California Water Service Group (CWT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to your fourth-quarter and year-end 2007 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Marty Kropelnicki, Vice President and Chief Financial Officer at California Water Service Group. Sir, you may begin.

Thanks, Syed and good morning. Welcome, everyone, to our fourth quarter of 2007 and year-end 2007 conference call. With me today is Pete Nelson, President and CEO.

I would like to remind everyone that a replay of today's call is available and this call is being recorded. The replay will be available from today through April 28 and the dial-in number for the replay is 1-888-266-2081, ID 835974.

Last night, at the end of the day, we released our earnings. If you haven't received the press release, it is available on our website at www.californiawater.com and I would like to remind everyone and make a few comments about forward-looking statements.

In particular, during the course of this conference call, the Company may make certain forward-looking statements. Because these statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the Company's current expectations. Because of this, the Company strongly advises all current stockholders, as well as all interested parties to carefully read and understand the Company's disclosures on risk and uncertainty found in our Form 10-K, 10-Q and other reports filed from time to time with the Securities and Exchange Commission.

I'll start off today talking about the fourth quarter of 2007. Revenue for the fourth quarter of 2007 was $85.9 million, up $5.2 million or 6.5% over the same period last year. Contributing to the revenue increase was $3.3 million in rate relief, $1.4 million in increased usage by existing customers and $500,000 in increased sales to new customers.

Water production costs for the quarter increased 7% or $2 million to $30.7 million. Embedded in that number, there are three components. Purchased water increased $2.2 million to $24.6 million, which represented a 10% increase. Purchased power was down slightly, approximately $152,000 or 3% to $4.7 million and pump taxes were up slightly $35,000 or 2.5% to $1.4 million.

Other operations increased 1.5% or $400,000 to $25.1 million. Two primary drivers there. One is the purchase of chemicals and filters used in water production, as well as a slight increase that we booked in our allowance for doubtful accounts.

Maintenance expense for the quarter increased 6.5% or $300,000 to $4.4 million. Depreciation was up 11% or $800,000 to $8.4 million, primarily driven by the Company's capital expenditure program. Income taxes were up approximately 6% or $1.4 million to $4.1 million and total operating expenses came in at $75.9 million, up 7% or $4.9 million over the same period last year.

In other income and expense, it came in at $1.78 million, up $800,000 or 82% over the same period last year. Included in that number is a gain of sale of $2.6 million from two properties that the Company no longer used or useful in utility operations and those properties were sold during the quarter.

Net interest for the quarter decreased 11.8% or $500,000 to $3.7 million. That was primarily driven by the increased construction activity the Company saw during the fourth quarter. Net income for the quarter was $8 million, up $1.6 million or 25% over Q4 of last year. Earnings per share on a fully diluted basis were $0.39 per share, up $0.08 a share or 25.8% over Q4 of last year.

Overall, Q4 was a very good Q4 for the Company and we finished the year strong. Having said that, I would like to take a moment to walk through the financial results for the full year 2007. Revenue for the full year was $367 million, up $32.4 million or 10% from $334 million in 2006. Contributing to the increased revenue was increased rate relief of $15 million, $14.7 million driven by increases in usage by existing customers and $2.7 million to sales to new customers.

Total water production costs for the year were up 12% or $14.6 million to $138.9 million. Other operations was up 5% or $4.9 million to $100.6 million for the year. Maintenance expense was up $2.7 million or 18% to $18.3 million. Depreciation was up 9.5% or $2.9 million to $33.6 million for the year. Income taxes were up slightly and property taxes were up slightly as well. Total operating expenses were up $28.5 million or 10% to $322.9 million for the full year ending December 31.

Other income and expense was up approximately 84% or $1.9 million to $4.1 million and included in that number is the real estate sales that we saw in Q4. Net interest expense was up just slightly at $165,000 was the increase to $17.1 million.

Net income for the full year was $31.1 million, up 22% or $5.6 million over the previous year. Earnings per share on a fully diluted basis were $1.50 per share compared to $1.34 in 2006, an increase of 12%. Included in the full year of 2007 is the dilution associated with a stock offering that we completed in October 2006, which equated to approximately $0.15 of dilution for the full year.

So overall, it was one of the best years recorded revenue for Cal Water, as well as net income. We finished the year strong and I would now like to put it over to Pete to give some comments on what is happening and then I will come back and talk about the balance sheet. Pete?

Thanks very much, Marty. Good morning, everyone. I am going to cover two areas. First is an update on our rate proceedings, which I usually do on these calls and second, I will talk about some new acquisitions that we were able to either close last year or expect to close sometime this year.

So first, rate cases and I will talk about three here. First is our 2006 general rate case. This is the case we filed in July of 2006, expecting a decision in July 2007. This covers eight of our 24 districts for general rates and we now have a decision in that case. We did not have a decision in July as we expected in '07, so we were able to start interim rates of about $2 million annual revenue back in July of '07. We now have the rate case approved in December for a total amount of $7.7 million. So we have rates going into effect with that additional $5.7 million starting January 1 this year.

Due to the delay in the decision, there was, what we would call, loss revenue from the July to December period of about $2.7 million that would have been in rates if the Commission would have made a decision on time. So we were able to file and we will be recovering that $2.7 million over 12 months beginning March of this year as a surcharge to customers. So this puts the 2006 general rate case to bed. It's the last time I have to talk about it.

And let's move on to the 2007 general rate case, which is our $68 million request annual revenue, which also covers eight of our 24 districts, but more importantly allows us to reflect our corporate or headquarters costs in all of our 24 districts at one time. This would go a long way to help mitigate the regulatory lag created by the process we have been using for years, which can actually delay recovery of corporate costs up to seven years, which is just we think unreasonable. We are deep in the process of the '07 rate case, working with the Commission and it is generally on schedule and we expect a final decision sometime in the third quarter this year.

The third proceeding is what we call the conservation proceeding and this is an important proceeding for the entire state, but there is two regulatory mechanisms that are being worked through in this proceeding that are really important to us and to other water companies.

The first is the water revenue adjustment mechanism, which is the decoupling mechanism, which would allow us to separate sales from revenue, which would allow us to promote conservation much more aggressively in the state.

The second mechanism is what we call the modified cost balancing account, which would allow the supply mix -- changes in the supply mix to be included in our balancing accounts for ultimate recovery. You may know that right now, if we have changes in our unit costs of supply, if electric costs go up, unit cost of electricity goes up or if wholesalers raise their rates, those changes in unit costs are recoverable in balancing accounts, but if we have to change the mix of purchase versus pumped water, let's say customers use more water and we have to rely on more expensive sources, that change in mix is generally not recoverable in rates.

This modified cost balancing account, if approved, would allow us to improve include all the costs of supply in balancing accounts for ultimate recovery, also a key component in allowing us to promote conservation much more aggressively in the state.

Well, that proceeding does have a proposed decision, which was issued the first or second week of January this year and that proposed decision only allows us to cover residential customers in the water revenue adjustment mechanism, not commercial or industrial. We don't think that is reasonable, we don't think that makes sense from a conservation point of view, so we are working with the Commission to try to have a decision, an ultimate decision that would allow all customers to be included in the water revenue adjustment mechanism, which we think makes much more sense from a conservation and a public policy point of view. So that is the rate update.

I will move on to mergers and acquisitions. We were able last year and we will be able early this year to add some small acquisitions to two of our states and I will talk about both of them. First, the state of Hawaii and in Hawaii, we added some systems on the Big Island, Island of Hawaii, principally on the Kona Coast, two acquisitions there.

The first is the Waikoloa Resort Utilities, Waikoloa Water Company and Waikoloa Sanitary Sewer Company. Together, we call those the West Hawaii Utilities. That is a stock deal, which is water and wastewater systems and basically the Waikoloa area and Waikoloa Village. It is about 9000 customers. We have an application with the Hawaii Utility Commission, which we filed in January this year and we expect a final decision sometime this year on that application.

Also, on the Big Island, we are close to closing a smaller transaction for a nonregulated business called Island Utility Services. This is a small operations and maintenance service provider. This would be an asset purchase. They have about 20 O&M contracts on I will say the western half of the Big Island. We hope to close that acquisition sometime in March this year.

Moving to Maui where we now have operations, we have purchased the Pukalani Sewerage Treatment Works, which is a regulated system pretty much in the center of the island of Maui in the Pukalani area. This is a regulated system, as I mentioned, sewer only, about 800 connections and we expect that to close sometime in the second quarter of this year. So we are happy with the growth pace in Hawaii and very happy with being able to add a second island to our operations there, the Big Island and that should be fully closed this year, sometime this year.

Secondly, the state of Washington, we were able to add five smaller systems in the state of Washington last year and add contracts to operate systems for others. When you add all that together, that is about 600 new customers and we were able to add systems in the north part of the state in the San Juan Islands where we added the Rosario Resort and other customers out of Orcas Island. So we are also happy with the pace of growth in Washington, being able to add to small systems and enlarge our footprint in that state also.

So now I will turn this back to Marty to talk about capital and financing and the balance sheet.

Thanks, Pete. Yes, a couple things on the balance sheet that we wanted to share with everyone today. First and foremost, the net utility plant passed up $1 billion in December. We think that is significant. If you look at the capital program for 2007, total CapEx is approximately $102 million, a little bit more than 10% of our utility plan. The Company-funded portion of the CapEx came in at about $77 million. That is the portion that we earn our authorized rate of return on. So that came in at about 8% of our total utility plan. So that was a couple million short of our internal target. Our target was approximately $80 million. However, we did finish the year with work in progress up slightly from where it was the previous year. So overall, nice growth in rate base and we ended the year with a work-in-progress balance of approximately $39 million, which is approximately $3 million from where we were the year before.

We have completed 2007 with no new financings and no new equity offerings. As you may recall, in the fall of 2006, we completed a two million share deal and we also completed $20 million in senior unsecured debt and 2007, we had no new financings and we ended the year with nothing outstanding on our line of credit and an additional $6 million in the bank. So overall, balance sheet is looking good.

Our debt-to-equity ratios were approximately 43% debt, 57% equity, which is about where we ended up 2006. That 57% equity is the ratios that we used going into the 2007 general rate case and those equity ratios are included in our filings for the '07 general rate case.

Looking out at 2008, we expect the capital program to continue. The relevant range there is probably between $80 million and $100 million of CapEx. That is a pretty broad range, but you have to remember in California, sometimes the permitting can be a little bit more difficult, getting final sign-off from Department of Health Services and also the size of the projects will have an impact on scheduling. We do have a whole host of projects, none of which are significant in themselves. If you look at the top 10 projects for 2007, they equate to about 20% of the total budget. So there is no, call them, super projects out there that are taking the biggest portion of projects. There are a lot of pumps and pipes and main replacements, etc., but nothing that is dominating or commanding a big chunk of the total CapEx budget. So 2008 is off and running and we will look to see what happens in 2008, but I think $80 million to $100 million is the relevant range for CapEx for the year.

A couple other significant points. As the debt markets have had some instability due to the subprime fallout, the Company has maintained its S&P rating. There has been no change there. They rate us as stable and I believe we are in the top tier of the water companies that have publicly rated debt with S&P and so that has continued to go well.

In January, we declared our 45th consecutive annual dividend increase and we are about ready to pay our 253rd consecutive quarterly dividend. We think that bodes well for the financial condition of the Company and the shape that we are in.

So going into 2008, we feel the balance sheet is healthy. There is plenty of room to finance our expense program. As Pete mentioned, we have completed some acquisitions that we think increase our footprint in growing markets and overall, our financial results we feel were very, very good for 2007. Pete, any other thoughts?

Sure, I will just reiterate, in closing, we feel very good about 2007, a good year, able to post solid financial results, continuing to implement the California Commission's Water Action Plan, which we feel is good public policy and we are very pleased that the Commission remains fully committed to the plan as well and happy that we are able to expand our footprint in Hawaii to a new island and in the state of Washington with acquisitions that were very important to us. At this point, I think we will take any questions.

Yes, Syed, why don't we open it up for questions, please.

(OPERATOR INSTRUCTIONS). Francesca McCann, Stanford Financial.

Hello there, good morning and congratulations on a good quarter and year. Looking forward to more. A quick question on the purchased water costs and the increase there, if you can kind of detail that out a little bit more and then also tell us what you see there moving forward, kind of trend wise what we can expect?

Sure. That is actually a really good question and when we haven't been in our blackout period, I have actually gotten quite a few calls about this issue because some of the other issues that are popping up with other water companies within the state that have had some issues this year.

First and foremost, the 10-K will be filed hopefully today or sometime tomorrow and in the 10-K on page 35, we break out our water production and really when you look at this issue and how it works, I think there is a couple of things that are really important when looking at us versus other companies.

First and foremost, mix matters. In total, the Company produced approximately 141 billion gallons of water during the year. Of that amount, approximately 50% was purchased water from wholesalers and the other 50% came from our own wells and groundwater.

When you look -- or surface -- when you look at the 50% that is ours, the majority of that comes from our own wells, approximately 46.4%. Only about 3.7% of the surface water came from our surface water plants of which we had four and that was just down slightly.

In total, of the 141 billion gallons of water produced, five billion came from surface sources, our surface sources and that was down slightly from 5.6 billion the year before. So as the reservoirs have had lower water levels, etc., that has affected our ability to run the plant, but in terms of it being a material part of our overall portfolio, it is really not.

The second thing is, given the fact that we have the largest number of districts in the state of California, I think we have gotten better at rate making around these issues and as you may recall in our rate-making process, every year, we have had eight districts come in for rates and we file a rate case for each of those eight districts every year. That has allowed us to address the mix issue every year in districts that change. So I think we have gotten fairly sophisticated at our estimates in terms of how we look at the total demand.

And then ultimately, we are big on trying to keep our wells productive and so as we saw some increases in demand this year, we have been able to increase our well production. I don't know, Pete, if you would add anything to that.

That's right. The [inlay] basin, we were able to increase production from our wells down there pretty well last year.

Okay. So for purchase -- purchased water costs then, expecting that -- okay. That sounds good. And then on the tax rate -- I'm sorry. Go ahead.

I think, Francesca, the 50-50 is probably a good ratio. As part of the CapEx program, we like to drill so many new wells every year as well. So obviously it is more economically advantageous to us to pump water, but I think that 50/50 mix ratio is what to look at and again, when the K comes out, look at page 35 because we break it out in all the percents so you can see it.

Perfect. Okay. And the acquisition landscape -- congratulations on what you did in the quarter and through the year. And I guess if you can talk a little bit about additional growth opportunities either in Washington or Hawaii or elsewhere. And then kind of as a second part of that, where your focus is going to be for O&M versus full systems.

Well, Francesca, we prefer to buy regulated systems, of course, at book value so they are accretive immediately. In Hawaii, the O&M acquisition was a strategic one. That does serve 20 separate areas up and down the Kona Coast and inland on the Big Island. I expect us to remain in our four states and look for prudent acquisitions in all four. This was a good year for Hawaii as opposed to maybe two or three years ago, it was a very good year in New Mexico. So they kind of go in cycles, but I think what you have seen, '07 and '08 is pretty much the pace and the strategic direction you will see from us in the future.

Okay. Perfect. And any kind of obstacles that you see looking forward as you expand your [operations]?

Can you be more specific on obstacles?

Be it regulatory -- I guess more so on the regulatory side?

Francesca, one of the things and as this question has come out throughout the years, we do look at a lot of opportunities. Part of the challenge is finding opportunities that we can make money on and that we can grow. As Pete said, growing rate base and growing the regulated business is always our first priority. However, you are capped at how much you can pay for those systems and make money on them. So having a strong disciplined approach on the M&A side is really, really important to both Pete and I in making sure we can do deals that are accretive.

So we kind of go where we think we can make money and where the opportunities are. We are not going to spend shareholder money on places where we can't make money unless we think it is a strategic opportunity that we think will lead to downstream our future profits by expanding our footprint.

Okay, perfect. And then just a quick question on the tax rate, which was certainly lower than -- I mean not lower than last quarter, but lower than we have seen in a little while. So any further detail on that?

The tax rate does bounce around a little bit. If you look at where we were, the effective tax rate in Q1 was 40.3%, the effective tax rate in Q2 was 40.8%. In Q3, it dropped to 40.2%. In Q4, it dropped to 40.3% and we ended the year with an average blended effective tax rate of about 40.40%. I think it is going to stay between that 40% and 41% and you see some volatility there because you have the effects of flow-through accounting and some of the tax changes that we have to look at and address quarterly. So we have a quarterly tax provision that gets reviewed by the public accountants in our tax department, but then we have an annual true-up, but I think between 40% and 41% is the relevant range and 40.5% is probably a pretty good benchmark to model off of.

Okay, perfect. Thank you so much. That's all.

Debra Coy, Janney.

Yes, good morning all. Just to follow up a little bit on the acquisitions. Can you just give us a total aggregate number of about what the consideration was for the whole lot of what you've acquired in the last quarter and what the revenue contribution would be?

Yes, let's talk about -- I think we need to talk about each deal independently because there are different types of deal.

And that is even better, but I was just trying to get a sense of kind of the size. It sounds like each one, other than the one on the Big Island, most are fairly small, but kind of how do they add up?

Right. The purchase price for the one on the Big Island was $21.5 million and that includes the assumption or the repayment of third-party debt, which was approximately $13 million to $14 million. That is probably the biggest one. That was an actual stock deal, so it was a developer-built plan. It is a growing area. That is the one that adds 9000 new customers to our business there and that is a regulated entity. That application has been filed with the HPUC and certainly you can pull information off that application.

Right, okay.

The Island Utility Services one, that is an asset deal that we are paying with Company stock. That is not a really big deal. It is under $1.5 million, but as Pete said, that one is very strategic because it gets us into the nonregulated O&M business on the island and we deem that as being important. The Pukalani deal was an asset deal that we paid cash for and that was $2 million. So when you look at -- these are at different phases. Obviously the one on the Big Island that adds -- the Waikoloa, that has not closed yet. That will close sometime this year. If I was to peg a date, I would hope by August, but that really is subject to the review and approval of the Commission in Hawaii. The Island Utility Services is pending as of right now and Pukalani is pending as well. It has been filed.

Okay, that's helpful, Marty. And similar on the Washington deals?

Yes, the Washington deals -- it is a little bit different landscape in Washington and most of the deals in Washington we have paid cash for. Obviously, as a public company, we like asset deals better than stock deals because it limits the liability to the subsidiary, as well as the parent company, but all the ones in Washington have closed.

Okay. And the aggregate value of the Washington deals? Will that be in the K?

They're not -- actually there's --

They are not material?

Yes, it's a couple million dollars total, Debra. It is not a whole lot.

A little over $1 million when you add them all together.

Actually, that's helpful. I just wanted to kind of get a sense. So thanks for that. Pete, coming back to the regulatory situation, two things. I am interested in why you think the Commission has tried to separate out residential versus commercial and industrial customers from the RAM mechanism and then how you think the timing of that process is likely to go.

Well, I guess I would say that the Commission did not separate. The ALJ's proposed decision did.

Oh, this comes from the ALJ not from the Commission?

Yes. We have worked with staff and interveners, all of whom agreed that all customers should be included in the revenue adjustment mechanism, but the proposed decision of ALJ and I'm going to just -- I will opine that there wasn't -- the ALJ wasn't clear on how the rate-making mechanism would work for the commercial industrial customers. It was more of a clarity issue, but all the parties agreed that all customers should be included in the revenue adjustment mechanism. That is what we are trying to change.

As far as timing, it could be today. We don't know; it could be soon. So it is actually -- it could be held today. I think it was on the agenda for today, but it could have been held. We will just have to see.

So if we get a resolution on that that all parties are happy with, it would take effect when?

It looks like, yes, July 1 would probably be the optimal time. Obviously it is a huge change to the front side of our business and on the revenue and on the revenue side, it will probably be one of the largest single changes our industry goes through and that affects the work that my team has to do, but obviously we would like to cut that over on the quarter, so it is a clean cut-over.

And particularly given the timing of your rate cases.

Exactly.

And in terms of that, I guess one of the surprises, Marty, you mentioned earlier, the mix issues relative to other -- what we are hearing from other companies, but the other thing that we really didn't see from you this quarter and perhaps it is geographic as much as anything else, but we are certainly hearing about some conservation-related reductions in usage. You talked a bit about that in the third quarter. Are you really not seeing much of a conservation impact on your revenues since usage was up in the quarter or do you think that was just more weather-related?

That is a very good question and just let's go back to Q3 and when we talk about revenue, we always break out the three components, what was rate relief, what was changes in demand by existing customers and what is sales to new customers. In Q3, we didn't see an increase in demand by existing customers. In Q4, we did see that go up. I think I mentioned it was $1.4 million, but we also -- we had a dry fall and we went into winter relatively dry. So I think it is probably a combination of both. It was overall a dryer year and conservation, but it is hard to disaggregate the two to see which is which.

And I know obviously we are still in the midst of 1Q, but it has been relatively rainy. Can you comment on how you are seeing trends as we start into the new year?

Yes, not giving any forward guidance per se.

Of course not.

If you go back and you look at 2006, it rained almost every day in January and close to everyday in February and we had one of the rainiest quarters on record for the state of California. This year, we have had a lot of rain and we have had a lot of snow, but they have been pocket storms. The storm kind of rolls in. We get a storm for a week and it rolls out. Last week, it rained. This week it is 70° here in San Jose and in the Bay area. So I think when I looked at the weather patterns, we were about 135% to 140% of normal as of last week. The snow pack was looking good because they got that big storm last week. But it is a little different than what it was in 2006 when it was just constantly raining.

Okay. So we are sort of normal-ish is the way it kind of looks so far, whatever normal means anymore?

Yes, I don't know if there's such a thing as normal in California, but I think the pattern is probably getting back to what we have typically seen in the past.

Okay, thanks. That's helpful.

Tim Winter, Smith Moore.

Good morning, Marty and Pete. I was just wondering if you could clarify the numbers for the 2006 general rate case. Did you say $7.7 million of revenue increase?

Yes, let me try that one because I thought that might be confusing. The total increase in revenue from that rate case is $7.7 million. We started $2 million of that back in July of '07, which was interim rates and then we added the $5.7 million additional starting January 1 this year.

Okay, and what was ROE?

ROE is 10.2%.

Okay. And did you record any of the difference or the gain between the interim and the actual increase in 2007 results and if not, will you be recording that in 2008's results?

That is a very good question. The Company historically has not recorded -- well, let me say it this way. We recognize revenue when it is billed. That has been our revenue recognition policy. That is what is on file with the SEC and that is what is in our 10-K and our footnotes. Obviously as we move to implement around, that changes and there is a very good chance those balancing accounts will be balanced and recognized on a go-forward basis. So when we look at 2007 kind of in our current world, we ended the year with approximately $3 million in balancing accounts. That was down slightly from $3.9 million in Q3. So I think that will change, but the short answer to your question is no, we don't recognize that revenue until we bill it and then we recognize it over a time period as consumption is used.

Okay, so the surcharge that you will be charging through 2008 to make up for the delayed timing?

Yes, actually it will start in March 2008 and finish in February 2009, a 12-month recovery.

So we could expect an additional $0.05 to $0.06 of revenue recognition that was actually billed in 2007?

Potentially, yes.

Not billed in 2007, Tim.

It wasn't billed, it was deferred.

Well, it was used.

That's right. That water was used. Expenses were recorded and recording the revenue March this year to February next year.

Okay. And can you guesstimate how much it negatively impacted '07, results -- the delayed -- the difference between the $7.7 million and the interim had it been in place?

Yes, we talked about that on the Q3 call and if my memory serves me right, which every year I get older, so there's no guarantee on this folks. This is why we do that Safe Harbor provision at the beginning of this call. I believe we recognized a couple cents of increase in Q3 and Q4, but it would have been closer to $0.05. So there is probably a net $0.03 incremental difference there. Again, I'm working from memory. I would have to pull my notes from the Q3 call.

Okay, thank you.

(OPERATOR INSTRUCTIONS). [Justin Kenny], Stifel Nicolaus.

Good morning, gentlemen. A quick question for you. When I am looking at the nonregulated expenses, it looks like you were up slightly over $1 million over the last year. I was hoping you could add a little clarity on what is pushing that higher.

Sure, you have a couple of things that flows through that line and again, I will call everyone's attention to the 10-K when that gets filed here in the next 24 -- actually 24 hours. We have a couple of things that flow through there. One, we have antenna leases that we sell or we lease our space to cellular companies to put antennas up. We have our extended service program, ESP, that flows through that line and then we also have nonregulated contracts that we operate. So you have kind of three primary vehicles there. The cellular lease program continues to grow every year. Our ESP program is continuing to grow, so those are kind of the three primary vehicles that roll through there.

No acquisition costs or asset sale costs are built in here?

Not yet. And it depends on the deal. Obviously if it's a regulated deal, you have kind of got to throw it all above the line into the regulated balance sheet. If it is a nonregulated deal, it would go below the line, but those costs usually all kind of get netted through as you close the deal and as it comes out of escrow.

Great. Thank you much.

(OPERATOR INSTRUCTIONS). Debra Coy, Janney.

Pete, just to follow up on the acquisition outlook. Interesting that we really haven't seen acquisitions in California. You mentioned earlier you are looking at all of your service territories for opportunistic acquisitions. Can you talk a little bit about the environment in California, why we really haven't seen much M&A activity in the state and what the outlook might be?

Well, we just don't see the opportunities in California at this point. We are working on several things that are in motion now, but nothing huge. And I am not sure why that is.

I am not sure why that is either. It seems odd considering the same needs for capital spending and developer systems and so on.

And the pressure that some of the cities are having right now on their financials, it's a little surprising, but I think if you look at the other California companies, you won't see many California acquisitions either this year.

No, that's completely true and I was just wondering your take on that. We are hearing from some of the other companies in other states that they are beginning to see some opportunities in the municipal market because of the budget pressures as you have mentioned, but you are not really seeing that in California to date?

Not yet. That is probably going to be a little delayed I would guess here. We do have one city in the Bay area here that is close to bankruptcy. But I am just not seeing the opportunities and that is why we have moved our focus to Hawaii and Washington.

Okay. Thanks, that is it for me.

(OPERATOR INSTRUCTIONS). I am showing no when in queue at this time, sir.

Thanks. I will just make a couple of brief closing remarks on the financial side and then I will turn it over to Pete to close out on the operating side. Again, obviously 2007 was a good year for Cal Water. We have remained steadfast and focused on addressing the regulatory lag issues that has kept us from hitting our authorized rate of return and return on equity.

As Pete said, we are aggressively going after the water action plan and we remain, from a financial standpoint, focused on building that long-term shareholder value. So we do have a number of analysts that cover us and we want to thank everyone for their support throughout the year. We have some excellent analysts, excellent coverage out there and I know for me, I look forward to the next conference call. Pete?

Me too. Thanks, Marty. Thanks to everyone for being on the call this morning. I really appreciate it. '07 was a good year for us and '08 should be a very exciting year as we go through and expect a decision on our 2007 general rate case and on the conservation proceeding. So I think this is going to be a lot of activity in '08 for us. Thanks very much.

Have a good day. Thanks, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.