Essential Utilities, Inc. (WTRG) Q1 2009 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Aqua America Incorporated first quarter 2009 earnings conference call. Today's conference is being recorded. At this time, I will turn the conference over to your host, Mr. Brian Dingerdissen. Please go ahead, sir.

Thank you, Gerald. Good morning, everyone. Thank you for joining us for Aqua America's first quarter 2009 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 Web site at aquaamerica.com or call Fred Martino at 610-645-1196. There will also be a webcast of this event available on our website. 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, references 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. Nick.

Thank you, Brian. And thank you everyone for joining us this morning. Pleased to report higher first quarter results and a great start to fiscal 2009 which I think should be our tenth straight year of year-over-year net income increases. And I think it’s a consistent record that I believe very few of today’s companies and today’s business climate can claim. Revenues were up a strong 11% due chiefly to rate increases. However I’d like to note that unlike many utilities and industries, our sales are still up. Customer growth is slow considerably due to the housing slowdown and the fact that we sold two franchises last year Woodhaven, Illinois and Fort Wayne north division in Indiana. And that represented almost 2% drop in our customer base eight to nine, but year-over-year our customer account is still up slightly and that's why we're still not seeing a downturn in the sale side. That customer growth help to offset slight volume drops in our commercial and industrial sales which obviously are geared right to the economy and however commercial and industrial is only 17% of our total sales volume, so it was a bigger drop on a small piece of our sales. We're hopeful that we've seen the worst in the housing downturn and therefore lack of builder or organic growth which is non-acquisition just it happens because the builder's build in our existing franchises. So, it gives you a comparison in '09, Q1 only 500 new homes were added and a normal year will be 2000 to 2500; see how far down housing has dropped. And looking at the building permit start which is best indicator the run rate in April of '04, '05 and '06 was at 2 million; it dropped to 1.5 million in '07 and in '08 this time last year it was still running 800,000 and 900,000 which people thought it was probably the bottom. This April the drop was now to 500,000 which is clearly less than what you need just to house the continued demographic growth of the country. So I am hopeful that we're seeing a bottoming out, now we should start seeing on the uptick. Pleased that we're still seeing our normal flow of acquisitions which is buy small ones to date and we have another six in the pipeline that we expect to announce by this summer and our phone is ringing and our balance sheet is strong as ever been. So, I am very optimistic on the acquisition front going forward. Looking at the cost side of the net income statement, O&M expenses were up 4.2% versus the revenue being up 11 and that's allowed our efficiency ratio something we track very carefully here O&M to revenue to drop to 43.4 in Q1 for the three months. But last year was 46.2, so precipitate has dropped. If you want to take a trailing 12 which is probably more realistic because our revenues are not consistent each quarter, trailing 12 basis the efficiency ratio is 41.2 in Q1 and for the 12 months ending Q1 ’09 versus 42.5 for all of this time in ’08. So again a nice drop and for all of ’08 the ratio was 41 each, that’s what you are going to look at your’09 modeling. If you think the sale of Woodhaven which under accounting rules the gain was attributed to a reduction in expenses because that's where it is done. If you want to add that back in say what the true run rate may have been it would have been 42% O&M to revenue. And for the end of this year without any anomaly that we are aware off, we expect that to be at least 150 basis point improvement, just because of the ongoing revenue increases for seeing and control of expenses that we have. Now I assume we have a regular summer, have a great summer it would be lower but the rainy summer would be a little less and that fuel prices stay fairly reasonable and they don't surge like they did last year doubling in two quarters. But so far so good. I am very pleased with the continued cost cutting controls that we've had in place for years here, so we didn’t have to take any draconian measures which usually hurts your structure of your company. Of the 4.2 increase to give you an idea in O&M and this is included in the efficiency ratios I just gave you. About a third of that increase, well over a million was one-time non-cash charges as a result of finalizing the rate cases that we just did, specially the one in North Carolina. To give you an idea, we had to write it off as non-cash. It's already been expensed, but they disallowed a portion of our rate case expenses, we had players and people whom we had to hire and they just allowed a set amount which was the less than what we had expended. And they also imposed a more stringent capitalization policy versus expense. Now as we had capitalized some things that they thought should be expensed which means that we had to take the one time non-cash write-off. And those were things like, a little bit labor, but grinder pumps which are pumps that grind up waste as it comes out of the house before it goes in the small pressure lines and we definitely thought that that was a capital investment, but because they break so often, I guess they felt this has to be expensed as maintenance. And something called jetting which is needed every 5 to 10 years. You actually plunge the lines with heavy pressure. Contractor, they come in with this big truck, jetting truck and we thought that was a capital expense. They disagreed and said it was a regular expense. Of course now we are doing it the way they want us to do it. But if you take those one timers out, our core expenses therefore were, about two thirds of this 4.2% that was the GAAP reporting. You can do math and see what the quarter increases were and they were generally due to water production cost, as electricity which is still going up. Chemicals which have stubbornly up, I think we are going to start seeing them come down later in the year with the economy, but they haven't yet. Purchased water which in many cases, it's more practical for our rate payers, for us to buy water from the municipality or another water company than still paying it ourselves and unfortunately, everybody's rate went up last year, so we had to pay more. And then just normal wage increases. Now on the other side of the coin, we were helped by falling fuel costs, which hopefully they will stay down to the 220 to 230 level that we are seeing today per gallon. And very placidly, we saw a drop in bad debt expenses validating our tightened collection process that's been put into place mid-year last year recognizing the recession could hurt us. If you look at our bad debt-to-revenue, 1.3% of sales in Q1 '08, it's dropped to 1% in Q1 '09 and we think for the full year, it will be below the 1%, which is pretty good even in good times for most utilities, but this is really only because of the current recession and the economic (inaudible). I'd like to go over three major issues that I think are important to emphasize on this call. First of all, you will note in our release that we expanded our capital investment program to a record $300 million or put in perspective, almost 50% of our revenues for the year and three times our appreciation. So a very, very intense capital investment program and I'll get into details on that. We're able to support this program due to the company's strong financial position, our access to capital markets and recently our especially low interest loans which keep rates down and increasing operating cash generation that we experienced in the company which almost completely cover our capital costs. Therefore, even with this increased investment program, we see very little equity dilution going forward in '09 and even into the future. We are seeing steady progress. The third item is steady progress on rate relief to support the needed investment in our country's infrastructure as Aqua continually adjusted the regulatory lag that adversely affected us in earnings from mid '06 through mid '08. Now in the quarter, we spent $62 million on improvements, that’s a record. Obviously you spend more in the next two quarters because that's the warm months in the North East, we do more of construction. We're addressing the few remaining environmentally-driven investments that we have to do to get the Aquasource states in full compliance. I think by the end of '09 all those will be accomplished. It's been a huge amount of investment. We have upgraded our major water and waste-water plants throughout the country for two things, future growth so that we have the capacity meetings as we go forward and grow. And we are also addressing at the same time, the new more stringent regulatory requirements that were initiated probably six years ago, but aren’t really due to be done. So, a lot of our cities are still working on these, will be actually in full compliance probably before the end of this decade and they are not really due in too early into the next decade. And of course, we are making major efforts to address our ageing infrastructure which is disk [ph] eligible. That's the surcharge eligible in the rate regulatory scheme and that will probably be the major portion of our spending going forward as we clean up all the old environmental problems and establish our plans to meet all the new record and as the new standards. So, a little opportunistic but Aqua is very proud of our major capital investment program and actually being counter cyclical to most companies and doing product to restore the country's economic momentum and its really that made possible because of the company’s strong financial situation as we entered this recession. And that allows us remarkably good access to the credit markets, actually lower financing rates than we have ever been able to get, yet our product is in demand even in the recession, so there is very little risk of our revenue stream not being supportive. Financially, we are accessing federally supported low interest loans using state industrial development bonds. We just received an allocation to do 58 million more in Pennsylvania on top of 22 million we did that was in the last year. We think we’ll probably go out this summer on that and probably we are looking low fives as the interest rate assuming today’s market. And once again S&P has reaffirmed our A plus rating on our largest subsidiary Pennsylvania which of course will be issuing these bonds. We also have a lot of room left in our lines, 74 million of unused line capacity and we're borrowing at less than 2% for our short line and that’s what carries this forward in the major capital program and then we capitalize it with retained earnings and to our new debt that we might have the issue. I truly believe that now is the time for strong financial utility companies to invest in America, we are going to be around for hopefully 100 years; the pipes are going to be around for 100 years and there is no better time with cost of capital for strong financial companies to invest. I mean interest rates are down, we find that for A plus rated companies all capital that we need is available and on the other side we're getting more of a stretch for a dollar spent because the cost for these projects are coming in well below estimates and therefore we're been able to do even more with same amount of dollars. Now Wall Street's truly recognized outlook for increasing internal cash generation, just to give you some numbers on that. If you take our 62 million we spent in the first quarter, our EBITDA was over 76 and if you want to take net income, depreciation and amortization and the deferred tax you'll get a different operating cash flow perspective, we actually had all that covered. We covered the whole 62 million just with our operating cash flow. For the year as I mentioned it accelerated, we probably spent 300 million this year, but with the increasing cash flows we're seeing we'll probably be able to get 85% to 95% of that covered strictly with our operating cash flow. So, we're very pleased that we're able to do more with less, less than interest rates and less equity solution and still get our job done on this needed investment for our system and hopefully helping with the counter cyclical investment in a recession. Now, positive regulatory treatment is the other reason that we're being well received by Wall Street and therefore taming our lower cost to capital. Our results show that regulators understand the need for continued spending on infrastructure improvements even in difficult times. There is a fear of many analysts that formula would get changed or something of that sort. I think that pressure will be on utility because with improved investments or high operating costs but you know we are probably one of the most efficient utilities in that sense in the country and almost all our request for the capital we are putting in which we are finding regulators still are recognizing have to be done. In that line we received approvals just recently in North Carolina and Florida our rate filings. This was our first complete experience before the North Carolina and Florida regulators and I think it is fair to say we now know what their rules and priorities are and hopefully we would be even better prepared for future actions than before. In North Carolina and Florida we did receive two thirds of our request and I think we more importantly built some important new relationships with these regulators and understand how they like books to be kept and what the rules are so that we won't have these kind of write-offs that we had to take this time next time. So in summary even with a record number of main breaks which was, it was an ironically very cold three to four weeks this winter where main breaks just went off the chart. Some unplanned non-cash charges due to the finalization of the rate cases I just mentioned and experiencing the continued negative effect of the economy in the first quarter, i.e. like a new home building and the industrial slowdown which was causing some volume sales in that sector. I have to say Aqua management is very pleased with our financial results and we are actually looking optimistically at the rest of 2009. Open it up for any questions?

Thank you, sir. (Operator instructions). We have Jim Lykins with Hilliard Lyons. Please go ahead. Jim Lykins – Hilliard Lyons: Good morning, everyone and congrats on the quarter.

Thanks Jim. Jim Lykins – Hilliard Lyons: A couple of regulatory questions first. You mentioned that you have the consolidation of same rate structures in Florida, North Carolina and I’m wondering in those states if you now have the single tariff pricing or if there is still little bit of work to be done there?

Not yet, but getting closer. In North Carolina, there were one or two outliers whose rates were so low, they felt to put it into a consolidated rate, the timing wasn’t right. So, I think we went from many rate divisions to maybe five. Two big ones, which are Statewide Water and Statewide Wastewater. And then we have a FAS bill which is our Brookwood division which we run from two to one and that’s only water and that’s not a separate rate structure. And then there are two either water or wastewater divisions on the coast which have the seasonal aspect and they wanted to keep those as separate, but didn’t say we couldn’t try it in our next filing put it all together. James Lykins – Hilliard Lyons: Okay.

Florida, we started with 80 divisions. And I think we ended with 7 or 8. Jim Lykins – Hilliard Lyons: Well.

So I mean a big step and I think regulators understand, both for workload, you have to have different accounts for each of these divisions. The smallest of our industry which means you are overwhelming; the rate meter has separate divisions with administrative process which don’t help anybody, the company, their related customers. And the best is if the US postal service is trying to say how much it would cost to deliver a piece of mail from New York to Philadelphia versus New York to Frankfurt Kentucky, the price would definitely be different. You have different rate structures and different tariffs and it just doesn't work that way. So, if the consolidated tariff is the common theme for electric companies, postal service and I think we're getting there in all our states. Jim Lykins – Hilliard Lyons: Are there any others that are an (inaudible) to try and get the single tariff pricing?

We still have Virginia, and there were all the states that Aqua was (inaudible). They have 21. We are going to be filing a case this year. We'll hope to get it as low as two. One water, one waste water, we will see and Missouri still has separate rate structure, not a big state for us. But we tried to consolidate that last time and they denied it, so we got a reasonable rate case, but all different rate structures. That mean does consolidate rates, but most of the rest are moving towards single tariff price. Jim Lykins – Hilliard Lyons: Okay. That's good news. You also mentioned that the regulators recognize the need for continued spending on infrastructure despite the economy, but I am wondering is if you think that they are still being fair and if you may even have changed or thought about changing the timing for filing any of your rate cases?

I think if you try and time the economy or regulatory philosophies, you are in trouble. We run this company as we know what we have to do. Most of our rate cases are driven by capital needs. We are doing it based on what the EPA wants as prudent. And when it's time and our lag starts occurring, I mean this didn’t happen in the south because we had to fix everything before we could go in. But I think regulators appreciated a lot more when you are in on a more normalized time period and your requests are single digit, then when you have to ask for 70% rate increases, 100% rate increases which makes it very difficult for us. So, our strategy would be to not time it around what we think is a new philosophy, but really around need working capital. Jim Lykins – Hilliard Lyons: Okay and a couple of questions about acquisitions. I know you can't comment specifically, but maybe if you can make some general comments about what you are seeing out there right now with the acquisition landscape, what kind of opportunities and also you said there's six on the pipeline right now. I am wondering if there's six more tuck-ins or if there might be one that's a little more sizeable and also what the timing might be for when you make an announcement with any of those?

The six-year tuck-in because our corporate development department we have one person for each state, their job is to get as many of these small private or public into our system where we have economy of scale. And as you know there are very few quite big ones because there's only 11 of us left, 12 of us who are publicly traded. I will answer it this way. I think municipal governments has not yet really addressed real poor deficits some of them are facing. There is a lot on stake now which were cutting and therefore they are going to cut aids to some of the local towns, cities. So they can live within their means. Those cities are using economic stimulus funds you can find in current budget. They are asking for pension, the federals which is another way of saying, can we stretch out our list of requirement a little bit and inevitably they are going to come up with some money. All those kinds of things are happening in the ‘09, ‘10 fiscal year budget that I see occurring. And I think it's going to come home to Ruston, maybe one year, maybe two years, maybe three years. At which point they'll either have to raise taxes considerably, cut cost considerably or look at asset sales or different ways of privatization to take some of their unneeded governmental services off their balance sheet and I think there will be opportunities for all the larger order companies in that sense. As you know we are not big into O&M but if the right opportunity comes across, we would do it but, we think that the smaller accounts will even be more effective percentage wise by some things like pensions and expenses of their labor versus revenues from growth and or lack up. And I think that’s the target market where I think maybe privatization in that area would be better for the town, they would just get out of the business versus staying with the assets and let somebody else run it. In the meantime we are also seeing (inaudible) long winded. In the meantime we are seeing some of the smaller companies, those who are private, who years ago wouldn’t even talk to us when we go in our normally, I call it prudent, they call it cheap offers are now revisiting some of those offers say maybe that we weren’t unfair to them we are starting to see some of that comeback. Jim Lykins – Hilliard Lyons: That’s good to hear. Alright, thanks Nick.

Thanks.

We take the question from Ryan Connors with Boenning & Scattergood. Please go ahead. Ryan Connors – Boenning & Scattergood: Good morning.

Hi, Ryan. Ryan Connors – Boenning & Scattergood: Hey Nick, the remarks have been very detailed. I don't have a whole lot of more, but I wonder if you could just continue on the issue of municipalities and this fiscal direst and whether or not that creates opportunities and to what extent you're going to participate in those things and you mentioned O&M. I guess what we will call the contract operations side. It does seem to me that that's the way that many of the municipalities appear to be going as opposed to outright asset sale, and you mentioned there that that's not something you've traditionally been real into, I think were you were; and obviously you've got the technical capability to participate there. You've great brand name behind you. What is your strategic thinking behind why that's not an area where you real interested in growing?

Well, two things. Margins in that business are very low. A lot more risk from a standpoint of you don't have the contract; you disport some cases every 30 days. On the other hand and in the case where your capital is stressed which it was 10 years ago, let say all of this we're trying to look at EPA rules and tight needs that we couldn't imagine where we would get the money and the capital to fix it. As I mentioned earlier and we'd be glad to give you much more detail on that David, I and Brain. We're seeing internal cash generation, we would have salivated over five years ago, which means that we have a little bit more chance to still do what have to do for the regulated side and have a little more opportunity to put some more capital in other areas that may be are not as high as margin but aren’t using cash up either. So one would be whether analysts still give us what they consider the right premium for a regulated company, when your O&M to revenue ratio is more like 80% right? You don’t make any more than 20% margins on a company like that, you don’t make kind of margins we are saying where it’s a capital intense business. So I think that's one of the decisions we have to make, there was no decision when you only had a dollar to invest where we were going to invest it and that was in the regulated side because that's our core business. But now that we are seeing that we are getting ahead of the curve, we are in more states; I think you are exactly right municipalities are going to look at privatization but many will not take the ultimate step which is why are we even in this business everything else telephone, electric, gas is private were not but with the continual federal supports and all that it tends to want to keep it in the municipal round. So looking at O&M is something that we would absolutely do around, I don't want to imply to you we are going to be going into it 50% of our revenues streamline that’s. Ryan Connors – Boenning & Scattergood: Sure and just from my perspective, you mentioned the analyst perception I mean you know even if it gets the lower multiple in theory if it is accretive than to earnings than it adds shareholder value, so I guess that's the other side of it. I do want to talk also about cash deployment priorities, I mean you mentioned the very robust capital spending program in your prepared remarks there and but you also had a very nice increase in the dividend just couple of weeks ago there. So, that's some thing that the dividend has been growing nicely over time. The fact that you are gearing up CapEx here is that going to impact the payout on the dividend or the increased rate in that over the next few quarters, years, etcetera?

I don’t think so. We have always paid, with 18 years in a row, we have raised the dividend, pretty healthily too and the CAGR is probably 7%, which is pretty healthy CAGR. We are still in retail stock, 60 some percent of our stock is owned by retail investors who are very much buying whole. Really, my aunts and uncles and everybody else. So I will have to hear it at the kitchen table, we didn’t help the dividend because that's what they want. Institutional investors have been very interesting. They weren’t as much into the dividend, but recently they are supportive of a reasonable payout ratio. So, it's always stronger because some Board members feel like if you can get 10% on your money, why are you giving it way. On the other hand, we think there is some reason for shareholders to get some return annually on their investment versus just look at this as a growth stock. So, that’s our dilemma, we are not a traditional utility where you buy it as an enhanced bond and we do have a growth potential, but we have to come up with a good balance. So, I wouldn't think that our Board will probably lean towards keeping our dividend policy consistent. Ryan Connors – Boenning & Scattergood: Okay, well great. Thanks for your time and congrats to you and your staff on the solid results.

Thanks.

We take our next question from Heike Doerr with Janney. Please go ahead. Heike Doerr – Janney: Good morning.

Morning, Heike. Heike Doerr –: Nick, with the North Carolina and Florida rate case is completed, where do you think we end 2009 as far as the ROE on the Southern states? I believe it was 3% or 5% in 2008.

Nick, with the North Carolina and Florida rate case is completed, where do you think we end 2009 as far as the ROE on the Southern states? I believe it was 3% or 5% in 2008.

Yes, I’ll do it individually for you Heike because it's hard to group them all together. Indiana is known pretty good, but that was an Aquasource state, but we put that in the north. And Texas, even though it took us four years of delay, we're finally getting the rate relief and we're seeing probably in the 7% range of ROE and that should improve as we get some enhanced revenues coming in. South Carolina, it's very small, but we're in the final stages of getting our rate there and that should get it to almost full earnings. In Virginia, we've always had earnings, but with so many rate divisions as one goes up, another one goes down. We've put a lot of capital four or five times depreciation in Virginia. So it's hard to stay on top of it. We continue to put money in, but if we are successful in this rate case, that we're going to be going for this year, I think we'll move up from the mid single-digit to somewhere around five now and we'll get closer to the eight, nine. There will be some lag because we're still doing more construction going forward, but sooner or later that will peak. Just like Texas now, we're spending just a little bit more in depreciation. The biggest disappointment as you can imagine has been Florida. We needed a rate case. There hadn't been a rate case there for 15 years in some of these divisions and we had the false start in '06. So, we actually lost money. I mean, I think probably I'll give you the numbers, that's easier. In '08 we lost $3 million, '07 we lost $2 million and that's with all the lost write-offs and because of the failed rate case and the fact that we didn't earn in any and all the major investments we are doing in Florida. Well, that's not going to turn around because of the rate case and I think this year we will turn that loss into a slight profit. So I wouldn’t brag about ROE because we are worried about not loosing money. So it goes from a negative to at least positive and therefore we are going to need more growth for continued relief to get up close to the mid-single digits probably in '10. In North Carolina because of the write-offs in the case, it wouldn’t be a sure number. We have had 2 negatives in North Carolina. One is, they had a drought and sales were way down in '08, but I think if we look at let's take '09. We have a case that just occurred we didn’t get what we thought we asked for, but we got two thirds of it. We are happy here. So we need to look at that way. I think at the end of the year, we will be looking at maybe 3%, but then when we get the next half in the next year that will help and we are going probably be going in for a filing on the FAS bill area when the water rates are still very low and we are not getting our earnings. So I think we will build it up in '10 or '11. Heike Doerr –: Great, that added level of clarity was helpful and you mentioned the conception patterns of the C&I customers, what are you seeing on the residential side?

Great, that added level of clarity was helpful and you mentioned the conception patterns of the C&I customers, what are you seeing on the residential side?

About the same, we have always seen maybe to 0.5% a year of consumption decay and that's because of smaller families, low-flow toilets being installed and whenever your plumber redoes your bathroom even in an older house, all the new houses use less water. And that ratcheting, you can do it two ways. Go in for consistent timely rate cases which means you know you are going to have lower volumes and if we need a higher price to keep your revenue requirement or you could do it like they are doing in California and trying to push it all one time when they call a RAM, a revenue adjustment. Heike Doerr –: They probably call it RAM?

They probably call it RAM?

Yes. Revenue Adjustment Mechanism. Heike Doerr – Janney Montgomery: Okay. That’s helpful.

And that’s in other way of doing it but do you want to take a look at our numbers, I think this is relevant. I think in California, two big California companies, the average usage is somewhere around 8000, 9000 gallons a month. In Pennsylvania, our biggest subsidiary and if you want to take Ohio or Indiana or any of them, its all in the low fours, 4300 to maybe 4800. The south being a little higher. So, our risk of less usage because of this constant 0.5% a year is probably very close to what would be the asset though for what the least you can use. Now you could argue, don’t take shower everyday, never water your lawn and you could drop it probably to 2500 gallons a month. But I think reasonable lifestyles in the northeast the 4000, 4200 is probably as low as its going to get. Heike Doerr –: So haven't seen current economic decline in residential consumption besides the historical trend?

So haven't seen current economic decline in residential consumption besides the historical trend?

No. Heike Doerr –: Okay. Thanks, that’s was helpful.

Okay. Thanks, that’s was helpful.

Don't forget, that’s offset because we've had more customers. If we were a city that was loosing population, then that would be elevated. There is that 0.5% is masked by the fact that we add customers. Heike Doerr –: Right.

Right.

I think that’s really where I think that Ryan's question or Jim’s was about the municipalities. They have three things going against them, many times municipal wastewater and water systems have revenue streams coming in from builders because they charge builders what they call a tap fee, kind of this revenue and incoming revenue. We counted it as contributed property but that helps subsidize the system and then of course growth needs more customers at more rate. If you stop growing then you don't have the capacity and in some cities we're starting to see a decline in population, which means you actually have to raise prices just to make up for the people who left. And I think at that point, it becomes a vicious cycle that the economy scales needed to spread out the places that are growing. And that's why I think this is not a one year trend; this is a 10 year trend. But it's inevitable. Heike Doerr –: Great. Thanks, Nick.

Great. Thanks, Nick.

Thanks.

(Operator instructions). We have a question from Jonathan Reeder with Wachovia. Please go ahead. Jonathan Reeder – Wachovia: Good morning, Nick and Dave.

Hi, Jonathan. Jonathan Reeder – Wachovia: I wanted to get a quick clarification on the $2.4 million depreciation and amortization rate case adjustment charge. Was that one time or is that due to like a change in the depreciation rates in North Carolina?

It was one time, however we had to make it all up at one time. I'll let Dave explain the intricacies of it, but that 20 whatever percent, 22%, 23% increase in the quarter-over-quarter depreciation is probably, don't model that in for the year. See I just got that sheet, I think depreciation looks like a high teen, 15, 16 for the year, even with this one time anomaly, but and then it will start going back down to the 10, 12 range. Dave, do you want to explain that?

Yes, sure Jon. It was primarily two things, it was number one the commission imposing a different depreciation methodology on the company, different than the one that the company had utilized during those early years, largely because they felt the projects weren't been closed on as timely basis as necessary. And so of the 2.4 million that was about 1.6 million and its just a one time catch up from years ago up through the current period. The remainder was again in the depreciation area due to an incorrect amortization rate or the company's contribution in aid of construction account. So that had been amortizing too quickly and of course it's contra depreciation, so to reinstate that on the book was again the other part of that one time expense. Jonathan Reeder – Wachovia: Okay. And that part would kind of be on a go in forward basis as well at pick up?

Exactly we will get that back going forward.

We now know in North Carolina what the rules are and accounting will follow them and (inaudible). Jonathan Reeder – Wachovia: Okay. So between the non-recurring, the catch up portion as well as that other O&M the 1 million write-off is kind of like one penny I guess total non-recurring items in the quarter?

I would say a penny and a half. Jonathan Reeder – Wachovia: Okay. And then if you could Nick could you give us a little more clarity I guess the 8.2 million in pending cases is that just one case that's out there or?

No there is a number of them. The ones we had in the queue as we speak, we have a County in Florida which regulates itself through the commission. Jonathan Reeder – Wachovia: That’s Sarasota?

No Citrus, in this case. Sarasota will be later this year. Darlington, Indiana a huge rate increase but not a huge rate case. We have doubled the investment of the community so they could get fire protection and reliable service and now they are paying. They will be awarded new rates Fort Wayne, we have our second phase coming in June of our rate case that was allowed last year at two phases, Pennsylvania wastewater, we have 11 cases in that we are trying to consolidate. We expect some kind of ruling this summer on that. South Carolina, which is our first case in South Carolina and we had our hearings and we are expecting some action on that this summer and then our first case with New York Water Service which is a 12% request in New York, then we will put a lot of capital in New York, good service. So, they are the ones that are moving as we speak and then of course we have 60 million more, we are going to be filing towards the end of the year with everyone being big ones, I should say in Pennsylvania, New Jersey, Ohio. Jonathan Reeder – Wachovia: Okay. On the 8.2 (inaudible), are those kind of first half timing or how should we be thinking on when those incremental revenues might be coming in?

I would gauge some of them forward to you. Fort Wayne you can gauge and we’ll give you specifics on the numbers, Q3, Q4 because that will start in June. Citrus is very small, Darlington will probably start in Q3. The wastewater we hope Q3, but maybe Q4 to be conservative. South Carolina Q3 and New York Water Service probably not till next year because there's a set time in New York that they take. Jonathan Reeder – Wachovia: Okay, and then one another comment that kind of caught my attention. In your release, you mentioned about the long-term growth rate and return to the historic earnings growth. I know 2009, somewhat of a catch-up year, but what is the new annual target for 2010 and beyond. Are we still looking at 10% EPS. I know it's getting tougher of the larger base.

A lot of it will depend on ROEs granted. We have the catch-up probably not, it won't be done just in '09, as I mentioned to Heike. There is a little bit to catch-up just to get full earnings on the capital we've already spent.

Our apologies, ladies and gentlemen. Apparently the speaker's line is disconnected. One moment while we will reestablish that.

Hello, we are on again.

All right. Thank you, gentlemen. You are back on.

We apologize. We don't know what happened here. Jonathan, we were just talking what we try to imply in the release. Obviously whether it's still dependent on regulatory release in the sense of what ROEs will be going forward? But I think the fact that most of our spending going forward will be surcharge dependent will help and a lot of its going to be what those surcharges are branded at, obviously, 10, 11 whatever and the low cost capital and not diluting earnings. If you remember back we used to grow net income, 13%, 14% net 3%, 4% dilution too. And we don't see any of that need at this point, unless we do a larger acquisition where we are going to have to really expand our shares more than 1% or less than 1% which we have seen in the last couple of quarters. Jonathan Reeder – Wachovia: Right.

Yes, I mean, I can't predict, we don't give forward guidance. I don't want to imply that, but I think we're out of the lag, I guess, that's what I was trying to say.

Mr. Reeder, any other comments or question please? Jonathan Reeder – Wachovia: No. Thank you very much.

We do have another question from Michael Gaugler with Brean Murray, Carret. Please go ahead. Michael Gaugler – Brean Murray, Carret: Good morning, everyone.

Good morning, Michael. Michael Gaugler – Brean Murray, Carret: Nick, I have been looking back to the last couple of quarters, at your interest expense line and it is staying fairly constant. Should we be thinking that that's going to maintain?

The interest will stay right around 10% of revenue. Michael Gaugler – Brean Murray, Carret: Okay.

That's a drop because it was always a little closer to 11. It is now getting closer to 10 and the reason is we are borrowing our imputed cost of 1.2 billion of debt we have borrowed is lowered now to 5.4% and even though we are borrowing more, it's keep coming at a lower rate. We have a little refi that we are going to be able to do next year, which should take some 7% to 8% debt out, assuming debt phase down and to give you an example, this is phenomenal because we are eligible for the economic stimulus plan. New Jersey, we are in for about $5 million worth of loans, half of it will be at zero and the other half will be at market rate. So let’s put 2.5% to 3% there. Pennsylvania, we just got another 3 million out of 10 million. We're still at 30 million in the Q which is somewhere between 1.5 to 3.5. And in Wayne, they actually gave us $5 million of zero-interest loans for 25 years. So it's hard to beat that rate. So that's helping on the interest rates front, the tax freeze which now are AMT eligible and that will lower that by probably 50 to 75 basis points. That’s why I said the times are good for us to be investing. Michael Gaugler – Brean Murray, Carret: All right. Thanks Nick. That's really helpful.

Gentlemen, we have no further questions in queue at this time.

Thank you everyone.

This does conclude today’s conference. Thank you for participating.