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Aqua America Inc. (NYSE:WTR)

Q3 2008 Earnings Call

November 5, 2008 11:00 am ET

Executives

Brian Dingerdissen - Director of IR

Nicholas DeBenedictis - Chairman, President and CEO

David Smeltzer - CFO

Analysts

Michael Roomberg - Boenning & Scattergood

Debra Coy - Janney

Jim Lykins - Hilliard Lyons

Richard Verdi - Sturdivant & Co.

Jonathan Reeder - Wachovia

Tim Winter - Jesup & Lamont

Stan Robbins - Robbins Planning

Operator

Good day, everyone and welcome to the Aqua America third quarter 2008 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Brian Dingerdissen, Director of Investor Relations. Please go ahead, sir.

Brian Dingerdissen

Good morning, everyone. Thank you for joining us for Aqua America's third quarter 2008 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 Will Meade at 610-520-6309. 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 maybe made to certain non-GAAP financial measures. Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the company's website.

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

Nicholas DeBenedictis

Thanks, Brian and welcome, everyone. We are obviously pleased with our third quarter and also our outlook which I will try and get into a little bit today. I think the results verify our successful business model, which we have stuck with and has been successful for over a decade and now its returning to its norms.

I think this quarter also validates and I will get into some of the credit issues that everybody is being affected by today, but I think the numbers, the balance sheet, the strength that we are showing also validates the fact that for the past decade, we have been working to strengthen our balance sheet and be prudent in our use of debt. I think that is going to come in very handy over the next, hopefully not too long but maybe, 12 months as the country and the world work its way out of the current credit crises.

I would like to start there. The major issue I would like to tell you is that we are still borrowing and can borrow and people want to lend this money. I think that is puts us aside for many companies today. Yesterday, S&P just reiterated our A plus rating, actually AA minus on the debt and give us a one plus, which is the highest 100% recovery estimate that they put out.

We also were approved last week for as a special state tax free loan, which we have to issue now through a private company. The state [fax] it as $80 million, we have a 68 pricing window and the S&P rating yesterday reiterates what they feel is an AA minus on that to the possible buyers of this note.

We have little refinancing ahead. We only have $7 million in [9], which is coming due. So we should be able to turn that debt over very easily and will not have any major affect up or down on our overall imbedded cost of debt, which still rise in the low 5s for our over $1.2 billion in debt.

We have little need for new equity because of our internal cash generation, which I will get into later with some EBITDA numbers. Basically, I am happy about that, because I consider our stock depressed at this point and I will hate to sell equity into the market at a time when it will not increase shareholder value in the future.

So we probably will not be accessing the market, short of a new acquisition or something of that sort that we would have as an opportunity. We would have to be a large acquisition, we can do most of them. The meat and potato ones we do year in and year out. We have been able to do it with our internal retained earnings and our debt.

So overall, I think we have plenty of room on our notes. We have basically a 100 million of unused line short. We have existing tax frees that we have not drawn down yet of $60 million. These were two $50 million deals we did late last year. We are still drawing them down as we do projects. So we have $60 million left on that. Those notes were at [49% and 52%]. We have this new $80 million, which we have not put out yet, but when we do that would add another $80 million.

And, of course, if you just look at net income and depreciation projections, why do not you just take this year, as we are well in excess of $200 million. Because of the tax reconciliation act and the way we are actually using our capital budget to maximize the benefit of that and there will be a huge amount of capital we put in service we complete in the fourth quarter, and then put in service of early next year over a $100 million just in that quarter, that will generate almost $35 million to $40 million worth of tax benefit free of cash that we can use to offset those expenditures, which mean that we are able to put more pipe in the ground and build new water plants without affecting rates going forward because this is a deduction from rate base, but it is a positive thing for both our shareholders and our ratepayers.

So we are taking advantage of that. Guess you could argue that the government talks about infrastructure and they are seeing this as the magic bullet to get us out of recession. Private companies like the water companies are actually spending the money, taking advantage of the government launches, but also creating jobs and improving the environment as we are doing it. So I am very pleased with that.

The revenues, let's start if we go through the release. Well, let me get one other item, because it is a very positive. The Board is very confident in our model. We lived through some regulatory lag, which were still the tail end of fixing. We are looking going forward at maintaining our old model, which was consistent for almost 15 years. Therefore, in August set for the December dividend, which would be effective, I think, November 17.

We are increasing our dividend 8% from $0.50 to $0.54 in a quarter and it will be our 10th consecutive increase above a 5% target that we usually set for ourselves, 18th increase in the last 17 years. We believe that this is a good way to return some of the benefits of our successful business model back to our loyal shareholders.

Let me go into revenue, revenue was up 7%, I will break it down for you about 5% of that is from rates, which I will drill down, and this is the reason why we are doing better, but its also the reason why we have relieved some of the regulatory lag from the hundreds of millions we have invested and not – we have got returned yet, that starting to come through.

About 1.5% is from acquisitions in new growth, but you take about 0.5% off that, so net one because we have have sold some properties both Fort Wayne north system and Woodhaven system. Last year, we sold at the end of the year the Henrico system. So, taking those out and that is about 1% and at least 1% for basically increase consumption from that organic growth. Also last year's third quarter was a very wet year and although this year was not overly aggressive, but it was a normal year, we were able to actually pick up about 1% based on just consumption of our existing customers.

How much of that was affected by the turn in the economy versus weather? It is very hard to come down, so I am giving you just the gross number and might have been up-more for weather and down-more for the economy or might have just been pretty stable at the 1%. We are very happy to see any growth in that area, because a lot of companies are reporting that they are going down based on consumption.

Now, probably, the fourth quarter will get a better read, because usually the fourth quarter is not as affected by weather, it is usually the second and third. The first is usually affected by cold weather. So the fourth quarter is pretty normalized quarter. So we will be able to tell a little bit more about what the economy and what consumption is doing in the fourth.

Our expenses are, I am happy to say, I feel it getting back under control. I will hit the O&M number and generically, because a lot of you follow that as the efficiency ratio. Let me tick off some of the things we have mentioned in the past.

Fuel has come back down. We are seeing fuel prices now breaking $3, which we have not seen since the last late summer of '07. So you can see we had a rapid run-up at very much affected Q1, Q2 and Q3. I think if fuel prices stay down, we will see fuel basically matching up quarter-to-quarter where they use to be in '07. As a matter of fact, if they stay down we will start seeing some positives in '08.

Now, fuel is not the biggest part of our budget, but it has the generic influence throughout the entire economy regarding gas prices, electric prices and deregulated states at all, so it is a relevant indicator. We are starting to see it come back down levels that we hadn’t seen for almost six quarters.

The good news, if you can say about the run-up is, it forced everybody including us to look at everybody in the fleet who has trucks, whether we should down size certain trucks. We put GPS devices on all our trucks, so we can track mileage and found some efficiency out of that. So fuel economies remains very big with us.

Bad debt is something we are tracking very carefully because of both the conversion of our computer system, which caused the initial bad debt and now the economy in general. I am happy to report that year-to-date we are down to the 1% level again, which is very good for most utilities. For us, it is little higher than we like to see. We like to look at the high 0.7%, 0.8% as great target for us. Most utilities would be very happy with the 1%.

We were running worse than that through the first six months. We are little over 1.2 to 1.25. So you can see its coming back now in the more normal utility indicators, not for us, we are going to try and improve it; direction is the right way.

Depreciation has been, year-to-date, it is only up 5%. Remember in '07, it was up in the high double-digit. We slowed down a little bit of capital, got ready for the rate cases. The rate case in Q3, its up about 8%. We think for the full year, it will be in that range, maybe, 7%, 8%. Because a lot of capital is coming in, in Q4, as I mentioned almost a $100 million. That will be closed usually a couple of months after it is contracted out and spent, which means the depreciation starts getting calculated next year.

So I would anticipate next year because of our capital spend this year and continuing in the next because of the surcharge programs. You will see depreciation returned to the 10% to 15% growth levels that was witnessed in '06, '07.

Now, that is good news and bad news. Good news is more cash generation. We get a recovery in rates, quicker where we have stakes that have surcharges. It also generates cash to support our ongoing programs, which means we have less dependence on external financing.

Interest has really been very flat this year of a 1% or 2%. As we move into this $80 million borrow and look at next year, it'll be probably back into the high single digits or double digits range where it was in prior years.

So, I am very much, much more pleased with the outlook on some of the expenses and bad debt which earlier in the year was a little bit of more challenging to us. Obviously, it is still going to be challenging, but we are going to work hard and I think we turn the corner.

Looking at O&M to revenue, which is a good way of judging the whole picture. Through the first six months we were going in the wrong way, that 43% in '07 up to 44.5% in '08. I am happy to say, we have turn that around in this quarter.

Q3 last year was 40.5, this year you are going to see on, if you do a quick calculation, it is in the high about 38%. I do not want to mislead you, because that includes a one-time gain and some write-offs which I will get into. I would say normalized, its probably closer to 39.5 which is about that 100 basis points that we would like to try and get it down.

For the nine months, you can blend that it is basically flat at 42 and for the fourth quarter, we think we can look at that 100 to 150 basis points decline again. For the full year, we will probably come in pretty level even because we are so far off in the first six months, but now you are starting to see that turnaround just like in the other areas and you are going to see a steady decline. Then, we would like to see at least a 100 going into '09. Part of that is because of the revenue is coming in now, because of the break issues.

So, I think some good news there on the efficiency side and obviously, we are doing our '09 budgets. We are watching every position, every truck because that is where you can increase your EBITDA and, therefore, use less cash for expenses. You have more for capital, which is really what the regulators look for and what the investors look for.

Well, returning, we had a strong record, whether you take five-year or 10-year CAGRs of pretty steady 10% EBITDA growth. This year we are not going to see that because the first two quarters, we were actually negative. We are starting to come back very rapidly now. I think you are going to see EBITDA growth in excess of 10% for Q4. If you see where we are today, Q3 with EBITDA was up 12%. So you are starting to see return a little heavier now because of the immediate impact of the rate cases, but it will come back to that normal, which we like to look at, which is 10% and I think you could model 8% to 9% with the 10% EBITDA growth and depreciation.

Talk a little bit about the rates because that is the bulk of our revenues this quarter. This has been the most aggressive rate year we have had because we had basically three years of backlog rates that we can do and projects were done, money was spent, the environmental rules were met, and we were in 35 different cases already this year that have been completed. That is a phenomenal workload.

By October 1, we had filed for $73 million and we had returns annualized at 60 in those 35 cases, that is an 81% efficiency on the rate cases which we are very pleased with because you never agree on a 100% with many regulators based on what they think your returns should be and what we thought. There is always some disagreement over capital and expenses and things of that sort.

We have existing rates cases in progress. In other words, they are already filed and will not be decided. Some could be decided late this year. Most will be decided next year in the first two quarters. Eight cases totaling $21 million, in progress. Believe it or not we are not stopping. We plan to file another 11 cases before the end of the year. Mostly small cases, indexes and small wastewater cases, involving filing their whole surcharges and indexes and some stakes to allow inflationary indexes, but we are trying to file those.

Looking at '09, we have currently 25 cases being prepared to be filed throughout the year that includes surcharge filings and some larger cases. Those 25 cases currently represent about $70 million to $75 million worth of request that we think we are going to be filing next year on our current plans. So you can see that they will not really affect '09 as much as they will '010 revenues.

So very busy rates plan and very appreciative of the reaction we got from regulators mainly in our new states, where we were at filing for the first time in some cases in over 10 years offers the companies that we have bought in the states and did not fix anything. So it is hard for them to file rate cases, which meant their expenses had deteriorated, their structure had deteriorated. In some cases, the way they accounted for rate base deteriorated and we had to fix all that in the midst of, what I consider very large rate request, because of the length that was and amount of money we had to spend on a low base.

Many of the regulators treated us fairly. I am very proud of the Regulatory Compact, that if it is fair they will go by the politics. Even though it is a large rate increase ramp that to you, example in Fort Wayne which hadn't been in for years and years. We had spent huge amounts of money to fix the environmental problems. We were actually asked for and were granted a 75% rate increase. Now that did not ask for everything we could ask, but we felt that was the fair amount. The regulators agreed with us. They faced it in over a nine months period, but that is a good example.

In Virginia, we have gotten some cases in excess of 100% because of the environmental improvements we have made just in key streams that were being deteriorated by the previous owners by not putting the capital. In North Carolina, we had a 75% award in Brookwood, rates are still under $25. So its not high, high rates, but it was a high percentage increase.

On and on, in Illinois, we had a 35% rate increase in a couple of system and we were just awarded in Missouri, a 41% average increase across the state. It is a small state for us. Once again, the regulators are tough but they treat you fairly if you can justify it.

Now, in some of these areas, because it was the first time through, we had some rate base adjustments, non-cash, it basically says what was on the books did not jive with what is on the books of the regulators and we had to adjust our rate base to accommodate what the regulators felt.

We do not usually see this type of things in our more mature states, Pennsylvania, New Jersey, Illinois. This is what I call the first time true problem we always have. Sometimes its up, sometimes it is down. For the third quarter, it was worth about $1 million of non-cash writes-offs to true-up the books. We also got a ruling in our Taxes case after four years, where we are awarded the rate return on equity that we will grant over awarded the expenses that we had ask for all except for small portion of rate case expense were disallowed.

I remember, some of the analysts who have been following us for a while, we had deferred expenses rather than the increase in the rates and then were smoothly through themselves up. So our accounting team had to predict five years in advance what the expenses would be versus what the deferral was. Unfortunately, although, the revenues are coming in, the difference in the deferred expenses, again, non-cash represented almost $1.5 million and that all had to be taken in this quarter. These are all pre-tax numbers.

Now, the good news is, we took a pre-tax gain on one of the sales of one our systems that we sold back to the homeowners association that we were serving of $4 million. So when you take the $4 million and take $1.5 million on the amortization line on taxes, a million off on the rate base adjustments which would be on O&M. You look at about $1.6 million tax effect that is about a $0.01. So I would argue that if you look at our number 26 versus 22, the core is 25. All these one-timers ups and downs were about a $0.01.

When you look at the 22, we are comparing last year to, I think you will also see the fact that that was the quarter that the Florida write-off occurred. That was a about a $0.01also when you take the ins and outs of that. So tax affected. So, I would say that we are very happy because the real GAAP numbers are 26 versus 22, but if you want to put a little bit more because of the one timers in the third quarter of last year and this year, probably back to where our norm is which is like, which is a very healthy in this economy a 25 versus 23.

A major stay on that theme, looking at the fourth quarter, we are expected operations to produce similar results, but I have to remind you that last year’s fourth quarter had two one timers in it that are in the numbers because of its GAAP. One was the sale of securities, we owned a fairly reasonable position in the company called Basin Water, which we were able to sell after the lockup period and we actually booked over a $0.01 gain on that. The other was a sale of a system where we had a one-time gain, the Henrico system in the fourth quarter.

So if you took those out the 19 looks more like 17 non-GAAP reports. I just saw you have an idea if you want to try and follow what is the core business model earnings. Capital spending, I mentioned about $100 million, we are going probably book in the fourth quarter because we are in the process of doing a lot of pipe work around our entire system. We have a plant in Maine and we have to finish the plant here in Pennsylvania, home of the World Champion Phillies by the way. We do not have any major project like a nuclear plan or something that we have started, that we could not stop on the dime.

So if you take a look at the capital spend program are probably in the 280 range this year, next year 250 unless a tax act is passed. We probably will do more if we have another additional year of the tax reconciliation act. The amount of that capital that has to be spent and I am talking about environmental compliances paying the builders back for their part of the pipe that they donate to us, that is an obligation compliance-oriented, that is about 10% of our capital spend. So we are looking at $20 million to $30 million that we just have to spend.

That needs a lot of discretionary spending that we can speedup, slowdown depending on tax policies, credit markets, and so on. It’s an excellent place to be in. Of course, our model is to invest and build the system better and to make it more efficient, and to use that as also a way of shareholders benefitting because of the infusing equity and debt at levels that are, especially equity that are either retained earnings and we issue those dollars or are selling stock that is booked on the market. So, that is a number to just takeaway 10% of our capital spend going forward, we see as being non-discretionary about 90% discretionary.

Regarding our other part of our revenue program, which is growing customers; as I mentioned, it was about a net 1% after disposition. So you are really looking at still around 1.5% growth rate. Organic growth has been okay and its down from last year 15% to 20%. New housing, it is no surprise to anybody, it seems to be stabilizing.

We are looking at that plus acquisitions, hopefully, for the rest of this year and finalizing '08, and than in '09, we are looking at more of the same of us trying to get close to the 2% growth range. That is of course, net of any dispositions we do. That is a very healthy growth rate for most utilities in a good economy. So I think it is not the four we like to shoot for, but it is still healthy enough to keep revenue enhancement at the topline without having just to depend on rates.

So, I think it is an important part of our program and we are continuing, and we are starting to see some opportunities in the acquisition side because of the other uses of capital municipalities may need like pensions and things of that sort. Actually this may open some opportunities over the next year or two that were not there in a better economy.

On the other hand, the poor economy means fewer homes are being built, few new organic homes, but that is just in my mind a backlog. Probably it was a little bit inflated in the '05, '06 period. It is probably deflated in the '08, '09 period and will come back to normalization at the right number, which is probably 1.2 million housing starts.

We are in the right part of the country that will benefit we think from most of the new housing starts when they get back to normal.

I think we have covered a lot. I will open it up for any questions now if you have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

Nicholas DeBenedictis

Hey, no questions?

Operator

We'll take our first question from [Michael Roomberg] with Boenning & Scatter.

Michael Roomberg - Boenning & Scattergood

Good morning, guys. Thanks for taking my call. You did mention a little about delinquency rates and bad debt expense. I am wondering, as we've have gotten into September, October, November, have you seen an uptick in that at all?

I know you talked about getting it to a lower number. But given that unemployment is up and there is lot of uncertainty, has that affected your delinquency rates or bad debt in any meaningful way?

David Smeltzer

Michael, actually it's ironic, but the bigger problem we had was the fact that we had changed over the customer service program late in '07, had to delay bills for a month, and then we decided not to try and collect. So we lost a quarter of our normal collection process, and we saw our bad debt jump, because people were transient in some of our areas, and they leave trying to collect. The biggest was in the Woodhaven, the one we sold. That was our biggest bad debt write-off, but we've seen it come down, even though the economy has worsened.

You're absolutely right on the foreclosure issue, which we've been fortunate our areas have not had as much impact as California, Arizona, or some of the areas where there was speculation, like Southern Florida. The parts of Florida we're in, we're not seeing that as much. I am not saying it's not there, but it's not to the degree of reading at least in the areas we're seeing.

We've become more aggressive now that we have our new computer system. It permits us to have centralized collections versus every state do their own collections and have 13 different policies. If you haven't paid your bill on the 10th day after the bill was mailed, you get a dinging notice and then sent out by computer to the field. They have to address it, which means you could get the money or [shut] the person off within a certain timeframe.

It's no longer an individual decision made by the collection agents sitting in an individual local area, so we have not seen an uptick. In fact, we're going the other way. But I would say, we are doing it based on the fact that we were artificially high in Q1 versus our norm.

So, those are two in our mix. Probably it's a little worse, because as I mentioned, point eight is like what we'd like to see. The run rate is now about 1.0, 1%. But I think most people would agree that's not a bad number for utility in this economy.

Michael Roomberg - Boenning & Scattergood

Okay. That's helpful. And another major question.

David Smeltzer

Let me address one more area, Michael, the other is, the new computer system allows us to bill people monthly, not quarterly. We're addressing these issues on a 30-day period, not a 90-day period. And the result of that is that our bill has been cut by a third, easier to pay, and it's still a third of the electric company bill.

When we're billing quarterly, our bill and the electric company bill were about the same, and people had to choose which one to pay.

Michael Roomberg - Boenning & Scattergood

Right, right. Okay. That is helpful. Switching gears a little bit to the acquisition front. A couple of questions that come to mind, particularly with what's transpired in the last 24 hours. In general, do you think that the political shift that we are seeing across the country is going to add some stigma to the trend towards privatization of public infrastructure that's obviously such an important part of your business? And in addition to that, in the Pennsylvania market, which obviously is huge, how, if at all, does the $400 million PA water bond affect your outlook on the state?

Nicholas DeBenedictis

Well, I'm on the taskforce that helped to develop it. So we were very supportive of it. We are eligible for it. It gives you low interest loans through what's called PENNVEST, which means that we can borrow as low as 1.5%, which we had been the number one user of PENNVEST over the past 10 years in Pennsylvania.

And I think it will provide more dollars for everybody. So I'm not worried about the fact that somebody will use it, and therefore, wouldn't let us squeeze out or possibly not sell their system to us, because they can get a low interest loan.

The backlog in Pennsylvania is about $12 billion. So this is going to be used by those who are ready now to use it, which obviously we are, and can put people to work right away to help the economy more than the ultimate solution by a planner to how to solve Pennsylvania's backlog of water and wastewater infrastructure commitments without having the government do it all. This is just a little nudge by government.

With the current state of the Pennsylvania budget, and I'm fairly close with both the administration and the legislature, I don't see any more programs being initiated in this vein. This was meant to give a jumpstart and to take care of the worst issues. We'll do the jumpstart part, companies like ourselves, and American Water, and everybody else will do the jumpstart part.

The other part will be addressing long-term combined sewer overflows in Pittsburg things of that sort, where the environment law is requiring them to do something and there is no money. Therefore, they'll use some of this funding probably to do it.

I thought it was an overall positive, not anticompetitive, not a government bailout, it's basically a nudge. I think it's more economic development-oriented than it is entitlement-oriented.

Michael Roomberg - Boenning & Scattergood

Okay. And if you could also…

Nicholas DeBenedictis

Medical shifts? I'm sorry.

Michael Roomberg - Boenning & Scattergood

Sure.

Nicholas DeBenedictis

I thought when you meant the last 24 hours, Iverson trade to Detroit.

Michael Roomberg - Boenning & Scattergood

That's just the capital from trade anyway.

Nicholas DeBenedictis

Having been in government for 15 years, and having run an environmental [NC] book at federal and state level, I found and served under four presidents. The shift of the environmental agencies will be about 5% one way or the other, depending on what administration, conservative or non-conservative, that's in office.

I think there will be a lot more rules and regulations developed under a new administration. Whether they enforce as much as the old administration, I hope they do, because you only have so many people in government, if they're writing rules, it can't be enforcing. So I'm hoping there is a balance.

I think it will all depend if they come up with a $100 billion sewer fund to help every city in the country so that they don't have to raise rates, then it will be just one more inflationary tax added to the rest of the population.

If they follow the current strategy of both the Clinton and Bush administrations, which was a cost of service model, we’ll give you a little help, fix your system, but raise your rates to support it, return on and return off your capital. I think we'll finally start addressing the $0.25 trillion backlog in water and $0.25 trillion backlog in sewer, and people will start not getting subsidized, including big industries that get subsidized, by rates that don't really pay the bill.

I think that's the biggest shift that we'll see that affects our business directly. Energy is a whole new policy. It's a lot more precise. I think you'll see a lot more innovative things there. Whether they are productive or not, I can't tell you. Whether a wind mill is better than a nuclear plant, it's to do what's better for our country, but that's not my realm of activity.

Michael Roomberg - Boenning & Scattergood

All right. Okay. Well, thank you. It will be interesting to see how that plays out. One last one and then I'll let somebody else hop in. You said in the past the long-term dividend target gross rate is about 5%. You've obviously been growing above that for quite sometime now. Has the thinking on that changed or are we still thinking long-term that the 5% is a safe bet?

Nicholas DeBenedictis

We're still under 70% payout. I think even with that type of 8% increase, obviously 5% would be less of an impact on payout ratio, I think it's affordable when we look at our five-year model. I think the bigger shift would be if credit markets are such that we have to conserve more capital, which is lot of companies are doing, cutting dividends to make sure they have enough money to continue the programs. We don't see that at this point.

And the second is, if tax policies change. Right now, the dividend tax policy is such that I think our shareholders want the dividend. If the tax policy shifts and it's not as valuable a way of rewarding shareholders, obviously, we'll shift our policy.

Michael Roomberg - Boenning & Scattergood

All right, okay. Thank you very much.

Operator

We'll take our next question from Debra Coy with Janney.

Debra Coy - Janney

Yes, thanks. Good morning Nick, good morning Dave.

Nicholas DeBenedictis

Hi, Debra

Debra Coy - Janney

Question on rates, you talked, Nick, about the success that you've had in the rate cases so far. I think perhaps the question we get from investors, more than any other, is what makes you think that water utilities can continue to put these large rate increases through in this type of an economic and political environment. What is your answer to that as we look at your big backlog of cases that you're going to filing going into '09?

Nicholas DeBenedictis

Sort of the two remaining cases that are in progress that I mentioned, which are first time through those state cases. In the every other, every new development that we bought with AquaSource, Heater, and Florida Water has now been filed and gone through one set of rates which means the books have been cleaned up. Our second round of rates are more normalized returns, more in the high single digits, low double digits.

The risk factor on size of rate increases. I'm not saying dollar amount, because the lower the rate, the higher the percentage. But that's really the political that your investors are asking about are behind this, and that's something we learned the hard way, that we couldn't go and get small modified rates, till we fixed everything and that meant two or three more years of no rate while you're building up a lot of capital. That's all been captured in the first round.

We didn't get full return, like the 75% rate increase that I mentioned in the Fort Wayne area. We didn't get full return, but we got close to it. So any future rate relief would be to make up that small difference that we didn't get this time, because our capital spend is now more in line with our return on the cash from depreciation in those areas.

Debra Coy - Janney

Okay.

Nicholas DeBenedictis

I would argue that every utility, electric even more or so than water, with the infrastructure needs that are out there if we have an inflationary period, are going to be in for rates. We did this last two years of rates. A lot of cases with high amounts and a time period where there was a void and no competition if you want to call it, competition among the regulators, time with the electrics, and the telephones. And I think you're going to start seeing your return of the gas. You start to see that already, and the electrics, where the amount of rate dollars are going to make us look paltry.

Debra Coy - Janney

Indeed. And related to that on ROEs, we were particularly pleased to see the 11% ROE you got in Pennsylvania a couple of months ago. How are you seeing the environment for the allowed returns and how do you think regulators are viewing this in terms of relative competition for [rocky] capital market? How are your utility regulators thinking about ROEs these days?

Nicholas DeBenedictis

Well, I'll give you a plug, because you've been to some of the forums that we've had, and where we have really addressed our biggest risk is the fact that if we don't get adequate return, investors will not provide us the money, because we're not a part in the [discretion] sexy industry. We just say we plow along. If we do things right, we'll get fair returns. It's a lag with regulators. But they'll treat us fairly and we'll earn our key and when I had a meeting one time with the Chairman of [GEML] and I told him that we should pertain to 11% return. He said, well, that allows your business.

We look a little better today compared to what's happening at other companies, but it's the tortoise and the hare basically, steady and straight, but you just can't startup, stop your capital program, because the environmental community won't let you. And we are already the lowest and most efficient utility, I'd say at 40% owning the revenue, I'd argue probably in the country, not only among water but probably among electric, because they have their high fuels.

I think regulators are starting to understand more and more that if we don't get the fair returns, we won't be able to [require] closely S&P ratings that we need to borrow the huge amount of money that we have. And the fact that there were regulators, the legislators in the same states with the regulators are now trying to pass infrastructure rehab bills and put all kinds of money on the table, say how important what we're doing is, they are doing on a progressive and steady basis.

I also think the electrics coming back in will raise ROEs, because I don't think they could afford to maintain what they've already built over the last 50 years, and all the new plans they want to build now, at ROEs that we've been getting. So I think there is a comparison factor coming into play. Pennsylvania has always been at the forefront in the sense of the water utility regulation. They've been very fair with their electrics too. So we are very pleased with the reorganization.

I think some of the reason we got the 11, Debra, was what I can call good portion points because of the fact that we are a [go] to company. They ask us to pick up some trouble companies, we do it. We've had very few service problems over the past 10 years. Thirteen people showed up at all our hearings of around 400,000 people that we had to mail letters to and invite to complain about our rate proceeding.

I think that played into a little bit of it, but I would argue that in Illinois we got 10.75. Help me Dave. I think it was 10.4, and its 10.7 in Florida, 12 in Texas. So wouldn't say, I think probably the higher 10s is now the new range below 11, I would hope.

Debra Coy - Janney

Me too. Thanks. One more big picture question and then one kind of housekeeping question. You mentioned the potential opportunities on the municipal side. We've been hearing more discussion of that over the last, I would say, six to nine months. It doesn't seem like much has come to fruition.

Can you give us an update of where you're seeing those kinds of conversations, what kind of municipalities, kind of what the activity level is on the potential acquisition front or probably prior partnership front on the municipal level?

Nicholas DeBenedictis

Well, to probably pry that we've never really gotten into that in a big way, if there is opportunity going forward, because that's the model people want to follow, we'll try and look at it. It's in most of the states that are more mature, that are facing high cost for their labor, because tension is starting come home to roost in many of these municipalities. And that means the water and waste water plants have workers who have high legacy costs.

The fact that the EPA has now issued orders in many of these areas for combined sewer flow on the sewer side and on the water side for unaccounted for water which is horrendous in some of these old towns and/or the new standards for THMs, trihalomethanes or cryptosporidium and parasitic type of things. All of this is now meaning money to be spent, and that's when you see decisions are made.

I can't tell you we have 10 right on the table that we're ready to announce in next quarter, but there's a digestion period to these things that's usually over a year.

Debra Coy - Janney

Can you say how many you have that are kind of on your radar screen, not for the next quarter, but for the next 12 to 18, 24 months.

Nicholas DeBenedictis

We're talking about at least a half a dozen.

Debra Coy - Janney

Interesting. Okay. And my last question is on the O&M ratio. As you mentioned earlier, there are some moving parts there relative to what appears to be down or a little tad under 38%. You mentioned around 40 normalized. We backed out some numbers and came out with closer to 41.

Maybe that's a question for Dave. How should we look at those O&M numbers in terms of what is included or not included there from a one-time basis?

David Smeltzer

We had seven numbers that had some one-time and eight numbers that had some one-time, including goodies. I tried to take the goodies out. I think '08 for seven would be flat if you take gap, which should be about 42, which is well above what we'd like to be.

The numbers are not coming down as rapidly in the south as I had hoped, but that's because we didn't get the rate increases as rapidly as I had hoped. They'll come down next year with cases in two of our southern states and with more normalized accounting in Texas, because now we don't have all these deferrals any more and amortization. It's going be straight revenues with less expense, a lot easier to gauge.

I think the fact that we were up almost 200 basis points through six months and now we are going to end the year flat gives you an indication that we're back on that track. I'll project that nine versus eight, you're going to see at least 100 basis points off.

Debra Coy - Janney

Okay. Thanks. I appreciate it.

Nicholas DeBenedictis

Good.

Operator

Our next question comes from Jim Lykins with Hilliard Lyons.

Jim Lykins - Hilliard Lyons

Good morning, everyone.

Nicholas DeBenedictis

Hi, Jim.

Jim Lykins - Hilliard Lyons

First of all, I was wondering if you go into a little bit more detail with your rate cases. The eight that are filed right now for 21 million, could you give us an idea when you expect those to start to come in. And then also, in '09, I know you said there is 25 being prepared. But maybe you can just fill in a few of the bigger ones and when you anticipate making those filings?

Nicholas DeBenedictis

Sure. Of the eight, I think four will be decided by the end of the year. But they are the smallest amount, less than $1 million. The two big ones are North Carolina and Florida. I think they will be decided sometime in Q1 or Q2 of next year.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis

For the nine filings, the biggest group in those would be Pennsylvania, late in '09, to be filed; New Jersey, late in '09, to be filed; New York, early in '09, to be filed; and then the number of small cases in Illinois; price indexes in Florida; six cases in Virginia to catch up; and a major case in Maine; two small cases in Indiana; and three cases for our three divisions in Ohio.

Jim Lykins - Hilliard Lyons

Okay. And I can't remember if this is in the press release or not, but did you disclose, or if you didn't could you tell us what do you think you might be falling for in PA, New Jersey and New York in '09?

Nicholas DeBenedictis

Well, we're finalizing it. I'm giving you nine months in advance. I can give you rough numbers.

Jim Lykins - Hilliard Lyons

Yeah, that will be great.

Nicholas DeBenedictis

Dave could call you on that.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis

We'll get with our rates person and have him talk to you about all the specifics.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis

However, one other thing I didn't mention was short-term interests. We have borrowed almost $100 million, almost all the time short, and then we turn into long if the projects were done. LIBOR came down again yesterday. It is now lower than it was before all these crises occurred, and actually lower than it was last year. Yesterday's LIBOR was 2.18. We borrowed in ranges of 30 to 50 above LIBOR. So you can see our short-term money is backed down to the 2.5 range again. And at this point we have about a $100 million still on our lines to borrow if we have to.

I think LIBOR was the number one issue that least bothered us three weeks ago when it was as high as 4 or 5. Less than a month ago, it was double what it is today. And we're just seeing a steady drop over the last two weeks. I think that's very, very good news for overall credit markets.

Jim Lykins - Hilliard Lyons

And one last thing I want to ask you, you mentioned housing stabilizing, but if you could just give us a better feel for how you see that turning into '09, maybe the first half versus second half?

Nicholas DeBenedictis

Yeah, I think with this new administration, it may occur even before that if Congress gets involved. I think there's going to be some squeeze on the banks to hop the foreclosures. And when that occurs, we'll all pay for it, let's not kid ourselves. It will be principle reductions and don't pay interest for a couple of months. This is me speaking. I'm not obviously in anybody's administration.

But I think once the prices stop dropping, you're going to see people who have waited in their apartment for a little longer than they would have normally because they want to make sure they hit the ultimate bottom of the market, and at that point, I think you'll see the returns to the normalized. Right now, I think our housing starts at 700,000, something like that, even less that.

And I've talked to some of the bigger builders, and they said, the money is out there, that means we're still plucking 6.5% mortgage. My first mortgage was 14%. Young kids can afford 6.5%, young families. I think nobody wants to buy a house once they think they're getting the absolutely lowest price. There might be another 5% in the market, in certain areas where there wasn't rapid speculation. I'm not talking about Nevada, Las Vegas, and Southern California or Southern Florida. But North Carolina would be a good example, slowed down drastically. We were almost 3.5%, 4% growth just a year ago, it slowed down to less than 1%.

The builders are telling me once people think that the housing price is at the bottom, they are expecting an upturn, because the financing is there. That's more affordable obviously than what they were getting before. They won't have this idea where they put a house up for sale and four bidders come in outbid each other, asking price which was occurring in the summer of the '05.

It will be more normalized than it was 10 years ago. You have a house on the market for a month or two, and you have to bargain a little bit, and you ask 5% more than you think you're going to get, and you actually put some money down on the house, all those kind of things.

So I think you're looking at another quarter or two of stale sales. You’ve get the winter coming up in most of the Northern States anyhow. Nobody buys a house around Christmas. But I think probably by second quarter of next year you can start seeing the housing bottom. And I think you have to or you're going to have to stabilize the banking accounting. That's me speaking. So that's what we're projecting here at this time.

Jim Lykins - Hilliard Lyons

Okay. That's helpful. Thanks, Nick.

Operator

Our next question comes from Richard Verdi with Sturdivant & Co.

Richard Verdi - Sturdivant & Co.

Good morning. Thank you for taking my call and nice quarter.

Nicholas DeBenedictis

Thank you.

Richard Verdi - Sturdivant & Co.

Nick, I wanted to back up to the rate case activity. I'm looking at a slide here from a presentation on your website and you went through it on your call here about rates approved in 2008. We're about $60 million. And I believe you mentioned that 81% of them has been approved so far?

Nicholas DeBenedictis

No. Richard, what I said was that that represented 81% of what we asked.

Richard Verdi - Sturdivant & Co.

Okay.

Nicholas DeBenedictis

I think a lot of times analyst say, well, if you ask X in XYZ state, you usually get 50% or 60% what you ask.

Richard Verdi - Sturdivant & Co.

Yeah.

Nicholas DeBenedictis

80% is probably at the high end of the range. I think reason for that was we modified our request. In some cases took less than what probably would have been the norm rule in the ROE in order to capture all the capital against some earnings on it, and knowing that we probably have to go back in a year or two to get the rest, but we felt the number was just too high to ask for at one shot.

Richard Verdi - Sturdivant & Co.

Okay. So you're saying you got about 50% of this so far?

Nicholas DeBenedictis

No, no. Of what we got…

Richard Verdi - Sturdivant & Co.

Yeah.

Nicholas DeBenedictis

80% of what we asked for is in the bank.

Richard Verdi - Sturdivant & Co.

Okay.

Nicholas DeBenedictis

It's annualized, but it's in the bank. The last one went into effect October 1.

Richard Verdi - Sturdivant & Co.

Okay.

Nicholas DeBenedictis

That will affect us positively for the next 12 months, so you could argue a 60% that to current rate revenues over the next 12 months.

Richard Verdi - Sturdivant & Co.

Okay, perfect. And I had another question here. Most of my other questions have been answered. On the acquisition front with America Waterworks back in the arena in the competitive environment are these shown up on the table on acquisition here and if so, how that's affecting your cost?

Nicholas DeBenedictis

In some states they really were there, even when they were private. RWE wanted them to grow too. I'd say no more or no less than in the past. I think at this point, probably less competition from people we had never heard of before who had money, but no normal water experience. That's gone. We're not seeing any of those types of investors coming into bench.

Richard Verdi - Sturdivant & Co.

Okay, all right. That's it from me. Thank you very much and great quarter again.

Brian Dingerdissen - Director of Investor Relations

Thanks, Richard.

Operator

Our next question comes from Jonathan Reeder with Wachovia

Jonathan Reeder - Wachovia

Hi, Good afternoon, I guess it is now guys.

Nicholas DeBenedictis

Good afternoon.

Jonathan Reeder - Wachovia

Congrats on the Phillies first of all, I know that was the forefront you outlined.

Nicholas DeBenedictis

That's right.

Jonathan Reeder - Wachovia

Didn't see Tampa Bay going on quite that easy, because it speaks the silly strength.

Nicholas DeBenedictis

I'll have my 270 yard drive when we play.

Jonathan Reeder - Wachovia

Exactly. Pretty detailed call so far. Just a couple quick clarifications if you don't mind. In Pennsylvania, in 2009, you guys are planning on filing full blown rate cases, is that correct?

Nicholas DeBenedictis

Yes

Jonathan Reeder - Wachovia

Okay. And then at that point you….

Nicholas DeBenedictis

We have a number of DSIC filings through the end of '09, and then a filing for all the non-DSIC capital and expenses incurred over the past two years.

Jonathan Reeder - Wachovia

Okay. And then after that point, Nick, is that when you might be able to get onto kind of the three-year rate case cycle and kind of avoid the debacle with the electrics coming in, is that sort of the plan?

Nicholas DeBenedictis

That's our strategy. Contingent on return to growth denying from a standpoint of normalized consumption and normalized organic growth. If you don't have any growth, that deters your revenue stream, but I am pretty confident that's going to return. And then, the second piece is inflation. You know we don't calculate anything, I think we're looking at about 4% which is right now, inflation looks like its going down, but I don't know how we can keep putting all this money out and keep inflation down.

And if inflation pops up again, in '010 and stays for '010, '011 something like that, then I think you're going to see all the utilities running more normally. But without that and with reasonable growth, and with the cash-flow we're going to be providing, we're not going to be going to the markets that much more to borrow. I think we could probably extend it from two to three years.

Jonathan Reeder - Wachovia

Okay. And any update on doing about 7.5% limit on the--?

Nicholas DeBenedictis

No, but my understanding of – we've had the lawyers working over getting ready to file it. When that becomes effective, before you spend a cent, have it approved. If we're under the old rules, which are five and we get it approved anytime in the next year or whatever to 7.5, then we're eligible for that 7.5. It's not like you have to start over it.

Jonathan Reeder - Wachovia

Right. But it sounds like, I guess, you plan on filing on late 2009 rate case, I guess the timing you get in that increase isn't has imperative in the near-term, its more for post 2009?

Nicholas DeBenedictis

Actually, you file a case in '09, you don't get it for to mid late '10, that extra five to 7.5 could have a positive impact in Q1 and Q2 of '10.

Jonathan Reeder - Wachovia

Okay.

Nicholas DeBenedictis

As soon as I get off this call, as a matter of fact, we're going to start our meetings on the filing.

Jonathan Reeder - Wachovia

Okay. Probably going to be around a little late based on how long the call is. Okay, quickly on the CapEx, if I understand you correctly, your plan is 250 in 2009 and unless you see, I guess changes in our credit markets, you're going forward with that no need to reduce that like some of the electrics have been doing?

Nicholas DeBenedictis

No. At this point, the 250 could actually grow if the Tax Reconciliation Act of 2008 is extended per year, because this year we're up to $37 million because of the cash generated from the spend, and where we could lower it somewhat or drastically, if we have to. But, as I mentioned, we're sitting with probably a line plus the $80 million plus what's left from the other -- we have about a year of spending already booked basically. We're not having to worry about them.

Jonathan Reeder - Wachovia

Right. So, I mean, as long as we don't see deterioration further from point, you don't see any issues?

Nicholas DeBenedictis

No.

Jonathan Reeder - Wachovia

Okay. And then last, just touching on the organic growth plus the acquisition, you are saying you're targeting now 2% or so for '08, '09. What do you see kind of beyond that? When can we get back maybe to the 4% range? Is that reasonable or do you think longer-term it might more in the 3% range?

David Smeltzer

I think I'm still comfortable with 4%. Texas, North Carolina, Florida, we're growing that without any acquisitions. Now that we have our rates, at least we have our regulatory relationship and our rates, and are starting to understand the rules a little better, we're starting to some acquisition possibility.

I mean we have not changed our model, although we did not hit it last year or we won't hit this year. Last year, I think we were mid threes, and something there. But we had all that digestion, Jonathan, from growing 20% in two years. I mean they were all small systems.

I'd love to say we could level it off exactly for each year. But when you look at it over a five year period, we’re comfortable with it.

Jonathan Reeder - Wachovia

Right. So they're ratcheting down. I mean that's just near term, given the economic pressures.

David Smeltzer

Yeah.

Jonathan Reeder - Wachovia

Okay

Nicholas DeBenedictis

Everybody just grows for a couple of months unfortunately.

Jonathan Reeder - Wachovia

Right. Okay, fair enough. I appreciate the time.

Nicholas DeBenedictis

Okay.

Operator

Our next question comes from Tim Winter with Jesup & Lamont.

Tim Winter - Jesup & Lamont

Good morning, Nick. I'll be quick. The North Carolina and Florida properties, if you were to separate given what you've spent adding to the system and what you purchased it for, what is roughly the current rate base and what is the return on equity or earning there and how long do you think it will take to get up to the normalized 10.5%, 11% range?

Nicholas DeBenedictis

I'll have to get back to you on the exact rate bases. In Florida, we look at it two ways. In Sarasota, which regulates itself, and we've had two rate cases and we're closing in on full earning there. And I don't know how much the rate base is in Sarasota. Dave might have that.

But on the Florida properties, the Florida water properties and so on that we purchased, we have not made any money on them up until now. And that's even without the write-off last year.

So, at this point, our return on equity is zero. And we'll give you the rate base. And we did ask for that states formula is on return on equity in this rate case. And we're hopeful that that's not going to be an issue. And see what is the --.

David Smeltzer

Well, Florida rate base is about $57 million.

Nicholas DeBenedictis

Without Sarasota?

David Smeltzer

All in.

Nicholas DeBenedictis

All in. I am going to say Sarasota is about a third of it. So, it's probably 40 and 20. On the 20, we're probably earning a reasonable return on equity at the 50% level. On the other, we're earning nothing. That's why this rate case was so important last year and it is more important this year.

In North Carolina, we're about 90 in rate base. We are earning, I am going to say, well, this year was a bad year, because there was a drought in North Carolina. So the --.

David Smeltzer

120.

Nicholas DeBenedictis

120. And we feel that's pretty good. 120 in North Carolina. I am going to guess it's not consolidated yet. We bought from four different companies properties. Hydraulics is now we've started. We've booked three new properties. We booked the ASI properties and then the AquaSource.

We're trying to get them all into one rate base now. Now, the only separate rate case was Brookwood and LaGrange, which I am going to say is about $10 million of the 120, and there, we're earning our full key, because we had our rate case. That was the one I mentioned had a 70% rate increase.

But the rest of the North Carolina, we're trying to put all of these disparate units together in one company, and get the rules of it. We're following all the accounting rules and the booking rules of the North Carolina, very first rate state, very professional state. We're in the rate proceeding now and we're asking for full return on it. Does that sound right?

Tim Winter - Jesup & Lamont

Yeah. 120, about 10 million is the --.

Nicholas DeBenedictis

But we didn't give you much more detail.

Tim Winter - Jesup & Lamont

Okay. I'll follow-up afterward. Thanks, guys.

Nicholas DeBenedictis

Okay.

Operator

Our next question comes from [Stan Robbins with Robbins Planning].

Stan Robbins - Robbins Planning

Hello. I am a newcomer to the company. And my questions are basically long-term oriented. One question that goes through my head is, it would seem to me that over time it would be harder percentage-wise to grow the company as fast as you have in the past, simply because your base is larger.

In other words, is there a possibility over the next five years than maybe your growth would be increasing at a decreasing rate? Is there a possibility that you would have to use more equity to acquire companies, because you probably have a much debt as you want to handle.

And so, does that mean the possibility looking from Mount Olympus down and, well, ask the little people when they're around, looking long-term, does that mean you might end up being a growth company, but not a growth stock? Pardon me for embarrassing questions.

Nicholas DeBenedictis

No, it's fine. First of all, with the internal cash generation growing and the EBIDTA growth of 10% a year, the need for equity becomes diminished, not increased, even with acquisitions.

The second question you asked was really the IBM issue. Probably you could ask that same question of IBM 30 years ago, 20 years ago, 10 years ago, and the answer is yes. As we get bigger, we have to grow faster to continue the same growth rate.

On the other hand, there are 50,000 individual water companies and we haven't even touched the surface in our model of being able to address them all. So if you believe that there shouldn't be that disparate an organizational structure the way the industry has grown, there will be many large cities, 500 or so large cities will always be probably municipal, which is why the Europeans go after that for maintenance operation and maintenance contract.

Then, there will be a number of other ones with eight or ten big companies that are private, I think in a way the consolidators of all these small, either municipal or private companies, who have gotten into the water business and now don't have an exit strategy. So I mean my job -- and I guess why you would buy the stock and why I own the stock is because I'm confident in the future that we can continue to grow.

Now, if we grow earnings from the current pace, and double them in X years, at some point your stock value is going to increase just because of the current earnings, even before you get to how much can you grow next year. I realize that's always what the investors are looking at. I think over the next year or so though, a stock that can grow, even at a bad market, has a steady track record, pays a nice dividend may be considered a good defensive play after the shakeout of the market over the past year.

Stan Robbins - Robbins Planning

Another question I'd like to ask is, and you alluded to this a while ago, we all know that there is a deflation evolving in the economy. We know there is a recession probably becoming a depression and so on. But eventually, with all the money that they are printing and bailing out various institutions, I think we all realize there is going to be a hefty rate of inflation in due course.

How will, I don't want to say run away inflation, God forbid, but if we get a rapid running inflation, will you be able or how will you be able to cope with that because you'll have inflation and costs without being able to readily raise your rates?

Nicholas DeBenedictis

Right. I referred to that Mr. Robbins earlier and we did go through that. This company is a 107 years old. We did go through that in the late '70s all the way through up until the early '90s. And what happened was more money was spent on operations then on capital infusion, rate cases were every 10 months, and it was just a constant [O&Ms] getting relief because that's the rules of the regulators.

Stan Robbins - Robbins Planning

I know.

Nicholas DeBenedictis

We're hopeful for the country's sake that doesn't return. But, basically, where [you have some gain] as much as any industry, so other than the lag, which means you have to go in more often for rates rather than stay out for three, four years.

Stan Robbins - Robbins Planning

Yeah.

Nicholas DeBenedictis

And I mentioned earlier, some of these properties we bought in the South hadn't been in for rates since the mid '90s and that's when inflation had slowed down. That would have been impossible had inflation been higher than the 2% or 3% it's been over the last 10 years.

Stan Robbins - Robbins Planning

Finally, what's the risk of acquiring a company? Many companies must be a 100 years old and there could be all kinds of piping time bombs that nobody knows about, how do you account for that risk when you are appraising a company?

Nicholas DeBenedictis

We value the company based on its inherent value of its book. We try and take book or less. We feel very confident that we can fix anything because we've been around a 100 years and we know what it looks like. Some of our pipe was 100 years old. We've been replacing it for the last 10 years.

And we have our own engineering department, our own environmental compliance department, our own legal department, and we basically don't have to rely on other people's opinions, we can do it ourselves. We feel pretty comfortable.

The pipe work is usually not the issue as much as it is. It's a waste, it's inefficient, and eventually has to be fixed, but it's not as immediate as a wastewater plant that's in violation of a stream standard where the EPA wants it fixed yesterday. In cases like that, we work with the EPA before we buy the system, get it what's called a consent decree so that we're held harmless as long as we feel our obligations and we've been able to do those flawlessly number of times over the past 10 years.

Stan Robbins - Robbins Planning

Okay. Thank you.

Nicholas DeBenedictis

Thank you for your interest. We'll get to meet you some day.

Stan Robbins - Robbins Planning

Yeah, we'll get that. Thank you.

Nicholas DeBenedictis

Thanks.

Operator

(Operator Instructions). And with no questions in the queue, I'll turn it back over to Mr. DeBenedictis for any additional or closing remarks.

Nicholas DeBenedictis

I just thank everybody for the time. Sorry it ran so long, but the questions were good and I wanted to thoroughly answer them. Thank you.

Operator

That does conclude our conference for today. Thank you for your participation and have a wonderful day.

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Source: Aqua America Inc. Q3 2008 Earnings Call Transcript
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