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Executives

Kevin Brophy - Director, IR

Nicholas DeBenedictis - Chairman, President and CEO

David P. Smeltzer - CFO

Analysts

Heike Doerr - Janney Montgomery Scott

Jim Lykins - Hilliard Lyons

Timothy Winter - Smith Moore & Co.

Steven Gambuzza - Longbow Capital

Ryan Connors - Boenning & Scattergood

Ajay Jain - UBS

Selman Akyol - Stifel Nicolaus

Aqua America, Inc. (WTR) Q4 FY07 Earnings Call February 27, 2008 11:00 AM ET

Operator

Thank you for standing by. Welcome to the Aqua America Fiscal Year 2007 Earnings Conference Call. Today's conference is being recorded. At this time, it's my pleasure to turn the conference over to Kevin Brophy. Please go ahead.

Kevin Brophy - Director, Investor Relations

Thank you, Dwaine. Good morning everyone, and welcome to Aqua America's fourth quarter and year-end 2007 earnings conference. 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. There is also a live webcast of this event available on the 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 - Chairman, President and Chief Executive Officer

Thank you Kevin. Good morning everyone. We start with a broad overview and then get into some specifics regarding the year and the quarter. I would characterize 07 as a good year, not a great year. Cleary, rapid slowdown and challenges in the second half of 07 provides us some of our organic growth towards our 4% goal, somewhat erratic weather this year. Good weather in some of the states, heavy rains in Texas. Great weather throughout the [ph] Florida and Texas... excuse me, in North Carolina and Florida, which cut sales, where we had and inordinate amount of maintenance due to the colder than normal weather.

It's a biggest disappointment that affected earnings and affected us to move reorganize around, which obviously is a disappointing rate case in Florida, but that's somewhere between $0.02 and $0.03 in our earnings. Overall, we are $0.71 versus $0.70. Once again slowing dilution, net income was up 3%, and earnings were up penny, $0.71 versus $0.70. The slow in division downed to now about 1.5%, and we expect that to continue to be down as I'll get into later in presentation.

The quarter was actually a solid quarter, when we take up some of what I'll call noise and this is a non-accountant speaking, so forgive me. But in 06, we had really two $0.01 gains that were one-time. One was regarding our Texas rate case and that was based on the fact that the ALJ decision came out in late 06 is still not finalized. But the preliminary decision came out, and we account both of what we are reserving and felt that the decision of the estimates being accounted for a next gain about a penny, again obviously one-time. And the other was another penny that was reduced full, because we switched the way, we did insurance from a quarter-to-quarter for levellized system, so there wouldn't be a quite variability. And that actually added between looking through reserves we had already accumulated.

This year, we had a penny for the fact, which make investment for a company called... invested in the company that is called... actually we invested in a company called Basin Water. We know the money and gave us more. They then did an IPO and the IPO trading well above of the mark that is share price and we decided to keep that investment and then took that fourth quarter. And that was about a penny. So, using that that two to one point... year or two, one from the other and you will get a better feel; it's not that is very solid quarter.

Looking at the year in general, our growth in customers was just shy of 3% before disposition of some property, which I'll get into under a new policy we have adopted. So not only 4% and now it is roughly between not major acquisitions of major Florida Water, New York Water, and acquisition of new on last time, but with the year of digestion and was just shy of 3%.

I do remember it's 9%, because some small cash flows we are seeing. EBITDA was up over 9%, is about $2 million to $3 million... and you will that's closely tracking the same. We think we are making our rate base basically we are about 2.5 billion of rate base and we are spending about $250 million in capital.

The disappointing area was expense base. And across the board, I mean overall O&M expenses were up for 15%, interest was up 15%, local taxes because of the New York acquisition is obviously when compared to a year prior and some rates in other states 36%, and depreciation was up 17%. We had a lot of headwind in the expense side this year, which I will pull for 08 what we are projecting is going to be much more contained.

We think the 15% in the O&M increases over half of that 7.5% was from acquisitions, mostly the New York Water, 1% was the write off we had to take a legal expenses and rate case expenses in Florida. Another one was simply the accounting accrual regarding first retirement in Pennsylvania, which we get back in the rate case. We are asking to get back to the rate case. And also the... there were some other help and mentioned great things that had to be trued up and the other was the 1% of the expense it reached.

Because of the increased write off in bad debt and should be tested, not the economy as much as it is to fact that we potentially better than customer information system, which basically is part of the automatic reserve in certain announcement. Over a certain number of day and we had some of the state that were under their own system, we need a lot more to discretion before they will try and basically shut people off for non payment. And this system is little bit more automated. And therefore there is only been a wash out of bad debt in the reserve side. We may need selective in the new structure and put loss on that out.

So overall, I clearly had a... that was our biggest challenge in 07. And we had a lot of non-financial issues that I'd like to material growth on that. First of all, I mentioned earlier the organic growth being down considerably, that has to where it normally is that all happened in the second half. And I attribute that basically through the mortgage rates flowing up and the surplus of housing that we've already built when the current hit. We are staring to see an uptick in the existing stock. And although pricings are not as high as they were in a year ago, that doesn't affect us, because people buy one or whether that's more or less in the house.

And we are starting to see a little bit of recovering in the housing, new housing based on the fact that interest rates have held. People are working again; and the inventory is going down to the global start building with them. Obviously we will have the building business, and that's my assessment of looking to numbers, who have got all the business program to [ph] get a more accurate section, but that's really easy here. I have put more pressure on the fact that the only way to... you don't have organic growth of just in the 4% or more acquisition.

We are slowing these activities with year-end with the historic acquisition and it's a great point as I mentioned the 3% rage. So we are pleased with that, and we do think that slow down of the economy was also fortunate authority on the municipal governments with revenue slow down. You think that open that floor up a little more. We do see the municipal acquisition in 07, and we are looking at more municipal acquisitions in 08. And remember 85% of market is all Missouri, where a small 15% private of the private sector of the overall water market.

The second thing that happened in 07 is we instituted a major customer information system as any one who called for a major system change had 35 separate systems in all our regions and states to one centralized system. That's the only... probably estimate that the IST probably can tell you... can happen and we don't have. It is... we worked ourselves throughout I think will beyond that. Our bad debt was up, because the computer now ticks out the reserve versus discretion at work flow state level, and actually ramp up expensive to fill up three call centers, and have duplicate on board and as the call centers during the transition.

The training of those people will get more and more efficient, but... build it more efficient. We had extra people and basically we had the typically growing teams, which I think are, we are now stable. And we are improving that, I think that will non-comparison 08 to 07, but it was a big comparison of 06 and 07.

Again another solid capital spent $236 million, which is as I mentioned about 10% of our rate case and will probably offset next year to 250 plus based on the project that we have in the pipeline now. And in fact it would be a lot more cash generator. I mentioned earlier that our EBITDA was up a little bit moving up into that. And in fact, it's the law, which recall the economic continues tag actually has a huge tax rebate for improvements made in water system that's going to be in our systems and therefore we write up our capital in a fact that's the one year you get a tax rate and generate more cash.

We will take a look at where we are. I think the biggest accomplishment on our capital strength in 07 as we completed all the fixed capacities on in the unit systems... small systems we bought some of electric companies, Elite and Aqua Source they have not fixed problems. Therefore they couldn't go into range and fill the problem we think the radium, arsenic, leaky INI [ph] systems and so on, That function in waste water and slides we are doing in the. We spent a lot of money in the system and I can tell you I am very proud that this is now fixed.

And at this point in time, looking back five years and forward five years, obviously we've ramped up our capital from the main one existing. So now $0.25 billion year is the debt. We think we look at the mix of that, probably 50%, five years ago was... we have to do this to meet the current environmental rules. In 07, 30% of our spend was to meet compliance, not only existing compliance, but also the fact that we are trying fill in advance of the next set of EPA rules that's come into effect in two years, and we are well in our way to accomplishing that.

As we look forward five years, I have estimated more than 20%, probably closer to 20% of our spend would be for compliance issue, whether it be needed the attention to plant or picked up a certain environmental rule was just passed. On the other side, growth is steady 20% of our capital spend. Growth meaning, if we but a system we needs more somewhere... growth that mean that the system has grown to the point. We have to expand the water or wastewater plant, or building new tank. That should go from 20 maybe to a little les five years out, but we spent about 20% of our money on that this year.

We left for 50% for infrastructure. Infrastructure is the probably 30% five years ago. Infrastructure is pipes, tanks and things of that sort of meters, and drops to... that was up, excuse me, to 50% in this budget 07. And probably, when we get to prices down, it maybe as much as 75%... 70% to 75% of our spend. And that is much less risky capital earning wise, bidding wise, more standardized. That's also very discretionary, EPA won't you spend the money, the spending it is encouraged by EPA and also it's encouraged by the regulators under their surcharge program.

I am shouting. I don't know what we can do. Are people having a hard time hearing me?

Operator

Sir. This is your operator. It's just... mic, if you would move it a little closer, mic will be a little clear, but and we are hearing you. Please proceed.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Can you hear me better now?

Operator

Yes. Thank you.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

So, on the capital side, I am very, very pleased with the climate we built, stable climate we've built. And I think that bodes well for the future and for the controllability of our program going forward.

Now, the next major thing we did this year, we changed out some people in our organization. We build a whole new treasury department. And I would say there was one major accomplishment. This was our major accomplishments for the year. First of all, we had a number of offerings, and in those offerings S&P reaffirmed the fact that we are having AA minus secured debt rating. They said that our senior secured first mortgage bonds are one notch higher than the corporate credit rating, which would be an A plus. And that we have a recovery rate of 1 plus, which means that you are pretty sure getting your money back, you borrow money... you borrow money from them.

The other is the risk profile, which ranges from a low of one to a high of 10 of corporation will rank to two. So, I think we are very pleased with the stability, especially for our debt lenders, our interest... excuse me, debt holders, and the fact that we are secured and we are running this business in a secure way. We had an enormous year of refinancing financings to get started of. An example, this year we did over 205 million in new debt. The average price using tax frees, using low interest state loan into 4.92% that allowed us to lower our embedded cost of debt on 1.2 billion. I think it's our total debt now, from 5.72 to 5.58. So, we are clearly over the next decade or two in great shape from the standpoint for shareholders, and for rate payers in getting a low interest rate for the 50% of our money that's invested with debt on this capital.

We also assumed another $23 million in debt on the New York Water at 565, which isn't bad. And our average... this is the biggest part of the variation between 7 and 8, we had $100 million always outstanding and an average balance during the year, at our various states for short-term to carry the capital program. And the average interest rate for 07 was 6.11 to carry that $100 million.

We assume two things; first, consolidate all those lines, who are paying a lot higher rate for small lines and some of our smaller states. One line at the parent, we anticipate our costing under 4% for all of 08, and we anticipate our average balance in 08 probably being in the $80 million range. We will be borrowing less having less on the line at a much lower interest rate. That should be a help for 08 versus 07, where we had such an increase in interest rates.

In 08, our borrowings at this point based on our $0.25 billion estimated capital budget and the cash that we are generating is basically we are taking $24 million out of refi that's coming out of 6.5% average. So, we think we should be able to do better than that. And then we have another 80 million in tax frees and regular ventures that we are going to have borrow to support our capital program. So you are seeing 100 million versus 200 million last year obviously less interest rate risk. We are very pleased with the status of our program and of course the cash is helping. We have... I think we will be up another... I think we are up 9% to 10% this year in EBITDA with some of system sales next year.

We had no problem beating that and this year we went up to 307 million of EBITDA. The gross story this year however was rates; both good and bad. I mentioned Florida earlier that was a shock to us and was a shock to our shareholders, because we had to take some write-offs. We've completely reorganized our rates department. We have decentralized the rates departments, so the presidents have much more responsibility in getting their rate cases filed and through. We brought in five new employees that are seasoned veterans. State agencies, other utilities, and we've worked very hard as a team and basically have some immediate successes. We've got a 70% rate increase in Kirkwood division, which is about 10% of the state of North Carolina, huge rate increase, but deserve we hadn't been heater had not been in for rates there since 1996; so it's pretty old rate case.

And also picked up... already cast in $3 million worth of rate cases already and that's an annualized figure in early 08 to already offset the track. On the other hand we had $67 million in the pipeline. These are major cases that have been filed and of course this new team had to do all this work over the summer to get them ready; most of them were filed late summer to fall. We have the Pennsylvania case, which is our largest case New Jersey would file in December, Minnesota in late August. We have five cases filed in Illinois and late in year two in Ohio, which were in the process and we are expecting two other major filings over the next couple of months. 2Q in North Carolina and Florida and of course we still have the decision in Texas, which we are hopeful will be forthcoming sometime in the second quarter. So you can see we have a lot of great activity.

Now to put this in perspective, in our 4, 7, 10, 5, 4% customer growth 7% revenue growth, we usually say 3% to 4% in rate release as part of that 7% revenue. If you take the six new run rate of 600 million of revenues that we had that the 18 to 24 million and we see we filed for 67. So this is truly a strong in the pipeline it's a regulatory lag, we much rather would have spread it out over a number of years, it was impossible to do. We didn't file the cases until we had all the meters in place and all the environmental problems solved. And most of this backlog other than Pennsylvania, which is pretty steady every two, two and a half year has been in stage, where we had a backlog in environmental improvements we had today. So that's going to be our big task this year in rates and also the... and also obviously the generation of cash and how to use that cash to support our big capital program.

The new item that we've added to basically our strategy, which will be ongoing now when we accumulated with coupled in size a number of customers in the last ten years, and we will collect a lot of systems although we say we've done about 200, some of those deals included 50, 100, 200 systems. So we have a lot of systems out there probably, probably over 500 individual type systems and not all of them are performing to the standards we want.

And we've listed some of those. We're continually revealing the portfolio. We did so one towards the end of last year. And I think it's a great microcosm example of why we would sell it. We had a county willing to buy a facility, where we had 13 or 14 small systems, all in one county all on need of major capital and a note growth accounting. The county dividend for other reasons to accumulate their assets, and they paid us a fair price. We booked the gain, which is in the number. And its one less major capital draw, major management attention draw, which I mentioned in the way of future potential growth or future potential growth in customer support in that income.

Looking at a number of other ones like that, there are two in Illinois, we are looking at one that is there in our Q... I'm sorry, in our K. And that's the Fort Wayne situation, which we been talking about for quiet a while. What has happened on that in the last two months and at this point we have North part of our system, which about a third of our customers has been taken by eminent domain, I guess you could call it quick take. We did two and in settlement of the two issues. One, we are going to run it for the next three to six months. Under an interim contract to give us the steady transition period.

We have appealed to price that they have... the government has given a 16.9 million towards what they think the assets, we obviously disagree. We also agreed to allow us to continue as the commission has been 100% request for both the north and the south. We have revised that only to the south now, submitted that last Friday and ask for 75%. Obviously, the... we can see the south is more profitable than the north and the need of less weight. And that's good for our customers also in south. But it also means that we still have out there finalization of the pricing in the north to resolve.

And then the two Illinois cases will probably generate in the neighborhood of about $15 million to $20 million of new cash, we will put right back into capital, but that means we don't have to borrow it. And of course some of that is equity, so some of that would be reducing our future. Equity needs that we are getting equity from selling new systems in profit.

So, I think that's a major new issue. It's part of our program. It's like, I guess if you are... and this were a rate we are listening to, they will be telling you that we are selling this building and buying that building. This would be moving your portfolio around. I think you can think of it that way versus when move on a single state area, we didn't have that opportunity, but look at that really is all or nothing.

So I think what we can control, we are really in good shape. Our capital spend is now mostly discretionary. We don't have any major environmental issues with building. We are ahead of the curve with the EPA. We are looking at the tax policies of the new economic improvement act and trying to see if we can gain within 08 time period committed to water utilities, the major part of our cash needs. That could be in excess of 30 million up may be highest 40 million. I think expenses we have are compliment now is under control. We have the move off of our customer information system behind us and less inflationary risk, which nobody can predict. I think our expenses are going to back in 3 to 4 range versus the four to five quarter and then 15 overall last year.

Our interests will still be under control. Depreciation will probably be up, less than 10% interest probably low single-digits. And I think our organization and our systems are in place all during 07. Now what did not under our control, it could be a major plus or major minus for 08 and 09, 08 for weather so far a good start, main breaks last year at this time were 450, this year they are about a 150. And in 06 what we compared to the prior, there were only 75. So you can see a big significant difference in the weather this year. And then of course success in the rate cases, it makes it great for our numbers next year. And the success of our acquisition and disposal program will mean a lot to our core earnings and our total earnings next year.

So that's a pretty broad summary. We will answer any questions.

Question And Answer

Operator

Very good. [Operator Instructions]. Our first will come from Heike Doerr with Janney Montgomery Scott.

Heike Doerr - Janney Montgomery Scott

Hello everyone can you hear me, okay?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

We can.

Heike Doerr - Janney Montgomery Scott

I am hoping may be this is a question for David Smeltzer. If we can iron out what the impact of the Fort Wayne condemnation would be on PP&E and revenue and operating expenses. What percentage of revenue we could see a decrease, how much the operating expenses were relative to the base. Can you put some numbers around this for us, Dave?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

I will give you a general answer and Dave can either give you a specific or quality fact like that. The Fort Wayne north system was losing money. So, it tells you that we are going to do better without it until we got rates than before. We have put a lot of capital in. We were arguing over how much we owed them for the sewer disposals that we used there plant for our customers. The range was we told them we felt we owe them 300,000 day excess for 2 million, and we settled it 450, which was reserve. So it takes a lot of those question marks out now. So for 08, it's going to have a positive effect, because we are basically getting money for an O&M contract, which is breakeven at worse. And we also don't have the losses incurred through 08. On the other hand, if we had gotten a 100% rate increase, then it would have been making money. Dave will give you the specifics for 08 and it's really is relevant for 09, because they have taken it Supreme Court rule 352 [ph] in their favor.

David P. Smeltzer - Chief Financial Officer

Yes, I don't have handy the revenues or expenses.

Heike Doerr - Janney Montgomery Scott

Okay.

David P. Smeltzer - Chief Financial Officer

But we feel great, actually improves the results when that go well, but I can get you those detail.

Heike Doerr - Janney Montgomery Scott

Okay, we can handle that offline. And Nick maybe as a bigger picture customer growth question, I know that the target had normally been 4, 7, 10, 5. As the company gets bigger and 4% customer growth is difficult to attain, do we scale back and think that maybe 3% or 2.5% is a more realistic annual run rate.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

So it's the IBM problem although we are nowhere near the size IBM, it's tougher to continue to grow on a bigger base, but I am still optimistic like there are so many out there that... and I think the new part will be the fact that municipalities are going to tighter now and maybe be looking again at selling their systems, where... And interest rates were so low on tax free and revenues were coming in because tax revenues and property tax increases. They were less willing to look at, where they should trim costs. And of course that's one of the areas assets sales would be one of the area.

I do think you are correct, I am wrong and housing market stays in the tank for a year and a half, different story. Because I mean we do depend on 1% to 2% actually more in North Carolina and Texas of our growth being organic growth. So I'll answer it with if we can get the housing market back to where it was in even 06, not even the 05 peak, I am comfortable for if. Because it stays down consistently for a couple of years probably will be tougher to head for.

Heike Doerr - Janney Montgomery Scott

Okay, that's helpful. And one final question; when we look at this 250 million CapEx you expect to spend next year, and now all of the cleaning up of the systems is taken care of; how does that break down regionally?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Well, regionally it's mostly in Illinois, Pennsylvania, New York and New Jersey. Ohio is pretty steady. We have a plan to build in Ohio and some price that is not excess of an infrastructure although they do have a disk type programs called sick in Ohio. But at the place towards the capital spend slows down is in the south, because we fix things now and there was an inordinate amount of capital spend South over the year that we are not getting any return on and that's our goal going and get return in the south.

Heike Doerr - Janney Montgomery Scott

Okay, great. Thank you for your help.

Operator

Our next question is from Jim Lykins with Hilliard Lyons.

Jim Lykins - Hilliard Lyons

Good morning everyone.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Hi Jim.

Jim Lykins - Hilliard Lyons

First of all with Florida, the rate case were going to file down there; will be for the same amount as to one that you withdrew last year and I am also wondering I know there has been some issues with the regular, just curious as to whether you've been able to make any in roads with the regulators in that stage?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Well, we did successfully... I would say we have been in constant contact. And we are working with all the parties this time. Last time we had not touched pace with everybody, meaning the people flooring against this and were at the very final stages. And the withdraw of the case, it wasn't just as easy as just dropping case. We actually have a good refund back, which is not an easy task with the new customer information system. We also committed to public meetings and public phone calls, which we accomplish. And now we are doing some town meeting, which has been very helpful for us. We were hearing what's on peoples mind. And that will have to be done and that should be done shortly, before the old case can be shut down. We hired a person, who actually came from the Florida Commission, who is now our rates person in Florida. He has given us a lot of insights and lot of experience that we are going with.

And we think that we are going to come up with an acceptable rate plan when we file in the second quarter to come up with a way to... we don't have 82 different systems we have to file for each time, which would make investment in Florida very difficult, because accounting and administrative cost overwhelmed the great case needs for service and for capital needs. So we are lot more optimistic and probably no a lot more at this time around. And it was about this time last year, where we are filing case that was ill -fated. So we are a year behind in Florida. Any... your first question was what will be asking for. I can't imagine that would be any less than last year, because we've actually... and that last year was 7 million. As we put more capital Florida we've put our automatic metering and then every thing else, so that we improve services to the customers. And we could justify the 7 million last time, so I can't believe it be any less. I think probably before the final decision is made though, it won't effect 08 earnings, it will only effect 09.

Jim Lykins - Hilliard Lyons

Only 08 earnings, not 09.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

We file it in 08, but it's going to take at least six to nine months. I don't know what the rules are in Florida specifically how many months during a process they take. But I can't imagine having any effect on 08 earnings. So it's all back-end loaded in 09.

Jim Lykins - Hilliard Lyons

Okay

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

As there are by the way many of the cases, The 67 case, the biggest one 67 million in cases in nine out of 13 states, biggest being Pennsylvania, none of these will be actually coming to fruition before mid to late summer, most of them late in 08. So the biggest impact of the thought is going through. It's still going to be late 08, early and mid 09.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Your quarterly model, I mean it's all going to happen in over a year of period, but where it bulges in the quarter, the quarter is all dependant on the litigation, time period, FDA files. And when you give you that separate list of the year, specific model, we can say it will be interested on. [ph]

Jim Lykins - Hilliard Lyons

Okay, that will be helpful. Regarding acquisitions and I think you mentioned something about some opportunities with municipals and how much money to do there that make us with the customer growth there. I am just wondering if you can give us feel for what you seeing out there right now. And if you think that at least in 08 it will be somewhat to what we have seen historically on the acquisition front.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Well, we'd like to do fewer, but bigger as some of these systems have been very small. It takes a lot of work to do any of them, you have closings and you have to go through the regulatory approval, but you take them as they come, because it's not like we can say we are ready to buy now, but they are ready to sell. So it's not a completely under our control, but we just had a meeting with our corporate development department before our Board meeting yesterday. And they think pipeline is full and they have a lot of... and this time a little bit larger. Now sometimes they are harder to close, but they are pretty confident that we can keep up the pace like Heike asked about 4%. Usually that's 2.5% of acquisitions and 1.5% to 2% of organic growth. We are asking our team now to come up with 3%, bar actually went up; we are not doing some bigger deals.

Jim Lykins - Hilliard Lyons

Okay. And one last thing, and I will let someone else ask questions. The economics stimulus that you mentioned; can you just maybe give us some color on what you think the impact would be from that?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

For year 08 capital spend in the water business if you are private held utility, a tax rebate for... so 35% is our federal taxes, Dave, I guess.

David P. Smeltzer - Chief Financial Officer

Yes, it's actually bonus depreciation, not unlike that which was enacted after 9/11.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

So if all 250 would be eligible, so multiply 250 times 35% and that's the amount of cash we would get by not paying taxes.

Jim Lykins - Hilliard Lyons

Okay.

David P. Smeltzer - Chief Financial Officer

250 times the 50% bonus depreciation and ten times.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

That's right.

David P. Smeltzer - Chief Financial Officer

And that would only be reduced by some 30, 40, 60 million of the 250 that maybe financed by the low interest tax free and they therefore not be eligible for the bonus depreciation.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

So if this 250 multiplied 250 times 50%, time 35%?

David P. Smeltzer - Chief Financial Officer

Right.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Okay, so 125 times, 35. So you can see it's pretty healthy there it's 30... in the $30 million to $40 million range.

Jim Lykins - Hilliard Lyons

Okay.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

It's actually... we are generating more cash with the EBITDA really means that we will able and Dave that because you are paying less taxes for the equity side, retained earnings.

David P. Smeltzer - Chief Financial Officer

It's not an income item.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Okay.

David P. Smeltzer - Chief Financial Officer

They are just impairment [ph] effect.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Okay. So we are... we are seeing less need for equity too Jim in our analysis that it did a year ago at this time with the five year plan.

Jim Lykins - Hilliard Lyons

Okay. All right, thank you gentlemen.

Operator

Our next question is from Tim Winter with Smith Moore.

Timothy Winter - Smith Moore & Co.

Good morning Nick.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Hey Tim.

Timothy Winter - Smith Moore & Co.

I just have a couple of questions on the O&M expense line. You have talked about new computer system and three new customer information systems and kind of a wash out with the bad debt reserve. Can you quantify at least to some degree how much that impacted the O&M line?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Yes, I can give you exactly... will call you back, 1.7 million, that was bad debt. Yes, bad debt was 1.7 million [ph] more, but we also have to quantify the increased operating expenses year-over-year, which will call you back on Tim, of the new call centers versus how much we had staff at the old. And the hidden dollar in there is that fact that we couldn't reduce the local staff until the new staff overlap with them and the strain. And so here is an example: we have people in our Kentucky office and our Dunhill office and then our Woodhaven office or in Illinois. We probably had 10 people entering those. We eased up a call center and happened to be in Kentucky, one of our three regional call centers, where we hired 25 people. They are handling the whole country, all 13 states. But we couldn't reduce the ten people that were local until the others got up in the running and the systems are up and running, so we had that overlap for the probably two quarters, which it will go away offset.

Timothy Winter - Smith Moore & Co.

Okay. And then as far as this pruning process goes. Did you take a gain on the Virginia sale, and if so how much? And what is roughly the price to book are selling... that you sold Virginia for and what the $16.9 million represents as price to book?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Okay. Well, let me start with the Virginia, because it's a 69 is Fort Wayne. In Virginia we sold for a little under 1.5 million average purchase price negotiated it was 2.5 times our book value if not more, almost three times. And therefore that difference after we expense the lawyers and all that was put as part of the way we accounting a system does it. If you take at reductions from O&M.

David P. Smeltzer - Chief Financial Officer

Yes,since it's been a sale of an operating asset, it needs to appear in the operating section of the income statement up top. And since it's relatively immaterial, we incorporated as a deduct in line O&M expense.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

It's that 2.5 times book.

Timothy Winter - Smith Moore & Co.

It's always not on that item on the press release that's gain on sale of other assets?

David P. Smeltzer - Chief Financial Officer

No, it's not; that's the security sale.

Timothy Winter - Smith Moore & Co.

All the $0.5 million that is Basin Water?

David P. Smeltzer - Chief Financial Officer

Basin Water, yes.

Timothy Winter - Smith Moore & Co.

Okay.

Operator

Mr. Winter, any follow-up question?

Timothy Winter - Smith Moore & Co.

Right. And then Fort Wayne?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Fort Wayne, the way... because we are still in court debating what the final cost is.

Timothy Winter - Smith Moore & Co.

Right.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

It's impossible to book the gains. I can tell you 69 covers our book value. We think it's worth a lot more.

Timothy Winter - Smith Moore & Co.

Okay. And can you give any kind of timeframe? I mean could this go on for years or...

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

The court... the Supreme Court ruling was about 6 months in waiting for the bearing on the scrutiny and then took them a year 3 to 2. This is not at Supreme Court; this will be at Allen County Court. But if either party after Fort Wayne disagrees with that court, then you have access to the Supreme Court. So, I can't tell you what the final is going to settled. Whether we will both agree with what the jury says, the judge says, it's a guess. I could argue probably a year ago.

Timothy Winter - Smith Moore & Co.

Okay, Thank You.

Operator

Our next question is from Steven Gambuzza with Longbow Capital.

Steven Gambuzza - Longbow Capital

Good morning.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Good morning, Steven.

Steven Gambuzza - Longbow Capital

If you were to receive 100% of your requested rate relief, the pending right now, just curious if you can give me some approximation of how much would flow through in 2008 based on the timing of expected decisions?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Well, behalf of Pennsylvania, you want 100%?

Steven Gambuzza - Longbow Capital

Just if you've got the amount that you referenced in the press release.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Actually 67, I'd say 40 of it half year 20, 65% of 20 will be 12, so $12 million in top line revenues.

Steven Gambuzza - Longbow Capital

Okay, is that just Pennsylvania or is it a full amount?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

That's a $12 million net income, there because I already took 35% on it. Yes, you asked for 100%; Pennsylvania we asked for 40, assuming we get it some time this summer, I just made broad adjustment half a year, and since all the expenses that we have asked for are already the expend that there is no more expenses once we get paid so it all falls to the bottom-line on today's run rate.

Steven Gambuzza - Longbow Capital

Okay. And what about the other $27 million that we released outside the Pennsylvania?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

New Jersey we probably won't see until late fall maybe winter, maybe a month. New Jersey's filing was for $7 million. And the Illinois ones are due in 11 months filed in December. So they won't be out for November and the... with the Illinois ones total is about 4 million. It's a one month $4 million, 35% of the taxes and that goes to the bottom-line, that's going to roll in the next year for 11 months then.

Steven Gambuzza - Longbow Capital

Okay.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Right now versus most of this revenue from REITs are going to really come... little bit... a little a lot half the year at Pennsylvania is a lot cross, but the rest is all going to be really back end loaded in to 09 with the two big cases still to file in Florida and North Carolina definitely won't show up in 08, they will all be in 09.

Steven Gambuzza - Longbow Capital

Okay. And then I was just wondering if you could comment on the outlook for O&M expense in Ohio. I think you mention that you expect some moderation back force of 3% to 4% growth rate. I am just wondering if you could maybe talk about risks and opportunities associated with that given potential opportunities better or given the inflation trends that everyone in the industry isn't feeling broadly, where are some risk of the upside might be?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

The risk of the upside is more people needed than what we have said. We think we are going to be flat to down in number of costs. This year we will up considerably based on what Tim Winter asked me about this about how many people did we add for the customer service in our IS [ph] department. So we would get to that, but that should not be and that's the biggest part of our factor, I mean people is 40% of the budget, O&M budget. Healthcare we have locked in pretty good rates for all of 08, but shouldn't be a major increase and that maybe 3% or 4% and we have had people pay to their benefit, which is not normal in the utility business to cuts back on the... moderated the increase, hence it is hard to figure at this point, I mean it's absolutely based on how well the stock market values. But at this point, the retention could be pretty bad; and we already are putting money in each year for expensing pension increases. Insurance is always a risk although we are now on an accrual basis on a year or 12 months and will be radical quarterly. We don't have any major litigation that we have noted in the K, but we are tripping those every day.

I'd say a car accident, something like that what would be. And in tower, Texas is a very valuable in tower price and the obviously big tower users in there. Most of the states, we figured increases. And on the positive side as we sell these systems, I think we will see that those systems have higher expense to revenue ratios and systems were keeping. So that could be a moderate risk.

Steven Gambuzza - Longbow Capital

The $250 million of CapEx, I know this is... I am shifting gears from thought give out CapEx versus operating costs. But I would imagine a substantial portion is capitalized labor associated with the pipe refurbishment and other activities, is that fair?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

That's fair. We try and keep that pretty steady, so do not want that... as long as the total spend is steady the amount of capitalized labor remains steady, I guide you that right. I don't know what the exact percentage is, probably in the teens but yes, we use own workforce to do some of the work on capital which means that their labor gets capitalized against that project. Then it's recovered in the next rate case.

Steven Gambuzza - Longbow Capital

Okay, thank you very much for your time.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Thank you.

Operator

Our next question is from Ryan Connors with Boenning & Scattergood.

Unidentified Company Representative

Good morning Ryan.

Ryan Connors - Boenning & Scattergood

Morning.

Unidentified Company Representative

Good morning Ryan.

Ryan Connors - Boenning & Scattergood

Yes. I want to kind of go back to the topic of CapEx budgeting for a minute and just kind of more conceptually get your thoughts on the strategic outlook or capital deployment. You have talked Nick about the sinology of with RIET where you are sort of now in a mode where you are evaluating and prioritizing among your different assets and territories and what I am wondering is in some of the states where there is at least some uncertainty as to whether you can get a decent return on capital on a timely fashion, how do you manage the process of capital deployment there as it pertains to capital improvement projects, in other words --

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Great question.

Ryan Connors - Boenning & Scattergood

In theory you would want to invest where you know you can get a good return and you got a good confidence that you can do that in a timely fashion, so do you hold back on some of the more proactive projects in the states where you have concerns about the regulatory climate.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

As of '07 your answer is yes. And that was one of the issues both with our new computer system and with the reorganization of rates and spreading the responsibility of time to tie your capital spend into what you can recover in rate including that responsibility on the President of that state, by measuring ROEs so you don't get too much lag, there's major organizational shift we made. Dave now has a program that we call the quack analysis.

Ryan Connors - Boenning & Scattergood

Can you afford the capital?

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Can we afford the capital? On every system there is a rate base so that we decide okay you want to spend this money as part of our 250 when will you get the money back and what kind of rate case will it need and if it doesn't seem realistic we cut back spending. So in some our states... there been a shift in the '08 capital budget although you are seeing the same number 250 that we told you about for couple of years, more of it has been shifted to states where we were ready to go in for rates or state that have a surcharge program.

Ryan Connors - Boenning & Scattergood

Okay and so when you look at the states that you laid out where there is going to be a lot of spending PA, New York, New Jersey, Ohio those seem to be states where the regulatory climate is fairly favorable. And so you are saying that that's not a reaction to some of the issues that you have seen in the south, it's more just that the improvements have made in the south and its nothing really not a lot more to do there.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Both because as far as the engineers in the south have plenty projects there.

Unidentified Analyst

Right.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

I would say it's not Ohio, its Illinois that brings us more money. The south has fixed those immediate problems there whether we get it back in rates or not we had spend the money because the environmental agency will sue this and service was down. Now we are in the more of discretionary phase where we are now saying we will give you the money to spend if you can show you will get quick return and the regulators wants you to do this.

Unidentified Analyst

Okay, that's helpful thanks.

Operator

We do have one question remaining. [Operator Instructions]. Our question is from Ajay Jain with UBS.

Ajay Jain - UBS

Hi, good morning. Maybe I will address my first question to Dave. Could you just confirm how much cash you have on hand right now and what the remaining proceeds are on the forward purchase agreement, how much of that is available for you to draw down on at this time.

Unidentified Company Representative

Yes, cash at the end of the year, we would see in the balance sheet when we file it today is about $14 million and funds restricted from construction activity which is the un-drawn portions of the tax free debt that was issued in the last year or so is about 77 million. We expect to bring a large portion of that down during 2008 as part of our financing.

Ajay Jain - UBS

Okay, so on that basis and I guess taking into account your CapEx budget for this year, I mean if you like you may need to raise any additional equity in 2008, can you comment on that at all.

Unidentified Company Representative

We don't have any new equity plans for 2008 other than the standard equity that we will bringing as a matter of course with our drip program.

Ajay Jain - UBS

Okay.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

Well Ajay we may look and this is Nick. We may look at all the alternatives provided under that forward equity provision because you know that is such a flexible provision, it says that could we put to us this August, we don't have any yield, if that's the case but it also gives buyback provisions and everything else. And obviously the value of the stock that UBS is holding in our account is let's say $23, $22.30 which under the current market conditions we are in the money, I guess you could call.

Ajay Jain - UBS

Got it, okay, and Nick can you give any more specificity on some other drivers behind the revenue deceleration last year in 07, what's like sequentially the top line growth decelerated pretty consistently each quarter and that's been and obviously you have got the regulatory set back in Florida and you talked about the impact of housing and erratic weather and I know there is always a lot of moving parts with your results but are there any major issues based on what you are seeing in terms of underlying consumption fronts

Unidentified Company Representative

Yeah, the acceleration if you look at the slope of the increase more than the total so let me qualify it that way. Your acceleration was more in the first half than the second half because Pennsylvania that's rate case in June or July or August I think of '08 excuse me '06. So your first two quarter comparisons in '07 were huge 11% to 12% on our biggest day. Adding to that New York water which was an additional 8% or 7% right of the back near quarter we did a run rate against 23 million in revenues on that 500 base and there they were heavy in revenues up till the fourth quarter. So that was on of the regions for the deceleration of fourth quarter. The third I would argue is that the most of the acquisitions that you did, came in very late in the year so there was really no unlike other years where its been a steady... you got average 4% or 2% over the whole year. We didn't have that advantage in 07, as a matter of fact we didn't get sequenced [ph] until mid-year and that was our biggest one and Antino [ph] was late in the year and so on, so whether really there is much comparison that next year will be a better comparison than that

Ajay Jain - UBS

Okay and just in terms of the situation in Florida assuming the discussions are back on track and Nick you mentioned that '09 is your anticipated recovery period I just wanted to clarify if there is a retroactive component to that or should we except that the write-off is basically permanent as it relates to '07 and '08?

Unidentified Company Representative

Very seldom do regulators ever go retroactive. We call it retroactive rate making and although we could argue it is fair I don't think we get it anyhow so I don't think we're asking for it. So I think that is lost forever.

Ajay Jain - UBS

Alright and just lastly Nick I think you mentioned in your prepared commentary you characterized the tax provision as a little bit of a headwind and that was based to a large degree on Sea Cliff or may be I misinterpreted but it looks like the tax rate was actually lower in '07 and it was materially down year-over-year in the fourth quarter up to 36%, is there anything I am missing in terms of the implications of...

Unidentified Company Representative

You know the federal tax?

Ajay Jain - UBS

Yes.

Unidentified Company Representative

Maybe I have to help you with that.

Nicholas DeBenedictis - Chairman, President and Chief Executive Officer

The federal inactive tax credit for the direct term of sketch me right now for the production credit was enacted a couple of years ago and at 3% and its double now in 2008, so you will find that the biggest chunk of the reduction in our effected tax rate is related to the doubling of the federal production credit.

Unidentified Company Representative

Okay, that's another cash generation for us.

Ajay Jain - UBS

Yes, okay, thank you very much.

Unidentified Company Representative

And where the cash business is.

Operator

Our next question is from Selman Akyol with Stifel Nicolaus.

Selman Akyol - Stifel Nicolaus

Thank you. Couple of quick questions if I may. First of all, in terms of the revenue in the quarter can you say how much of that was acquired and then as well as O&M how much of that was --

Unidentified Company Representative

Some of the acquisition of the increased items 13% year-over-year, 55% was acquired in Sea Cliff, New York Water Manteno and the other small acquisition.

Selman Akyol - Stifel Nicolaus

But that's looking at '07 over '06 I am just looking at the quarter.

Unidentified Company Representative

Oh, for the quarter. I can't, I'll have to get back to you on that. 9% -- most of the quarter this is what I said earlier the rates really didn't really help us in the first half of the year. For the quarter it was revenues grew 9% or 12.2 million, 7.6 of that was acquisitions.

Selman Akyol - Stifel Nicolaus

Okay.

Unidentified Company Representative

Bulk of it was acquisitions. New York Water and Sea Cliff and then the other 4 or some million were the rates.

Selman Akyol - Stifel Nicolaus

Okay and when I look at the O&M line how much of that was up to the acquisitions.

Unidentified Company Representative

See those 8.7 million acquisitions were well over 3 million of that, insurance was 1.8 million, we threw up the insurance that was the big hit in the fourth quarter. And post retirement benefits for million which was the... what I mentioned will get to factor in rates to see a year end through up.

Selman Akyol - Stifel Nicolaus

Got it. And then just one other question, you had North Carolina and Florida sort of file I guess net part of the 67 million total, can you break those two out?

Unidentified Company Representative

North Carolina and Florida are not part of the 67.

Unidentified Analyst

Okay.

Unidentified Company Representative

They are in addition and I am going to say that Florida is just on my last filing you could judge that it's a year later and we have put more capital and expenses went up. We thought we justified 7 million last time. So that could be the floor and on the North Carolina, I just don't have the number but I think its high single digits. Because it's a bigger state and we haven't been in for a number of years and we put a lot of capital in North Carolina to figure $7 million, $8 million, $9 million.

Selman Akyol - Stifel Nicolaus

I got you. Do have a number for Ohio?

Unidentified Company Representative

Yes, Ohio will be negotiated with... we already got one rating freeze in the first quarter that was 400,000. We had the late counting rate increase which is part of the $67 million... and that's in final stages of negotiation now we are hearing it. In fact we are hearing it since last night. And the other one is the start, the million which we locally negotiate and that's probably about 0.5 million to 0.75 million.

Selman Akyol - Stifel Nicolaus

So in total approximately $4 million for Ohio?

Unidentified Company Representative

Yes.

Selman Akyol - Stifel Nicolaus

Okay, Thanks so much.

Operator: And our final question from Vishal Katriwal [ph] from Stanford Group.

Unidentified Analyst

Well Nick and Dave how you're doing?

Unidentified Company Representative

Hi, how are you Vishal?

Unidentified Analyst

Doing good, just a quick question about the Fort Wayne system, the litigation they are offering 16.9 million Nick, what is the fair value according to you?

Unidentified Company Representative

That's the fair value of... I think because of the litigation. The lawyers told me I am only allowed to say I apologize but I am only allowed to say that's more than our booked value. You see we're going to be negotiating in court.

Unidentified Analyst

Okay, and again like the difference between book value and what you get in after the litigation, will that hit the O&M, line just like the Virginia systems or will that be a separate line item.

Unidentified Company Representative

We would expect, Vishal that any gains at the end of the Fort Wayne negotiation might be more significant than those gains which are realized in the past. And if so we likely have a separate line in the operating section to break that out. The gains historically have been somewhat immaterial and that's why they have been included in the O&M line

Unidentified Analyst

: Okay, that helps a lot thanks.

Operator

And with that I would like to turn the call back to management for closing comments.

Unidentified Company Representative

Well I think the core training program and all the questions we have got and we will clarify much more individually with people. It's going to be part of our ongoing story, its going to be generating cash and equity for the company which means less need for new stock sales which should be less diluted in the sense of what's happened in the past and I think we will try and clarify it on the accounting stage just mentioned. So its very clear what we bring in but I consider that's absolutely part of our ongoing business model now as to how we are going to achieve our goal of 4.7 to 10.5. So I appreciate all your time, it was kind of granular but I thought this was an important lesson for the year end involve. Thank you.

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