plus next year, we don't see any equity infusion, other than the drip. We have a drip where we give people a chance to get their dividend, put it back in the company.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Yes. And do you foresee the drip as continuing in its current form indefinitely?

Nicholas DeBenedictis

Well, it's a popular program because we give 5% off on the stock. But I mean, that's something the board probably would consider if they felt we were getting our -- we were getting too much stock in the company. And we are growing equity pretty healthy in the 5-year plan, issuing equity, growing equity from retained earnings.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Lastly, I did catch your comment with respect to transitioning the fleet over coming years towards CNG. Can you just kind of quantify that? Is it possible to do that at this point?

Nicholas DeBenedictis

Yes, yes. I'm a -- we want to be a first mover on this just like we were with solar. I really believe in it. It's economically driven, unlike solar, where we used every grant and every subsidy we could get to make it work. This works -- just the only deterrent in my mind is Detroit because there are not enough people who want the cars yet because they haven't realized the savings they could have. There's still people who fear safety, which is just a misnomer. There is no safety issue. It's actually safer. It's not a liquid fuel. If you have an accident, it's going to escape in air. It's not going to fall in the ground and then somebody could ignite. And until you get the cars, they won't put the gas stations in. Right? It's a chicken and egg. So we felt as a fleet provider, we had the opportunity to put our own gas stations up, fill them at night, and we've started to convert. Whatever is up for renewal, they're going to be replaced with NGV. Now the problem is they charge you more for NGV vehicle original equipment. The payback is 3 years, 4 years to make up that difference, and we have trucks for 7 to 10 years. So it makes sense for our rate payers. But on the other hand, if it -- it shouldn't be any more expensive. It's an engine. Right?

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Right.

Nicholas DeBenedictis

But because -- and I ran into this when I was at EPA. And I don't want to sound like a government hawk or anything like this. But until EPA set MPG standards, Detroit didn't build small cars because the marketing people run Detroit. And if the government says, "We're going to say natural gas, just like in India, China. It's going to be our main fuel for vehicles." Detroit will build it. It's not like you don't have the engineering. So we're planning to stay out front on it. Now you asked me to put numbers on it. Equivalent diesel fuel, $4 is less than $2. So you're MPG on a truck, which is like 5 miles to the gallon, and how many miles you drive it, you can figure out the payback. It is absolutely economically positive, especially if they give the prices to be the same.

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

And what is the nominal difference in capital per vehicle on a percentage basis?

Nicholas DeBenedictis

Oh, enormous. $100,000 dump truck is right now $130,000. That's OEM. We did not want to retrofit a gasoline engine to get natural gas, then you have all kinds of trouble. So we're only looking at new. And because they're not selling a lot, they pay more for that engine so, therefore, they try and get it back right away. It has to be mandated...

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

And how much -- Nick, do you have a rough idea of how much you spend on your vehicle fleet every year in terms of capital?

Nicholas DeBenedictis

No, but I can get you that. Why don't you call Dave, and he'll get you that.

Operator

[Operator Instructions] We'll take our next question from Heike Doerr with Robert W. Baird.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Nick, I'm hoping we can talk about the fourth quarter. I want to just make sure I understand the numbers correctly. As we understood it, fourth quarter last year was $0.24. That was $0.20 from continuing operations, $0.03 benefit from bonus depreciations and about a $0.01 from discontinued ops. I believe you mentioned that you were comfortable with the first call estimate, which, I think, you said was $0.20 but, I believe, is $0.24. I want to just make sure that we're talking apples-to-apples here?

Nicholas DeBenedictis

Yes. I'm comfortable with first call, which lawyers tell me I can't say what it is. I think you're very close if you said $0.24.

If you look at Thomson's, I don't -- so if that's the number that you think first call is, I'm comfortable with it.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. And so when you talk about what -- go ahead sorry.

Nicholas DeBenedictis

But I want to make sure is if you look at our GAAP last year, it was $0.24. And it looks like it was a flat quarter, and you just described the real number was $0.20 to $0.21.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. So when you say you're comfortable with the first call, you mean on a continuing operations basis?

Nicholas DeBenedictis

Yes. Dave, am I right on that? I want to make sure of the technicality. Is Dave still on?

David P. Smeltzer

Yes, we're here. $0.24.

Nicholas DeBenedictis

$0.24, Heike said, is it continuing operations?

David P. Smeltzer

Look, continuing operations last year was, what, $0.20.

Unknown Executive

For the fourth quarter, $0.20 without the tax benefit.

Nicholas DeBenedictis

Right. And we're apples-to-apples would be the $0.24?

David P. Smeltzer

Right. Yes. So we're comfortable with first call on a continuing operations basis. Right.

Nicholas DeBenedictis

Right.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

I wanted to make sure we're all talking about the same numbers.

Nicholas DeBenedictis

Yes. Good news.

Operator

[Operator Instructions] And there are no further questions at this time.

Nicholas DeBenedictis

Okay. Thank you, everyone.

Operator

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

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