Essential Utilities Inc (WTRG) 2008 Q4 法說會逐字稿

Good day and we welcome to Aqua America Incorporated fourth quarter 2008 earnings conference call.

(Operator Instructions)

At this time, I would like to turn the conference over to Mr.

Brian Dingerdissen.

Please go ahead, sir.

Thank you you Brandon.

Good morning, everyone.

Thank you for joining us for Aqua America's fourth quarter and full-year 2008 earnings conference call.

If you did not receive a copy of the press release you can find it by visiting the Investor Relations section of our website at aquaamerica.com or called Fred [Martino] at 610-645-1196.

There will be also a webcast of this event available on our site.

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

As a reminder some of the matters discussed during this call may include forward-looking statements that involve risks, uncertainties and other factors that may cause the actual results to be materially different from any future results expressed or implied by such forward-looking statements.

Please refer to our most recent 10-Q, 10-K and other SEC filings for description of such risks and uncertainties.

During the course of this call, reference may be made to certain non-GAAP financial measures.

Reconciliation of these non-GAAP to GAAP financial measures are posted in the Investor Relations section of the Company's website.

At this time I'd like to turn the call over to Nick for his formal remarks after which we'll open the call up for questions.

Thank you Brian.

Good morning, everyone.

Pleased to announce a solid quarter and second half of 2008, which allowed us to meet analyst expectations for the $0.73 in diluted earnings versus $0.71 for '08 over '07.

This year we closed our forward equity position and only had to increase our outstanding shares by 1% which is the lowest increase year-over-year since I think I've been here for 17 years.

Yet, we did spend a record amount of capital, $267 million to address the environmental and infrastructure programs on our properties throughout the 13 states.

2008 marked a year when the majority of our capital investment addressed our infrastructure rehabilitation program, on which timing is more discretionary, as most of our environmental compliance projects, which are not discretionary, because many are under orders from state environmental agencies, are now nearing completion.

The majority of our money is now in infrastructure spending and just a small percent, less than 10%, of environmental compliance.

Our plans now are to spend $280 million in 2009, again, chiefly on our infrastructure and Water Quality Improvement programs.

But this could go higher as we attempt to participate in the nation's economic stimulus program.

Now this is made possible for a number of reasons.

Because we have access to the capital markets, our recently confirmed rating for Pennsylvania, which is our largest borrower, was confirmed by S&P just about a week ago as a double A minus rating and a one plus recovery rating by S&P, which is one of the highest on the scale of 1 to 10.

In combination with that, these ratings in combination with our increasing internal cash position, in 2008, we generated $322 million in EBITDA, and project this will grow in line with our, and actually may exceed our ten-year EBITDA cager, which is ranged a little over 10%.

We also issued $22 million in tax free bonds yet to be drawn down, at the height of the credit crisis in December and just last month, the Pennsylvania Economic Development Authority has authorized us to issue another $58 million in tax-free bonds anytime during 2009.

Actually in light of the current low interest cost on our recently renewed short-term loans, to give you an example we're paying a blended 50 basis points above LIBOR, which means we're borrowing today at under 1.5%.

We have the luxury of timing on the issuance of the long-term debt to expand, to support our expanding capital investment program.

We still have in excess of $75 million left on our short-line before we have to go into the long-term debt.

The investment in distribution infrastructure, or in plain language, old pipes, is just coming in time.

This winter was a slightly colder winter in the north and due to that cold weather, we had more pipe breaks in the first, over the winter, which starts in late December here and goes through early March.

We had more pipe breaks in that time period than we had in the first 3 quarters of last year.

That's the bad news, is it increased our overtime and maintenance costs and did slightly negatively effect 4Q and could effect 1Q maybe up to $0.01, but we still have a month and a half to go, so but, it was not a great January from a standpoint of expenses on pipes.

Now the encouraging aspect, however, I always look for the bright side, is that all the brakes were minor.

We had no major blow outs, which would cause damage claims or disruption of major service.

Which you're starting to see more and more in some of our municipalities where large pipes go and areas are washed out.

We fortunately did not have any of those.

And all of the breaks were on the two-third's of the pipe that aren't, isn't the newer pipe which we've been replacing over the last decade or two, so to me, as an engineer, that shows the, our pipe selection program and the fact that we started addressing this a year, ten years ago, not just yesterday, is making a difference as we proceed on.

I can't imagine what our pipe breaks numbers would have been had we not addressed, at least a third of the system that has already been addressed.

Now, we're not going to be able to do this rebuild overnight.

It's obviously a, a 20, 25-year program, but it is economically affordable because of the state's infrastructure surcharge mechanisms, which have been he enacted in most of our northern states, and complimented by the low interest loan programs, which we've been accessing much more readily now and will be augmented by the economic stimulus plan.

I'd like to mention that due to our strong financial position, the Board once, again, raised our dividend in December by 8%.

That gives us a $0.54 annualized rate now.

And this is the 18th increase in the last 17 years, and our record has been recognized by Mergent as a Mergent Dividend Achiever.

Now for some financial statistics.

First of all, revenue showed a strong 7% increase in 4Q, which gets us back to our long-term cager that we've experienced over the last 5, 10, over the last 10, 15 years.

And a lot of that was thanks to $60 million in rate awards, achieved during 2008.

But, basically kicked in the third and, and almost full blast in the fourth quarter.

Now, about 60% of these awards will, will positively effect results through the third quarter of '09.

So this is something that effects not only this year, but next year.

We're now focusing on finalizing the current cases, which were filed in '08 and are still in progress and hopefully will be decided in '09.

There are cases, well we just finished case in Ohio for $400,000 in one of our larger divisions.

We have a case in the final stages in Indiana, a very small one, $150,000.

And we have three larger cases, North Carolina, Florida and Pennsylvania.

In Pennsylvania, we, the docket was just suspended and we're in discussions now with the, with the Office of Consumer Advocate, OCA and ready to do the process through the litigation.

In North Carolina, we have a settlement agreement among all parties for $7.7 million, which is now being reviewed at the North Carolina Public Service Commission.

And we hope to have a final ruling on rates sometime in the second quarter.

In Florida, where it's a two-hearing process at the commission level, the commissioners voted this week on the revenue requirements, which we are estimating to be about $6 million in revenues, however, this is not final, since there is a second hearing in two weeks to vote on the rate structure.

Now looking forward, in 2009, we're planning another active year in rates and expect to file over $70 million in rate requests.

Much of which will effect us in late '09 and the majority of which will positively effect 2010 financial results.

Timely rate filings are crucial if you're going to address the regulatory lag which we've experienced over the last couple of years into early '08.

And we've experienced most of that in the southern states, and to a lesser extent even in our northern states that were more mature.

We're complimenting the timely rate filings that we just talked about with timely and permissible filings under the surcharge mechanisms to support the increasing infrastructure portion of our capital program as it grows and will -- and we're also going to continue to prune under performing assets, which do two things.

They take from some of your regulatory lag away, but they also generate cash that you can invest elsewhere in the system in performing assets.

As a matter of fact, the pruning program did effect our results in a sense, in a way because they affected fourth quarter '07 results by approximately $0.02, about $2.4 million, when we sold the Henrico, Virginia system late last year, and we sold our investment in base and water late last year, 4Q, and they were both adjusted into last year's results.

If you adjust for that, our 4Q '07 earnings from operations would have been about $2.4 million less than, than GAAP reporting, and -- or about $0.02.

Versus the fourth quarter '08 results of $0.19, so you can see, we, we would have had a much more larger gain in the quarter to quarter, that you don't see in the GAAP reporting.

We also, I feel very good about the containment of costs, which were somewhat when commodity prices were rising so rapidly and we were not gaining any recovery in rates, were getting out of hand and starting to hurt the financials, the efficiency ratio is now on it's way down again, which is great news.

If you look at the full-year results, which has -- not a great first half of the year, because that's when commodity prices were still zooming, we've dropped from 42% to 41.8%, so 20 basis points.

However, the fourth quarter, if we look at that, last, the reportable was GAAP was 41.9%.

However if you, you assume that the pruning exercise for Henrico and, and [Basin], were subtracted from the, from the expense side, the way accounting does it, it would have been 42.6%, and we ended this year on an apples-to-apples basis at 41.2%, so it's a nice 100 basis points drop in the fourth quarter.

Overall expenses were up for the year 3.6%, they were up 5.7% for the quarter but once, again, if you adjust for the Henrico sale, which was deducted, the profits were deducted from expenses, it would have been about 3.8% for the quarter, so you can see we're running just under 4% run rate now, and I think a lot of that is the fact that chemical cost, fuel costs, which had doubled are back down in line and some of the other costs have started to moderate.

So, I feel real good about the, the expense side of the business as we go forward.

And of course, I think what makes us somewhat unique in addition to our strong credit rating and access to the markets, is the fact that we're still growing.

Obviously, our sales are up, revenues were up, we, we did grow our Company last year.

It wasn't as even with the economic slow down.

We were able to complete nine acquisitions, and then coupled with a slow-down in organic growth, but we still had growth in, less some of our northern states, but the southern states, although they dropped almost 50% from normal levels or more, they still were growing and we showed about 1% growth just, what we call organic growth.

New houses developed in areas that we already are serving, so with that 2% growth pattern, although it's not like what, the levels we'd like to see, it gives us a base now to build and we're very optimistic about, about '09 and hopefully to starting to see a turn around.

So, I'm very pleased at our earnings growth in '08, which I expect to continue in '09.

The impact of rate awards received in the second half of '08, when they're realized and new awards are granted, and our customer base grows, that we're optimistic about our, our '09 picture.

I'll answer any questions you may have now.

Thank you.

(Operator Instructions) And we will take our first question from Michael [Rumberg] with Boenning & Scattergood.

Good morning, Nick how are you?

Hi Mike.

We heard a lot of statistics and evidence in recent weeks that state and local budgets are tightening and pressure is being placed on the government's to find cash quickly.

Surely an asset sale of municipally-owned water utility would seem provide a pretty sizable plug -- in a lot of holes in these budgets.

It would seem this might be a catalyst for an acquisition strategy going forward.

I'm just curious to get your thoughts on whether or not that thesis would be correct?

And if so.

have you seen that thus far and do you anticipate seeing it going forward?

Yes, I think it's more prevalent now than it has been for years.

I think one validation on that is the, the Trenton proposal to sell their system to American, in the sense that part of the rationale being used by the mayor is to -- is to avoid a tax increase to, to plug a budget gap.

I think you're going to see that more and more.

Your seeing it more now in the larger cities where there's a lot more politics involved with doing something like that.

And a lot more opposition, I guess, there's been, some opposition to anything, so but we're starting to see it in our sweet spot is going to be what I'll call small town USA, which takes a little more time, because the problems aren't as acute, but they're there, and I do, I am optimistic that it's going to open up an aspect of the business which has been heretofore looked upon only as a chance to run a system like that versus buy it.

So I'm, I think you're absolutely right.

And in terms of budgets, insofar as they're kind of done on 12 months basis, do you see it as more of an issue are or more of -- a catalyst in the next 6 months or 18 months?

If you have --

No, no.

I, I think it's more a ten issue than a nine issue just because it takes you time negotiate it.

You have to go through a very long public hearing process, and then at the state -- I'm sorry at the local level because the council is just not going to approve it and then you go through the state regulatory process, and there's a lot of trip and falls along the way, but you eventually get there, but it's not a 3 month or 6 month process.

Right.

But --

Okay.

What I'm optimistic on, is it, it's Michael on the phone now?

Yes.

What I'm optimistic on, it starting -- I mean when you look at our pipeline it's got to be a couple years long.

Just, you can't just do it week to week or even quarter to quarter, so I'm optimistic that's a whole new aspect of the pipeline that's going to be, be out there.

And I don't think it's gone away because of the, the real crucial part, and I think accounting has addressed it, the (inaudible) or whatever, is they're starting to now recognize that there are liabilities to the pensions they've given away at municipal levels.

When you start adding those in, it becomes very clear anything that's labor intensive like a water or sewer plant, is adding to that long-term structural deficit that some of these municipalities have.

Right.

Okay.

That's very helpful.

Thank you.

In terms of, O&M costs and other costs, you did mention that, that one of the results, I believe of the stimulus package or another recent initiative would be accelerated depreciation schedules.

Can you give us a sense of how to think about that going forward?

Yes.

Obviously it has great benefits for the tax burden, but maybe in the short-term, a net negative for shareholders.

Well, in a way it gives you a chance to do more construction and not have to raise rates, because you're getting almost an interest free loan from the government.

That's the way I look at it.

But, you'll get that as those deferred aspects that we call regulatory assets, which is deferred taxes, which we're not allowed to earn on until they're brought back in or brought back in over the next 20 years, 25 years, then you start earning on it.

So I'd call it deferred earning statement while you're putting the benefit to the rate payer now, it is going to eventually payback to the, to the shareholder.

It's the right thing to do, that's why we did it.

I mean, it's more work.

You have to, to -- obviously not only do the bookkeeping, but do the work.

You take the risk, in the sense that you're bidding projects out, and you have other things to do also, but this year, we increased our capital budget by over $30 million above what we thought we were going to do and we got that all back plus, I believe, David at $35 million or so in deferred taxes.

It's in the financials.

So, we made that decision in April of '08 when it was passed and we said, the right thing to do for the rate pair is to do it, and we increased our capital budget, and the shareholders didn't get hurt by it, but they won't benefit immediately.

They'll benefit over the next, you know, X years, 25 years.

Now having said that, I would argue the shareholders are benefiting because if you have good service, the regulators reward you for good service and this expenditure makes you're system better, and less controversial because if you have a bad service, that's what hurts you in your regulatory climate.

So in a way it is a positive for the shareholders also.

Absolutely.

Can you quantify the -- the increased depreciation expense that will be realized?

I think $40 million is a good number, is that okay?

Okay.

Yes, that's helpful.

And that would kick in presumably the beginning of 2009 or at a later point?

I'm going to is ask Dave to help me with that one.

Yes, and that's -- the number that Nick's quoting is actually the deferred taxes that are associated with the increased tax depreciation relative to our capital budget and that number was, in fact, the 2008 benefit associated with the bonus depreciation and we expect a similar benefit in 2009.

Okay.

But now you understand, Michael, it's not a P&L issue.

It's, it's the regulatory books, not the P&L books.

Right.

Okay.

Okay.

Yes.

In other words, your not going to see an increase in depreciation of $40 million on our books.

Right.

It would hurt earnings.

Right.

Okay.

One last question on the financing side, we've seen you guys begin to work with Pennvest in gaining low interest financing.

I'm wondering if you could elaborate a little bit on that and where you see that going in the months and years ahead?

Sure.

Well, I take pride in Pennvest because it was created when I was Secretary for the Environment in the '80s in Pennsylvania and it's probably the most effective of all the state low interest loan programs.

We've used it.

Meaning Aqua has it used quite extensively.

As a matter of fact, I think if you look at the top users of the system over the years since its inception, Aqua's number one.

I was very encouraged when rather than outright earmarks or grants, the economic stimulus bill actually put the extra $4 billion in waste water, I think it's $4 billion and $2 billion in water, through the state revolving loans funds.

Which means that there's not going to be a whole new mechanism or favoritism shown in how the grants are given out.

It's ready to go in good projects.

We've applied for $33 million, we usually apply for $5 million every meeting, this time we applied for $33 million in projects for the May decision meeting in Pennsylvania.

So, if we, we move some projects that we were, we're going to do in '10, and maybe even later up, so we could do, and they're ready to roll, but that's what the economic stimulus plan asked for.

And when you look at the rates, which range from 1.5% interest to 3% interest, you almost cannot go that way for your rate pairs and it also gives you new access to capital that's sort of not on the normal credit markets.

So we're, we're going to use it.

I think, I'm very pleased that the infrastructure program didn't put private sector at a disadvantage by giving earmarks and/or grants to large cities and all that, and we're willing to compete with anybody for the low interest loan program, because we think our projects warrant a recognition.

Okay.

Great.

Thank you very much.

We will now take our next question from Tim Winters with Jessup & Lamont.

Good morning, Nick.

Good morning Tim.

I was wondering if you could address the sales volume growth or lack of growth this year in the fourth quarter related to the economy and to weather?

Yes, we look at that pretty carefully, and we've been seeing year in, year out, a steady usage decline due to conservation.

Fixing pipes, environmental ethic, whatever, smaller families, low flow shower heads.

Low flow toilets, about a 0.05% a year, and it's been steady, so we work that into our budgeting and then of course, we hope to overcome that with more growth on the system, i.e.

customer growth, unit growth, and then every once in a while you get a good hot summer, which really mass the whole usage patterns, but that's what a high-fixed asset business, that's what you really bring money to the bottom line.

If you look at our overall sales for the year versus '07, we were down about 1%.

So, a little faster than what we would normally look at, and that's it, that's adjusting for customer growth.

That's strictly same store sales, if you want to call it that?

And a couple were up, Texas being one of those notable exceptions.

Florida, they've had a drought in Florida.

People using a little more water.

North Carolina, they declared a drought, so North Carolina was down.

But, most of it was in Maine, Pennsylvania, Illinois, and a lot of it was because we didn't have a great summer.

It was a little bit wet this year.

Especially in the midwest.

In looking at the fourth quarter, it did accelerate, and it looks like it was about 1.8% in the fourth quarter.

So, I want to attribute that mainly to the economy more than to weather, because fourth quarter doesn't, I mean, the south is affected by weather in the fourth quarter, but not necessarily the north where the bulk of our customers are.

I guess the, looking at the risk factor, if you take a look at our sales, and dissect them, we only have 4% of our sales are now to industrial, and I'd say that was the most susceptible to quick, slow down in usage.

Because of the economy.

About 14% is the commercial customers, which could range from your barbershop to a large shopping mall or office building and usage was down slightly there.

And then, but most of our system now -- is 85%, 90%, not 90%, 80% to 85%, is residential sales and probably 85%, to 90% in units, but in total sales I'm giving you volume sales, so we did not see like some of the other companies I saw reporting yesterday as big a drop, and I can't tell you why.

Other than the fact that I think we've seen this happening over a longer period of time, and most of our customers are already using just slightly above what some people consider the minimum amount, which is like 125 to 150 gallons a day.

Does that --

Yes, that's very helpful.

On the issue of [Pita] financing.

How much did you borrow in '08 and what was the rate and what do you expect the rate for the $58 million in '09 to be?

We borrowed $22 million in '08, at 6.5%.

And that was at the worst part of the market, but we felt we had to go out with it, because we'd lose the allocation and we thought 6.5% was better than what we were seeing and who knew what would happen in '09.

As we look now, if we were to go out today, we think that could be as much as as 100 basis points plus lower.

So we think we'd be in the low 5%'s.

And you have access to $58 million at low 5%'s.

Right we could do that tomorrow.

It's already been approved.

And that's in addition to what you could get from Pennvest?

Oh, yes.

It's in addition to Pennvest.

In addition to running up our short-line, which is strictly a strategic move, because of the low interest rates.

We haven't seen, less than 2% money for quite a few years.

As a matter of fact, it was 6% this time last year.

But do you have any thoughts what you're giving your increasing operating cash, what you need to externally finance outside of Pennvest and Pita after the dividends?

I assume there's no need for equity.

No new need.

No need for equity.

No need for any other debt, but it does give us some room in case an opportunity comes up to, to have the capability to do something with it.

Okay.

Thank you.

Okay.

(Operator Instructions) We will take our next question from [Hike Duer] with Janney.

Good morning.

Hikea Duer with Janney

Hi Hikea How are you?

Good, how are you?

First question, Nick you mentioned the pruning program that, I believe it was in Illinois that you had an asset divesture, is there anything you have on the chopping block for 2009?

How are you thinking about that going forward?

Yes, we have one that's almost completed in Texas, which we will get a gain, and it's not a big, I think it's about $1.5 million, but once, again, it's an under performing asset that we didn't, we didn't want to be in.

And I think we're looking at one in Virginia that we're actively pursuing, and, but there are a number that that we're analyzing as a management team, but not yet announced.

But, we're in the preliminary discussions, most of the time with an authority or something of that sort, who may be able to handle it and absorb the challenges better than we are.

And do these divestures take as long to complete as an acquisition does or do they go a little faster?

Well, we had one that we did not get done, because the, after all, after two years of hearings and debates and everything, the municipal authority at the end said, you know what, you're rates aren't that bad, maybe you can keep it.

So, I think when you deal with the government or a municipal authority, it's a little longer.

If it's another private sector operation like we did a homeowner's association like we did Woodhaven, that only took about six months.

Okay.

That's helpful.

And you had mentioned the basis point improvement we've seen in the fourth quarter, how should we be thinking about the sufficiency ratio as we look into 2009?

I'm comfortable with the old, maybe down 100 basis points.

Okay.

And lastly, I believe this is probably a question for Dave, pension expense, can you talk about where you'll be coming in on 2009, relative to what your assumptions had been and what had already been reflected in recent rate cases?

This is one of the areas that I've stayed involved with.

So, let me just give you my thought process and Dave can you give you the exacting amounts.

Having come from government, I was focused on the pension as soon as I got here and we've been working on things like OPEB and we were the first company into the PUC back in the early '90s to come up with the OPEB issue, and, and on the pension, we started, on the defined benefit pension, we started taking action on almost, well, 6, 7 years ago, and as we sit down, our 1,600 employees, over, under 50% of them, well under 50% are in the pension.

So, we don't, we don't have as big an issue because we stopped the inflow into, into the pension 5, 6 years ago.

All new employees including organized, the labor, are now in a 401, not in the defined benefit.

So, what you have is people who have been here for five years or more that are still in the pension and that meant none of the southern employees are in defined benefit plan.

So, does that mean that the employees that came over from Aquasource, none of them had -- came in your pension plan?

No, we gave them an enhanced 401K, which I think they preferred, with, with earnings power in a sense that they perform, versus the traditional defined benefit, which is favored sometimes by the organized labor, and the other thing we did on OPEB, see when you talk pensions a lot of people just lump them.

The biggest problem General Motors has is not the defined benefit, it's the healthcare, it's called OPEB, other than -- what's OPEB stand for?

Other Post Employment.Benefits.

Other Post Employment Benefits.

But, it's really the healthcare.

And, we actually eliminated that years ago, and capped the people who were still on it to a certain amount so we have an annuity now that actually gets trued up every rate case, and last rate case we actually reduced the amount.

If I remember right.

So, actually rates went down as a result of the actions we took.

So, it's not a big a problem with us as some other companies, because of those actions.

Now having said that, we still have, well in excess of 40%, like 40%, 42% of our employees, are in it.

So, we have to make sure there's enough money there to pay them.

We've capped the future growth in it in most cases, but that may be the next thing we have to look at so that it's truly an annuity that is predictable, and this year we didn't have a great, like everybody else, have a great investment record, but we were down 20%, I think 28%, and I guess if I compare that to Harvard and Yale which are much smarter I am, I think we did better than them.

But, 28% is 28% and we have to make that up.

But, because most of the people, 60% of the remaining people are in Pennsylvania, it's a ERISA state, I don't know if this is getting too technical for you, versus a FAS 87 state, and the risk factor in an ERISA state is much less.

Dave can take it and give you the actual numbers, Hikea.

Right.

As Nick mentioned, Pennsylvania is an ERISA state, which means our rates are established based on the contribution level that goes into the plan.

So, if you look at our total pension costs in 2008, was a little over $10 million and about $8 million of it was in Pennsylvania based on our contributions to the plan and a little over $2 million was in the other northern states based on FAS 87.

And going forward into 2009, we expect that $10 million will be a little over $12 million.

So it's, it's about a $2 million increase in our pension costs, but all of that is based on the FAS 87 states and not based on the contribution level in Pennsylvania.

So are you benefiting from the fact that the market took a turn for the worse shortly after the Pennsylvania rate case was filed, did that help you at all?

Or is it not really a benefit between the two?

No.

No because it's trued up.

Up or down, nobody wins, nobody loses, just it's trued up in the next case.

I this I what Dave is saying is that we didn't, our expense didn't zoom as much, when you look at whatever it is, $2 million your saying Dave over a two-year period and it's $150 million in expenses, we're in the low, 1%, 2,% range on rates.

It's not going to be a huge impact.

Okay.

Thanks for the help.

We will now take our next question from Jim Lykins from Hilliard Lyons.

Good morning, everyone.

Hi, Jim, how are you.

Good, how are Nick?

We've seen a couple of announcements here lately where some of, or at least a couple of states are going to allow some gas utilities to include infrastructure related, CAPEX and rates right away so [known] regulatory lag, something that's similar to the (inaudible) that you have in some of your states.

I wonder if you guys have heard anything similar for the water utilities and if so, how that might potentially affect your CAPEX outlay for 2009 and '10?

Sure.

Are you referring to North Carolina?

No actually New Jersey and Oregon.

Okay.

New Jersey we're actively participating in a proceeding now tied into the American -- American case.

I think they got awarded the rate case, but we're continuing with the part that they had asked for a [disc], and all the water companies are supporting that, and we're in hearings as we speak.

New Jersey is the only major state we're in where we have infrastructure problems that doesn't have a disc.

So it's very, very important I think, not only for the company's, but for the state of New Jersey if they're going to address that problem.

And I think the, one of the key commissioners in New Jersey has really focused on this and is conducting the hearings so, we're hopeful that there will be something similar in New Jersey, some day, next year, as there is in Pennsylvania and Ohio and Indiana and all the other more mature states.

Old industrial states, so that would help us because we, our next step in New Jersey after we finish up all the environmental issues is to start on the pipe.

We understand that one of the southern states is considering it, and I think that would be a great thing, so we're, we're obviously supportive and optimistic and the southern states have not required as much pipe work because we're still working on all the wells and a lot of the treatment devices, but eventually, even though it's warmer weather, they're going to need, everything doesn't last forever, so we are going to end up having to replace all the pipe there too, so probably timing is not as crucial, but it's important.

What was the third state you said?

I just mentioned two.

North, or I'm sorry, not North Carolina.

New Jersey and Oregon.

Yes, Oregon, I'm not aware of.

We're not out in Oregon.

But, I think it's, people are understanding, especially now, when we started on that infrastructure ten years ago, people used to say "could you define infrastructure?".

Now it's a code word.

Everybody's talking about it.

So.

Okay.

And you have some leasings happening in some of states that you mentioned, do you think you could ratchet up your '09?

Oh, yes.

I think New Jersey we would be investing at a higher level if there was, if there was a surcharge mechanism for sure.

And North Carolina, same thing, because a lot of pipe in North Carolina that has to be fixed.

Any idea how much you would increase your CAPEX?

Well, most of our CAPEX this year is going to infrastructure.

Uh-huh.

So, I'd say another 5%, 10% wouldn't be out of the question, if there's an enhancement of either the current programs, like their considering in Pennsylvania, or initiation of a program like New Jersey.

Okay.

You mentioned you've got about $70 million to file in '09.

Can you break that out by state in amount?

Sure.

It's almost every state, so what we'll do is after the call I'll actually send you the cases and when we're filing things of that sort.

Okay.

That would be great.

Thank you gentleman.

It's almost every state, I mean it's a pretty broad program.

Okay.

Thanks ,

(Operator Instructions) We will take our next question from Ben Joseph with [Grace Fulker].

Hey, thanks for taking the call.

A quick question on Pennsylvania, you mentioned in the prepared remarks, the rate case there, the docket was suspended and now it will be discussed in litigation.

I was wondering if you can elaborate on that?

Sure.

The normal process in Pennsylvania is you file for what you think you deserve, and then if the commission or any opposing party, either the consumer advocate, the trial staff, small business advocate, or anybody else, decides that they don't agree with you, they can ask for it to be put into hearing process.

And I would say 99.9% of the, of the requests by Utilities in Pennsylvania are after a month suspended, and said that they're going to investigate it, and they put a judge to it, and then you start the process.

So, this is not abnormal.

The question then becomes will they finish the case earlier than the nine months required by law or, and that would be called a settlement, or does it go the whole procedure, go through hearings, testimony and then it goes to the commission formally versus in the form of a settlement.

In all our wastewater cases to date, we've been able to reach settlement in an expedited manner because the, we are basically not making a lot of money.

We're picking up small wastewater systems that the state wants us to fix, and I think there's a feeling that, that we've done our part, and, and they usually have been much more willing to settle.

So, I'm thinking, hopeful that we're talking maybe this summer, versus, the extended period.

Now we're only talking about, although there's like 11 different cases, we're only talking about less than $1 million, so you can see these are not big cases, but they are fairly large percentage increases because we had to go in and rebuild the whole wastewater plant for these small towns.

Right.

And so the total rate, I think you mentioned there are 11.

The total, though is only $1 million for Pennsylvania of that $20 million you're seeking.

That's right, that's right.

Of the $20 million that's currently pending, I think you said the breakdown again was $7 million in North Carolina.

Oh, I'm sorry.

I'm giving you -- we asked for $20 million.

Oh, okay.

You asked for -- Pennsylvania.you asked for $20 million.

And I can't tell you, we'll call you after the call, how much we asked for in North Carolina and Florida and what we think we're going to get.

Obviously they're not final yet, so it's premature to talk about them.

But, I wanted to give you a feel for the progress we're making on that subset of the '08 filings that weren't decided yet.

Okay.

I thought that there was just a $20 million currently pending across 3 or 4 states.

Yes there is and so maybe $15 million of that we're going to get, maybe a little more.

I don't know.

But we'll get to you and give you a drill down and much more granularity on it.

Okay.

Thank you very much.

And we will take our final question from Michael Gaugler with Brean Murray Carret.

Hi Nick.

Hi Dave.

Hi Michael.

Listen, most of my questions have already been answered, but Nick perhaps you can give us some color on any potential states your're really focused on in terms of customer growth this year, and kind of as an extension of that, do any states outside your existing operational footprint look attractive?

Well, I think the fast growing states that we're not in, look attractive as the, obviously, the southwest and more in the southern part.

Ironically, we saw a little bit of increased activity in Pennsylvania, which is not a growth state, but is our base state in the sense that we did pick up quite a few, what I'll call small town systems that needed help.

Honesdale, Sharpsville, these are names you may or may not recognize.

Emlenton and so on, so what, I guess was Michael from Boenning had asked about, is happening as we speak, and that was the Pennsylvania story and we have an active one in New Jersey if it's gone through the process now.

So, I'm starting to see a little bit more than we would have anticipated in the north, and that's good news.

In the south, Texas, Florida and North Carolina continue to be the states we're concentrating growth in.

But we did want to get our firm base on our, on our rates, to make sure we had possibility of consolidating rates, make it more achievable.

Actually the single tier of pricing helps the rate pair because it puts less cost into the system, but it is a big jump for states who have never done it, that's the key part of some of these cases we're doing an addition trying to get return on the investment we've already made.

But, as soon as those cases are behind us, and hopefully the economy starts coming back, they'll be our key states and then if there's any possibilities in the southwest, that's probably a place we'd look.

All right.

Thanks Nick.

Thanks Michael.

And there are no further questions at this time.

This does conclude today's Aqua America Incorporated fourth quarter 2008 earnings call.

We thank you for joining us today and ask that you have a wonderful day.