Si * '-U 1 · 6 A. I am employed by Aqua Pennsylvania, Inc. ("AP", "Aqua Pennsylvania" or 7 "Company") as Senior Manager of Regulatory Accounting. 8 3. Q. Please describe your education

.-''."Si *

"i • * *-'

; '-U • ••' .

^ ' i r

- • r J [ . . . , . i " •• - .» r ) i

' { ' ! • / V . S • . ; ' • '

•f nE'ir > !. • 1 i . ^ • - ' i . •

i ^ * " - ' v' -

. ; i r . , . 1 I I . , • -

/iY-v • • > • II. . . • • : • • • i

!>• ' , - 1 -

—Jus. 1 ..." • * • . \ . . . I*

i - -

R - 0 0 C " 7 a i H MM5-OS,

AQUA PENNSYLVANIA, INC. 2007 RATE CASE

6^

DIRECT TESTIMONY

STATEMENT NUMBERS 1 THROUGH 9

--•,. • , -t .. ,

!. .; .1

'ri'-< :

- t I ; • -41. 1

• • - ,i

• f . - -" =•', - • - ;

: YY. ; - ^ ::: ;

:: i'/.:;-Y^

- ; ^ Y T ^ \ Y '" i '•^^Y"Y-"^-'- , • «fc7l: " * • \tt.- H

V"i --^:Vv.-.:

-J:'

A:

•' t

^ . r ' - T . H f - i ' a - . - i f ' i 1 . ' 'i " t " - " I - -c • —-

. t. • - - ..- J . . - <

. _ y . - . Y -

TaMe of Comteets i]

4

Direct Testimony of Robert M. Griffin

Direct Testimony of David P. Smeltzer

Direct Testimony of Richard R. Drager

Direct Testimony of Paul R. Moul

Direct Testimony of Paul R. Herbert

Direct Testimony of John J. Spanos

Direct Testimony of William J. Jerdon

rn c=> O cx> ^ 0 ^ r n r n 7t» i *

Direct Testimony of Wi#iagi CrfackeiOr.

ETT^ ^ —

CD S i n cr O r"l TO

Direct Testimony o^teve ^ Tagert

^ 1 AVERY' READY INDEX" INDEXING SYSTEM 600015

AP STATEMENT NO. 1

BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION

AQUA PENNSYLVANIA, INC.

DOCKET R-00072711

DIRECT TESTIMONY OF ROBERT M. GRIFFIN

With Regard To Revenue And Expense Data,

Rate Base Claims, Rate Design And Various Other Matters

November 21,2007

l-PH/2792690.4

AQUA PENNSYLVANIA, INC. DIRECT TESTIMONY OF ROBERT M. GRIFFIN

1 I. INTRODUCTION AND SCOPE OF TESTIMONY

2 1. Q. What is your name and business address?

3 A. Robert M. Griffin. My business address is 762 W. Lancaster Avenue, Bryn Mawr,

4 Pennsylvania 19010.

5 2. Q. By whom are you employed and in what capacity?

6 A. I am employed by Aqua Pennsylvania, Inc. ("AP", "Aqua Pennsylvania" or

7 "Company") as Senior Manager of Regulatory Accounting.

8 3. Q. Please describe your education and business experience.

I

9 A. I graduated from Villanova University in 1972 with a Bachelor of Science degree in

10 Accounting. In addition, I received a Master of Business Administration degree in

11 1980 from Philadelphia College of Textiles and Sciences. I have been employed by

12 Aqua Pennsylvania for over 40 years during which time I have worked in various

13 capacities in the Accounting Department.

14 4. Q. What are your duties as Senior Manager of Regulatory Accounting for AP?

15 A. Principally, I am charged with the supervision of the capital budget and the

16 Continuing Property Records (CPR) department, where all capital expenditures

17 throughout the state are analyzed, unitized and booked to the Company's fixed asset

18 ledgers. In addition, I am responsible for all Original Cost Studies performed for

Pennsylvania acquisitions. Other duties include the preparation and filing of

I-f>H/2792690.4 1


1 Pennsylvania rate cases and responding to interrogatories from parties to the rate

2 case. I also am responsible for changes in Company rates, rules and regulations as

3 they pertain to tariff filings, DSIC filings and Earnings Report filings.

4 5. Q. What is the purpose of your testimony?

5 A. . The purpose of my testimony is as follows: (1) to identify and describe the principal

6 accounting exhibit (Exhibit 1-A) submitted in support of the proposed rate increase;

7 (2) to explain and support the derivation of certain of the Company's revenue,

8 expense and rate base claims; (3) to provide an overview of the Company's

9 acquisitions since the end of its last water base rate case; (4) to describe any major

changes or other matters related to rate structure and rate design; (5) to explain the

11 Company's proposal to implement a Purchased Water Adjustment clause; and (6) to

12 discuss the Company's satisfaction of the commitments it made in the settlement of

13 its last water case.

14 6. Q. For which of the Company's Exhibits are you responsible?

15 A. Although other individuals were responsible for aspects of their preparation, 1 am

16 generally responsible for Exhibit 1-A and the following exhibits which comprise a

17 portion of the Commission's rate case filing requirements: Balance Sheet, Operating

18 Expense, Operating Revenue, Other Data, Rate Base, Rate Structure and Statement of

19 Income.

l-PH/2792690.4


1 II. PRINCIPAL ACCOUNTING EXHIBIT

2 7. Q. Was the exhibit entitled "Aqua Pennsylvania, Inc., Exhibit 1-A, Revenue,

3 Expense and Rate Base Claims" prepared by you or under your supervision?

4 A. Yes, it was.

5 8. Q. Please explain the content of Exhibit 1-A.

6 A. Exhibit 1-A presents the Company's pro-forma revenue expense and rate base data

7 based on historic (June 30, 2007) and future (June 30, 2008) test years. For the future

8 test year, revenues are based on the estimated number of customers served as of June

9 30, 2008, thereby reflecting the annualized revenue from anticipated customer

10 changes during the two years ending June 30, 2008. Operating expenses have been

1.1 similarly adjusted to reflect, for the most part, future test year end conditions. The

12 Company's claimed rate base includes its estimated net Utility Plant in Service at

13 June 30, 2008.

14 9. Q. Were the data contained in Exhibit 1-A taken from the books and records of the

15 Company?

16 A. Yes, they were, except for certain depreciation figures shown on pages 2, 60 and 81

17 which were taken from reports prepared by the independent consulting firm of

18 Gannett Fleming, Inc. These reports are presented in separate volumes designated

19 Exhibit 6-A Parts I and I I sponsored by Mr. John Spanos.

l-PH/2792690.4


1 10. Q. Do you anticipate the need to make additional adjustments to the data set forth

2 in Exhibit 1-A?

3 A. No, I do not at this time. However, in the course of this proceeding, further

4 adjustments or revisions may be called for based upon, for example, substituting

5 known and experienced data for estimates or correcting inadvertent errors.

6 11. Q. Does the Company propose to submit a revised accounting exhibit to reflect any

7 such adjustments or revisions?

A. Yes. As it has consistently done in previous rate proceedings, the Company will

9 submit, during the rebuttal phase of this case, an exhibit to be identified as Exhibit 1-

0 A (a), which will correct errors that may be identified, incorporate known changes

11 and adopt any other appropriate adjustments that come to the Company's attention

12 during the litigation process.

13 12. Q. Is the Company's claim in this rate proceeding based primarily on the future

14 test year data presented?

15 A. Yes.

16 13. Q. How were the future test year data that appear in Exhibit 1-A developed?

17 A. Exhibit 1-A was developed in the same manner that the Company has used in

numerous prior cases. The actual results for the year ended June 30, 2007, as taken

from the Company's books and records, were used as the starting point for purposes

l-PH/2792690.4 4


1 of developing projected revenue and expense levels anticipated as of June 30, 2008.

2 Specific historic and future test year rate adjustments are set forth in this exhibit. The

3 future test year capital additions and retirements, described in the Rate Base section

4 of my testimony, were added to the Utility Plant In Service at June 30, 2007 to arrive

5 at the future test year amount. The Utility Plant In Service, Accumulated

6 Depreciation, Customers Advances for Construction (CAC), and Contributions In Aid

7 Of Construction (CIAC) levels for the historic and future test years are shown in

8 Exhibits 6-A Part I and Part I I .

9 14. Q. Mr. Griffin, please explain the data on page 1 of Exhibit 1-A.

A. Page 1 shows the number of customers served at June 30, 2006 and 2007 and

11 anticipated at June 30, 2008 by customer classification. Aside from the Pinecrest

12 Rate Division and most fire hydrants, page 1 indicates that the bills of all existing

13 metered accounts and some newly-acquired metered accounts will be increased by

14 Supplement No. 82 to Water-PA P.U.C. No. 1.

15 III. OPERATING REVENUE

16 15. Q. Please describe the derivation of the Company's pro-forma operating revenue

17 claim.

18 A. The Company's revenue claim, as summarized on page 3 of Exhibit 1-A, was derived

19 from revenue recorded in the twelve months ended June 30, 2007 for all-Pennsylvania

water operations. The historic test year revenue was adjusted for the change in the

l-PH/2792690.4 5


1 unbilled revenue balance at June 30. 2007 as compared to the prior year balance

2 (accrual to as-billed basis adjustment); the application of present rates that became

3 effective on June 22, 2006 to the test year billing; the annualization of revenue in

4 newly acquired areas where less than twelve months of revenue was recorded in the

5 test year; and customer adjustments developed by the Company for the Town of

6 Hubbard (p. 13), the Masury Water Company (p. 15), and Foamex Corporation (p.

7 16) and from actual and anticipated customer changes during the two years ended

8 June 30, 2008. Projected customer additions during the future test year were

9 determined on the basis of a four year average of actual customer growth from July 1,

10 2003 to June 30, 2007. Separate revenue statements for the Company's Main

1 Division and for its 31 other rate divisions are set forth on pages 4 through 4-30 of

12 Exhibit 1-A. I note that customers added as a result of any acquisition that closes

13 after July 21, 2007 will continue to be billed at their currently-effective rates and will

14 not be affected by this rate filing.

15 The first column of page 3 sets forth the actual amount of revenue recorded by the

16 Company for the year ended June 30, 2007 by customer classification. The second

17 column reflects the total revenue anticipated under present rates (for the year ended

18 June 30, 2007) and is the sum of column (4) on pages 4 through 4-30. The third

19 column reflects the total revenue anticipated under present rates for the year ended June

20 30, 2008 and is the sum of column (6) on pages 4 through 4-30. The fourth and fifth

21 columns show the percentage and dollar effect of the rate increase requested by

l-PH/2792690.4

#


1 customer class. Finally, the sixth column (the sum of the third and fifth columns)

2 provides the total anticipated revenue under proposed rates of $348,356,258.

3 16. Q. Please describe what is shown on pages 4 through 4-30 of Exhibit 1-A.

4 A. Pages 4 through 4-30 provide data, similar in format to that summarized on page 3,

5 for each of the Company's thirty two existing rate divisions. The first column sets

6 forth the actual amount of revenue recorded in each rate division for the year ended

7 June 30, 2007 by customer classification. In addition, the rate adjustments on pages

8 13 and 14 are included here because these adjustments are included in Mr. Herbert's

application of revenue calculation. The second column reflects various adjustments

as identified and supported by Mr. Herbert in AP Statement No. 5. The third column

11 shows the adjustments necessary to reflect the anticipated additional revenue from

12 customer changes which were experienced during the year ended June 30, 2007.

13 These adjustments are summarized on pages 6 through 6-2 and supported by the data

14 on pages 7 through 10-4. In the fourth column, I have shown the total anticipated

15 revenue under present rates for the year ended June 30, 2007, which is a compilation

16 of columns numbered one through three. In the fifth column, I have annualized the

17 effect of customers anticipated to be added during the twelve months ending June 30,

18 2008. Aside from fire protection revenue from estimated customers as of June 30,

19 2008 as shown on pages 17 through 17-3, the additional metered revenue attributable

20 to future test year customer growth is derived by multiplying the historic test year

customer growth adjustment by 135%. An explanation of the 135% factor is given on

l-PH/2792690.4 7


1 page 12 of Exhibit 1-A. In addition, the specific customer adjustments developed by

2 the Company on pages 15 and 16 are included in the sixth column of pages 4 through

3 4-30. The sixth column sets forth the total anticipated revenue from customers as of

4 June 30, 2008 under present rates, which is a compilation of columns numbered four

5 and five. The seventh column shows the percentage rate increase proposed for each

6 customer class and the eighth column reflects the anticipated additional revenue from

7 the proposed rate increase. Finally, the ninth column (the sum of the sixth and eighth

8 columns) provides the total anticipated revenue under proposed rates.

9 17. Q, Are there any specific revenue adjustments that deserve further comment?

O^Bo A. Yes. The revenue from the following acquisitions that closed during the historic test

11 year or in the first two months of the future test year have been annualized to reflect a

12 full year's service: Country Club Gardens Rate Division (p. 4-6) and Floral Estates

13 Rate Division (p. 4-9).

14 IV. OPERATING EXPENSES

15 18. Q. What is shown on page 20 of Exhibit 1-A?

16 A. This schedule is a summary of the adjustments to operating expenses under present

17 and proposed rates, the details of which are shown on pages 21 through 46 as

18 referenced under "Details Shown on Page Number". Most of these adjustments are

19 self-explanatory. Additional supporting information is included in the Balance Sheet

and Operating Expense Exhibits. As shown on page 20, these adjustments result in a

l-PH/2792690.4 8


net increase in future test year operating expenses of $5,990,938 under present rates

and an additional increase of $213,800 under proposed rates. I would note that these

same adjustments are carried forward to the fourth and sixth columns on page 2.

4 19. Q. Mr. Griffin, are you the accounting witness for each of the expense adjustments

5 noted on page 20 of Exhibit 1-A?

A. No. I am the accounting witness for only certain of the adjustments. The witnesses

who are responsible for the expense adjustments are as follows:

EXPENSE ADJUSTMENT PAGE NO. RESPONSIB

Payroll 21 W. Packer, Jr.

Cost of Serving Additional Customers 22 R. Griffin

General Price Level Adjustment 23 R. Griffin

Maintenance of Security Expense 25 R. Griffin

Amort, of Sharon, PA Customers* In-Home Boosters

26 R. Griffin

Customer Service Fees 27 R. Drager

Amortization of NARUC Conversion Costs

28 W. Packer Jr.

Amort, of PA Merger Costs 29 W. Packer Jr.

Hubbard Expense Elimination 30 R. Griffin

Electric Expense 31 R. Griffin

Lobbying Expense 32 W. Packer Jr.

Amort, of New Positive Acquisition Adjustments .

33 D. Smeltzer

Amort, of New Negative Acquisition 34 R. Griffin

-PH/2792690.4 9


Adjustments

Wireless Communication Expense 35 W. Packer Jr.

Uncollectible Accounts 36 R. Griffin

Amort. ofV.P. Production Relocation Costs

37 R. Griffin

Chemical Expense 38 R. Griffin

Management Fee 39 R. Drager

Normalization of Rate Case Expense 40 R. Griffin

Active Employee Healthcare Expense 41 R. Griffin

Unreg. Contaminent Monitoring Rule II

42 W. Packer Jr.

Pension 43 W. Packer Jr.

SFAS 106 Post Retirement Benefits 45 W. Packer Jr.

Vehicle Lease Expense 46 W. Packer Jr.

1 2 20. Q. Please explain the adjustment for Cost of Serving Additional Customers

3 appearing on page 22 of Exhibit 1-A.

4 A. This adjustment recognizes the additional expense associated with providing service

5 to new customers. The derivation of the operating ratio between incremental

6 operating expenses and revenue is developed in the lower portion of the page. The

7 application of the operating ratio to the additional revenue from new customers

8 connected during the two years ended June 30; 2008 is shown in the upper portion of

9 the page. An adjustment of $109,400 is produced from the calculation. This is the

10 additional operating expense that is incurred in conjunction with the $789,075 of

11 additional operating revenue from the new customers.

l-m/2792690.4


1 21. Q. Please explain the General Price Level Adjustment appearing on page 23 of

2 Exhibit

3 A. This adjustment reflects the anticipated effect of inflation on operating expenses that

4 were not specifically adjusted in this case. The $713,700 adjustment is derived by

5 multiplying the. total test year operating expenses that were not adjusted elsewhere in

6 the case ($32,797,747) by the GDP chained price index forecast for the second

7 quarter of 2007, the end of the historic test year, [(122.1 / 119,5) = 2.176%]. The

8 index data was obtained from the Blue Chip Economic Indicators, dated September

9 10,2007.

'0 22. Q. Please explain the Hubbard Contract adjustment appearing on page 30 of

11 Exhibit 1-A.

12 A. During the fall of 1994, Consumers Pennsylvania- Shenango Valley" Division entered

13 into a water supply contract with the town of Hubbard, PA. During a 1997 rate case at

14 Docket No. R-00973972, Consumers proposed to treat the annual Hubbard revenue as

15 below-the-line income. The resultant compromise, which was eventually approved

16 by the Commission, required that specific portions of utility plant and an allocable

17 share of operating expenses be removed from the ratemaking process. The formula

18 developed in the 1997 Shenango Valley case was applied to test year expense figures

19 to develop this adjustment, which reduces pro-forma operating expenses by $210,900.

0 The corresponding rate base adjustment is made on page 81 of Exhibit 1-A and in

21 Exhibit 6-A Parts I and II sponsored by Mr. Spanos.

I-I'M/2792690.4 1 1


1 23. Q. Please explain the Electric Expense adjustment on page 31 of Exhibit 1-A.

2 A. The future test year Electric'Expense adjustment applies the applicable 2008 electric

3 tariff rates to the test year power usage at all Aqua Pennsylvania locations. The test

4 year usage for Waymart and White Haven was normalized due to a correction that

5 was made outside the test year. The electric expense adjustment increases pro-forma

6' operating expense by $705,900.

7 24. Q, Please explain the Maintenance of Security Expense on page 25.

A. Over the past three years, as part of its site security program, the Company purchased

9 over 400 cameras, alarms and other computer equipment that allow its plant

0 operators, dispatchers and Safety Director to respond to fence or building alarms, call

11 police, have tape backup, or simply view the Company's facilities at 28 sites. It is

12 necessary to begin a maintenance and repair program for the cameras, alarms and

13 computer equipment immediately. A copy of the vendor bid is provided as

14 Attachment 1. This adjustment increases pro-forma operating expense by $344,900.

15 25. Q. Please explain the Amortization of Sharon, PA Customers' In-Home Boosters on

16 page 26,

17 A. The Company has experienced low pressure in a section of main in'SR 18 in

18 Shenango and Wilmington Townships, Sharon, PA since its acquisition of that

19 system. There are 28 AP customers who are most affected because they are at the

• natural highpoint of the system. In 2007, the Company secured a PennVest loan for

l-PK/2792690.4 12


1 $1,283,150 to replace the deteriorated 12" main serving this area. At the same time,

2 Company engineers sought a solution to the low pressure problems. The most cost

3 effective solution was the purchase of 28 in-home boosters. Since these boosters will

4 be the property of AP's customers, it is not appropriate to capitalize their cost of

5 $94,500. This adjustment amortizes the $94,500 over three years.

6 26. Q. Please explain the Amortization of New Negative Acquisition Adjustments on

7 page 34 of Exhibit 1-A.

8 A. The Company is seeking rate base treatment for these acquisitions based on

9 depreciated original cost that is greater than the Company's purchase price. The

0 difference between the depreciated original cost and purchase price is being

11 amortized to income in this case. The Company has selected a 20 year amortization

12 period, consistent with similar amortizations adopted in its 2003 rate proceeding at

13 DocketNo. R-00038805 and2005 rate proceeding at Docket No. R-00051030. This

14 adjustment reduces pro-forma operating expense by $10,100.

15 27. Q. Please explain the adjustment to Uncollectible Accounts expense on page 36.

16 A. An uncollectible accounts factor of 0.51267% was calculated by utilizing the

17 Company's actual write-off experience (excluding increases to the bad debt reserve)

18 for the three years ended June 30, 2007 divided by the Total Sales to General

19 Customers for the three years ended June 30, 2007. 1 applied this factor to the Total

l-PH/2792690.4 13


1 Sales to General Customers under Proposed Rates to arrive at the pro-forma

2 uncollectible accounts expense level of $1,786,047, or an increase of $328,400.

3 28. Q. Please explain the adjustment to Amortize the Relocation Costs of a new AP

4. officer as shown on page 37.

5 A. AP's new position of Vice President of Production was filled in September 2007.

6' The person in this position is responsible for the treatment and delivery of a safe and

7 . reliable supply of water to AP's customers. The relocation costs are in accordance

8 with the Company's relocation policy. A five year normalization period was utilized

9 to arrive at the $20,000 rate adjustment.

10 29. Q. Please explain the Chemical Expense adjustment on page 38.

11 A. A three year average of chemical usage at each treatment station is used along with

12 the 2008 contract prices to arrive at the Chemical Expense rate adjustment of

13 $347,600.

14 30. Q. Please explain your adjustment to Rate Case Expense of $48,300, as presented on

15 page 40 of Exhibit 1-A.

16 A. The legal, technical and administrative costs necessary to process this rate request are

17 estimated to be $925,000. Normalizing this amount over a twenty four-month period

18 and subtracting the amount expended during the twelve months ended June 30, 2007

results in a rounded expense increase of $48,300.

l-PH/2792690.4 14


1 31. Q. Please explain the adjustment appearing on page 41 for Active Employee

2 Healthcare Expense.

A. The Company provides health insurance coverage to all of its full-time employees.

This adjustment applies the 2008 contract rates, already received, to the coverage

levels in effect during the historic test year. This calculation, after deducting the

Employee Healthcare costs expensed during the historic test year and the employee

contributions, results in a rounded increase of $549,500.

r0

I I

V. DEPRECIATION, TAXES AND OTHER ITEMS

9 32. Q. The next series of adjustments to the Company's Statement of Income (page 2 of

Exhibit 1-A) is found on pages 60 through 74 of the same exhibit. Who are the

responsible witnesses for these adjustments?

12

13

A. The responsible witnesses for the adjustments on pages 60 through 74 of Exhibit 1-A

are as follows:

ADJUSTMENT

Statement of Annual Calculated Depreciation Compared with Book Annual Depreciation

PUC - General Assessment

OCA - General Assessment

OSBA - General Assessment

Pa Capital Stock Tax

EXHIBIT 1-A RESPONSIBLE PAGE REFERENCE. WITNESS

60

61

62

62-1

64

R. Griffin

R. Griffin

R. Griffin

R. Griffin

W. Jerdon

l-PH/2792690.4 15


Federal and State Payroll Taxes 65 W. Packer Jr.

Computation of Federal and State 66 W. Jerdon Income Taxes

Deferred Federal and State Income 67 W. Jerdon Taxes

Interest on Long-Term Debt 71 R. Griffin

Amortization of Debt Discount and 72 R. Griffin Expense

Other Interest Charges 73 R. Griffin

Interest during Construction 74 R. Griffin

1 33. Q. Please explain the adjustment to depreciation expense shown on page 60.

2 A. On page 60 of Exhibit 1-A, I have shown the Company's annual depreciation expense

3 claim of $53,598,054. The annual provision for depreciation was computed by

4 Gannett Fleming, Inc. for utility plant in service at June 30, 2008 using the straight-

5 line remaining life method as set forth in Mr. Spanos' Exhibit No. 6-A. The amount

6 computed by Mr. Spanos relates to utility plant in service, exclusive of customers'

7 advances for construction, contributions in aid of construction and the Hubbard main

8 extension. Comparing the Company's claimed amount with the depreciation expense

9 recorded on the Company's books for the year.ended June 30, 2007, results in an

10 increase of $7,954,700.

11 34. Q. Please explain the adjustments for PUC, OCA and OSBA General Assessments.

12 A. The adjustments set forth on pages 61, 62 and 62-1 are based on the actual assessment

3 factors billed for the fiscal year July 1, 2007 to June 30, 2008. The assessed rates are

l-PH/2792690.4 16


1 applied to Gross Intrastate Operating Revenue at present and proposed rates resulting

2 in pro-forma changes of $86,900, $199,300 and $16,900 at present rates and further

3 changes of $186,500, $61,400 and $7,200 at proposed rates for the PUC, OCA and

4 OSBA assessments, respectively.

5 35. Q. Please explain your calculation of interest on Long-Term Debt which appears on

6 page 71.

7 A. A calculation is made to determine the interest expense applicable to the long-term

8: debt portion of the original cost rate base as of June 30, 2008. I have used the same

9 capital structure as recommended by Mr. Moul for rate of return purposes (see AP

0 Statement No. 4 and Exhibit 4-A). The projected weighted cost rate of debt as of

11 June 30, 2008 is 5.88%. Comparing the calculated interest with that recorded for the

12 year ended June 30, 2007 results in the adjustment carried forward to page 2 of

13' Exhibit 1-A.

14 36. Q. The next adjustment is for Amortization of Debt Discount and Expense

15 appearing on page 72 of Exhibit 1-A. Please explain this adjustment.

16 A. As stated on page 72, this adjustment removes those costs because their recovery has

17 been reflected in the calculation of the Company's claimed long-term debt cost rate.

18 37. Q. Page 73 reflects a decrease in Other Interest Charges of ($52,168). Would you

19 please explain that adjustment?

MJH/2792690.4 17


1 A. This adjustment eliminates the test year interest on short-term loans since the

2 borrowings which generated these charges support construction work in progress and

3 do not represent permanent capital.

4 38. Q. The last adjustment, on page 74, is for Interest during Construction. Please

5 explain this adjustment.

6 A. For financial accounting purposes, interest during construction is recorded as income.

7 However, for ratemaking purposes, it is recorded as an addition to rate base. This

8 adjustment is made to eliminate interest during construction as income, so as to allow

9 for full recovery of the Company's pro-forma interest expense (weighted cost of debt

fo times rate base) and is consistent with the treatment accorded this item in the

11 Company's previous rate cases.

12 VI. RATE BASE

13 39. Q. Please describe the data presented on page 80 of Exhibit 1-A.

14 A. Page 80 shows the Company's claimed original cost measure of value as anticipated

15 under present and proposed rates.

16 40. Q. Mr. Griffin, Exhibit 1-A, pages 81 through 86, relate to the Company's Rate

17 Base claim. Please identity the responsible witnesses for these items.

18 A. Certainly. Witness responsibilities are as follows:

I-PH/2792690.4


ADJUSTMENT

Utility Plant

Materials & Supplies

Cash Working Capital

Acquisition Adj-Garbush, Mast Hope, Country Club Gardens & Lakeside

Hubbard Adjustment

CIAC & CAC

Service Line & Customer Deposits

Deferred Income Taxes

EXHIBIT 1-A RESPONSIBLE PAGE REFERENCE WITNESS

81

82

83-86

81

81

81

81

81

R. Griffin & J. Spanos

R. Griffin

R. Griffin

D. Smeltzer

R. Griffin

R. Griffin

R. Griffin

W. Jerdon

1 41. Q. Please describe how you calculated the Rate Base Valuation at Original Cost in

2 the amount of $1,337,834,507?

. 3

4

5

6

7

8

9

10

A. The derivation of this figure is shown in detail on page 81 of Exhibit 1-A. I have

calculated, based on the Company's records, the amounts set forth under the columns

. captioned 6/30/07 and 6/30/08, for all of the line items except Accumulated

Depreciation and the Acquisition Adjustments for the Garbush, Lakeside Acres, C S

Water, and Country Club Gardens divisions. The Accumulated Depreciation figures

were developed by Mr. Spanos in Exhibit 6-A Parts I and II . Mr. Smeltzer is the

Company's witness with regard to the claim for the acquisition adjustments for the

divisions mentioned above.

l-PH/2792690.4 19


1 42. Q. Please explain the derivation of the total Original Cost of Utility Plant in Service

2 in the amount of $1,920,631,708.

3 A. The starting point was the historic test year end balance of $1,787,270,222. That

4 figure was then increased to reflect future test year plant additions (net of retirements)

5 and acquired systems. The anticipated additions and retirements for the year ended

6 June 30, 2008 are set forth in detail in Attachment 2 to my testimony and comprise

7 needed improvements to the Company's water supply, storage and distribution

8 facilities. The largest individual projects are the relocation of high service pumps at

9 the Pickering West treatment plant ($10.5 million), the clariflow basin at the

jO Pickering West treatment plant ($3.8 million) and the bulk carbon system at the Crum

11 Creek treatment plant ($3.2 million). The Pickering West high service pumps will

12 replace fifty year old outdated horizontal pumps with higher efficiency vertical

13 pumps that will improve the hydraulic and post-treatment plant system operation.

14 The clariflow basin project will improve pretreatment to enable the Pickering plant to

15 produce the higher quality water necessary for increasingly tighter standards for

16 surface water plants. The bulk carbon system at Crum Creek will improve the

17 methods for taste and odor control at that station and eliminate the need for bagged

18 carbon. The Pickering and Neshaminy plants have had a bulk carbon system in place

19 for several years. Other future test year projects include $ 106 million of

20 infrastructure replacements to mass accounts, such as mains, services, meters and

l-PH/2792690.4 2 0


1 hydrants; $7 million of additional purification system replacements primarily to

2 existing treatment plants; and, $8 million of pumping & purification building work.

3 43. Q. Please explain the $3,727,607 addition for Materials and Supplies.

4 A. .As shown on page 82 of Exhibit 1 -A, this amount was developed by averaging the

5 monthly balances in the Materials and Supplies account for the thirteen months ended

6 June 30, 2007.

7 44. Q. Mr. Griffin, you have included four cash working capital items in your rate base

8 claim. Would you please explain how each of these was calculated?

^ | ^9 A. The derivation of the Cash Working Capital - Expense allowance in the amount of

10 $1,516, 800 is shown on page 83 of Exhibit 1 -A and has been calculated in the same

11 manner as utilized in the Company's recent rate cases. Details concerning the

12 calculation of the lag days used for the receipt of revenues and the payment of

13 expenses are provided on pages 83-1 and 83-2, respectively. This same methodology

14 was used to calculate the Cash Working Capital - Taxes allowance in the amount of

15 $174,200 and the Cash Working Capital - Payroll Taxes allowance in the amount of

16 $280,000, as shown on pages 84 and 84-1.

17 45. Q. Please explain the reductions from rate base for Contributions in Aid of

18 Construction (CIAC) and Customers' Advances for Construction (CAC)

19 amounting to $60,151,031 and $48,716,025, respectively.

l-PH/2792690.4 21


1 A. These reductions to rate base are summarized in Mr. Spanos' Exhibit 6-A Part IL

2 The CIAC and CAC related to plant in service at June 30, 2007 reflect the actual

3 CIAC and CAC recorded on the Company's books of account as of that date. In

4 developing its rate base claim as of June 30, 2008, the Company did not include in its

5 projected balance of utility plant any plant that would be placed in service during the

6 future test year and would be funded by CIAC or CAC. Therefore, it did not make

7 any estimate or projection of CIAC or CAC that would be received during the future

8 test year with respect to plant that would be placed in service during the future test

9 year.

0 46. Q. Please explain the entry for Service Line & Customer Deposits.

11 A. The Service Line and Customer Deposits have either been refunded to customers or

12 ' escheated to the Commonwealth of Pennsylvania. There is no current balance and the

13 Company no longer takes customer deposits.

14 47. Q. The last rate base item for which you are responsible is an offset of $1,971,000

15 against the cash working capital claim for Accrued Interest. Please explain this

16 item.

17 A. As shown on page 86 of Exhibit 1 -A, this amount is developed by calculating the

18 average lag days in payment of interest and subtracting from that amount the average

19 lag days in receipt of revenue. The resulting figure was then multiplied by the

Company's average daily interest expense of $106,034. Of the amount calculated,

l-PH/2792690.4 22


1 $1,971,00 was used as a rate base deduction because that amount reduces to zero the

2 Company's cash working capital claims.

3 VII. ACQUISITIONS

4 48. Q. Please provide an overview of the acquisitions which the Company has

5 completed since the conclusion of its last water base rate request in June 2006.

6 A. Since June 2006, the Company has completed the following acquisitions: Greenbriar

7 Estates (9/06), Floral Estates (10/06), Country Club Gardens (11/06), Garden Hills

8 (2/07), and Lakeside (12/07). Exhibit 3-A contains the journal entries recording the

9 valuation and the original cost studies for the acquisitions mentioned above, as well

b as for Garbush (10/05), Oakland Beach (12/05), C S Water (1/06), and Stonecroft

11 Village (3/06) systems that were acquired during the pendency of the last PA rate

12 case.

13 VIII. RATE DESIGN

14 49. Q. Are there any special rate design features that you wish to discuss?

15 A. Yes. The Company is proposing to continue the step rate plans for the Chalfont and

16 White Haven divisions. In addition, the Company has proposed several rate design

17 features that I wish to explain.

18 50. Q. Please describe the step rates/revenue imputation that the Company is proposing

for the Chalfont Division in this filing.

l-PH/2792690.4 23


1 A. Aqua Pennsylvania acquired the water assets of Chalfont Borough and surrounding

2 area on November 1, 2001. The acquisition was undertaken pursuant to an agreement

3 that was submitted to the Commission as part of the former Philadelphia Suburban

4 Water Company's ("PSW") Application for a Certificate of Public Convenience to

5 acquire the Chalfont system at Docket No. A-212370f0066. Under that agreement,

6 PSW may raise the rates in Chalfont by not more than 50% over a series of four

7 annual rate increases, beginning on November 1, 2002. In the 2001 PSW rate filing

8 at DocketNo. R-00016750, the Company filed for multiple calendar year rate

9 increases (step rates). The Commission in its Final Order at Docket No. R-00016750

10 specifically recognized that the rate equalization plan for Chalfont had been presented

^ ^ 1 and approved in the application proceeding and adopted PSW's step rate plan. The

12 approved step rates became effective November 1, 2002 and 2003. The next four

13 steps in Chalfont's rate plan, i.e. the November 1, 2004, 2005, 2006 and 2007 rates, .

14 were approved by the Commission at DocketNo. R-00038805 and R-00051030. In

15 this filing, the Company is seeking to increase Chalfont's rates as of November 1,

16 2008 and 2009 in accordance with the original rate equalization plan.

17 51. Q. Please describe the step rates that the Company is proposing for the White

18 Haven Division in this filing.

19 A. Aqua Pennsylvania acquired the water assets of White Haven Authority on March 12,

20 2002. The acquisition was undertaken pursuant to an agreement that was submitted

h to the Commission as part of PSW's Application for a Certificate of Public

l-PH/2792690.4 24


1 Convenience to acquire the White Haven system at Docket No. A-212600f0007. The

2 Company agreed to provide for a twelve year rate equalization plan, including a three

3 year rate freeze, at the time of closing. The Commission in PSW's 2001 rate

4. proceeding specifically recognized that the rate equalization plan for White Haven

. 5 had been presented and approved in the application proceeding and adopted PSW's

6' . . step rate plan. On March 12,2005, new step rates went into effect for the White

7 Haven division. The March 12, 2006 and 2007 steps were approved by the

8 Commission in AP's last rate case at Docket No. R-00051030. In this rate filing, AP

9 has filed tariff pages containing step rate increases for the White Haven Division for

10 March 12, 2008 and 2009.

> 11 52. Q. Please explain other significant rate design changes that you made in this filing

12 and the reasons for the changes.

13 A. It has been determined by Aqua Pennsylvania's operating personnel that more than

14 50% of the customers of the Thornhurst, Mast Hope, Pinecrest, Eagle Rock and

15 Oakland Beach Divisions are seasonal customers. As a result, we have proposed

16 rates for these Divisions that are either the same as the Fawn Lake Division proposed

17 rates or are in rate equalization plans on the way toward the Fawn Lake Division

18 proposed rates. The Fawn Lake Division is an appropriate rate target or proxy

19 because it is similarly dominated by seasonal customers.

20 The Rivercrest water customers have been removed from the NUI III Division and

^ ^ 1 placed on their own because the same Rivercrest sewer customers just experienced

l-PH/2792690;4 25


1 more than an 80% rate increase. The Company extended the Rivercrest rate

2 equalization process, which moves these customers toward Main Division rates, by an

3 additional rate case so as not to impose double digit water and sewer rate increases on

4 the same customers in the same year. The Company has continued to design flat rates

5 for the Pinecrest community due to the fact that none of the homes are currently

6 metered and metering involves separate meter pits in every home due to the lack of

7 basements. Therefore, AP requests an additional two year metering exemption for

8 this community to allow customers more time to budget for the meter pit expense.

9 53. Q. Please continue with your discussion of rate design changes.

)o A. The Company is seeking to equalize the following rate divisions with the Fawn Lake

11 proposed seasonal water rates: Eagle Rock, Tanglewood and Thornhurst. The

12 Company is seeking to equalize the following rate divisions with the Main Division's

13 rates: Paupack and NUI I . Certain rate divisions require more than one rale case to

14 equalize their rates. The following rate divisions are being moved toward the Fawn

15 Lake seasonal water rates: Mast Hope, Pinecrest and Oakland Beach. The following

16 rate divisions are being moved toward Main Division rates in this case: Bensalem,

17 Bristol, Chalfont, White Haven, Wapwallopin, Applewood, Marienville, Hedgerow,

18 Rivercrest, Garbush, and Country Club Gardens. For the remainder of the rate

19 divisions (Paupack, NUI III, Meadowcrest Collective and Pennsview), the Company

20. has proposed rates that are less than those proposed for its Main Division. In

| l addition, the Company proposes that these divisions' proposed rates not be scaled

l-PH/2792690.4 26


1 back unless they would exceed the Main Division rates, in which case they should be

2 set equal to the final Commission-approved Main Division rates. Finally, I note that

3 the Company, as part of its acquisition of the Waymart water companies, inherited a

4 contract for service to Woodloch Pines, Inc. At the suggestion of the Office of

5 Consumer Advocate, Woodloch Pines and AP executed an addendum to the contract

6 on August 13, 2003. Under the terms of the addendum, the Company will bill

7 Woodloch Pines for water service at a price that is the greater of (a) the contract's

8 take-or-pay price of $4,800 per month take-or-pay for the first 1.2 million gallonsôf

9 registered usage and $4.00 per thousand gallons for actual consumption above 1.2

10 million gallons per month, or (b) an amount determined by applying the Company's

1 otherwise applicable tariff consumption rates to Woodloch Pine's actual consumption

12, plus the applicable tariff customer charge for the four 2" meters that are included in

13 the contract. Attachment 3 which is appended to this statement, shows that the

14 proposed tariff rates applied to Woodloch Pine's historic test year consumption will

15; exceed the contractual price. For that reason, the Company will notify Woodloch

16 • Pines, Inc. of this rate filing and of the anticipated increase in rates calculated in the

17 manner described.

18 IX. PURCHASED WATER ADJUSTMENT

19 54. Q. What is the Purchased Water Adjustment (PWA)?

20 A. The PWA is an adjustment clause that the Company is proposing to capture changes

*1 in its cost to purchase water caused by changes in the rates charged by non-affiliated

l-PH/2792690.4 27


1 suppliers from whom the Company purchases water. Attachment 4 is a proposed

2 tariff rider that describes the mechanics of the clause.

3 55. Q. Explain generally how the PWA would operate.

4 A. The PWA would adjust customers' bills by adding a charge or credit to reflect

5 increases or decreases, respectively, in the Company's Baseline Cost. The Baseline

6 Cost is the annual purchased water costs approved as an operating expense in the

7 Company's then most recently concluded base rate case. When one or more of the

8 Company's suppliers change the rates for water purchased by the Company, the

Company will re-compute its annual purchased water costs based on the level of

consumption and other billing determinants that formed the basis for the Company's

11 calculation of its Baseline Cost. If there is a change in purchased water costs above or

12 below the Baseline Cost, a charge or credit, as applicable, would be added to

13 customers' bills. The Company may, at its option, implement a charge to recover an

14 increase in purchase water costs. If the change is a decrease in purchase water costs,

15 the Company must implement a credit to reflect that decrease.

16 56. Q. Why has the Company proposed the PWA?

17 A. The Company purchases water from a number of different suppliers in order to meet

18 its customers' demands on a reliable and cost-effective basis. Most of the Company's

19 suppliers are municipalities or municipal authorities. As such, they can implement

: ^ 0 p ' rate increases quicker and more frequently than public utilities that are regulated by

l-PH/2792690.4 28


1 the Commission and the rate increases become effective even if they are contested by

2 one or more customers. As a result, the Company's water suppliers frequently

3 implement rate increases at times that do not coincide with base rate cases filed by the

4 Company and well before the Company could reasonably expect to file a base rate

5 case to reflect those increases in its rates. As a consequence, the Company

6 experiences a significant lag between the time its suppliers increase their rates and

7 when the Company can recover those increases in the rates it charges its customers..

8 The PWA would help to reduce this lag.

9 57. Q. Will the PWA be subject to audit and reconciliation?

0 • A. Yes, the operation of the PWA, as proposed, will be subject to audit by the

11 Commission and will also be subject to an annual reconciliation process, which is

12 spelled out in the proposed tariff rider. In addition, the Company's costs to purchase

13 water, including the prudence of its decision to purchase water rather than develop its

14 own source of supply in a given area, its efforts to minimize purchases from high-cost

15 suppliers and its efforts to contest, stop, reduce or delay rate increases by its

16 suppliers, can be examined by interested parties at the time a PWA charge is

17 implemented, at the time of the annual reconciliation and in subsequent base rate

181 proceedings. Consequently, the .purchased water costs recovered through the PWA

19 could be subject to greater scrutiny than a claim for recovery of purchased water costs

20 made solely in a base rate case, where it is only one of many issues competing for the

1 attention of the parties. For this reason, among others, the Company would have

l-PH/2792690.4 29


1 ample incentive to take advantage of every reasonable opportunity to prevent

2' increases and pursue decreases in its purchased water costs.

3 X. SATISFACTION OF COMMITMENTS FROM 4 THE 2006 PA RATE SETTLEMENT

5'; 58. Q. Did the Company make certain commitments as part of the settlement of its last

6 general water rate case?

7 A. Yes, it did. The Company's last general rate case was concluded by a unanimous

8 settlement among the active parties. The terms of the settlement are contained in the

9 Joint Petition For Settlement Of Rate Investigation ("Joint Petition"), which was

0 approved by the Commission in its final Order entered June 22, 2006 at Docket No.

11 R-00051030. Paragraphs 8.f. through 8.m. of the Joint Petition set forth

12' commitments that the Company made, including the submission of certain

13, information in this case, as explained below.

14 59. Q. Paragraph 8.f., of the Joint Petition states that AP would amend its tariff to

15 allow municipalities, at their own expense, to attach marking devices on public

16 fire hydrants owned and operated by Aqua Pennsylvania. Has AP met this

17 commitment?

18 A. Yes. Please refer to Rule 46 of Tariff Supplement No. 82 to Water-PA P.U.C. No. 1

19 being filed herewith.

l-PH/2792690.4 30


1 60. Q, Paragraph 8.g. of the Joint Petition states that AP will provide, on a confidential

2 basis, system maps to Plymouth Township showing the location of all public fire

3 hydrants within the Township. Has this occurred?

4 A. Yes. System maps containing the required information were provided to Plymouth

5: Township shortly after the conclusion of the last proceeding.

6 61. Q. Paragraphs 8.h. (1) and 8.h. (2) of the Joint Petition state that the Company will

7 provide in its next general base rate water filing a breakdown of costs billed to it

8 by affiliated entities for which it seeks recovery from customers. The Joint

9 Petition further provides that such costs will be broken down by type of service

0 and sundry. Have you prepared such a breakdown?

11 A. Yes. The breakdown of test year costs billed to AP in the prescribed manner is

12 shown on Attachment 5 to my testimony.

13! 62. Q. Paragraph 8.h.(3) of the Joint Petition states that the Company, in its next

14 general base rate water filing (i.e., this case), will provide a comparison of AP's

15 current claims for services and sundries to the corresponding claims advanced

16 by AP in its previous rate case. Paragraph 8.h. (4) states that the Company will,

17 if applicable, identify any changes made between rate filings in the manner AP

18 accounts for affiliated charges, including any changes in the specific accounts to

19 which such charges are booked. Are you providing this information?

l-PH/2792690.4 31


1 A. Yes. Please refer to Attachment 5 for the information requested in paragraph 8.h.(3).

2 AP has changed the manner in which it operates its customer operations. Beginning

3 July 1, 2006, all of the former AP customer service employees were transferred to the

4 new Aqua Customer Operations (AGO) within Aqua Services, Inc. At the same time,

5 ACO began allocating its costs to each state that was receiving services using a

6 customer based allocation. In addition, the AP payroll and bill processing charges

7 from the 2005 PA rate filing charged to account 6017 and 6367 are now charged

8 directly to ACO and a portion allocated back to AP.

9 63. Q. Paragraph 8.i. of the Joint Petition requires that AP provide sufficient data in its

0 next rate tiling to quantify the amount of executive compensation AP seeks to

11 recover from customers. Paragraph 8.i. also states that the data AP provides

12 should be broken down by the entity initially incurring such costs and, if such

13 costs are allocated by an affiliate, AP should identify the allocation methodology

14 and/or percentage allocation factor utilized.

15 A. Please refer to Attachment 6 appended to my testimony for the required information.

16 Aqua Services, Inc. allocates the executive officers' time based on the number of

17 customers of affiliates. Mr. DeBenedictis' allocated compensation is shown in

18 Exhibit 1-A, page 39-1, row 32. Mr. Smeltzer's allocated compensation is shown in

19 Exhibit 1-A, page 39-3, row 151. Mr. Stahl's allocated compensation is shown in

20 Exhibit 1-A, page 39-4, rows 160 and 161. Mr. Riegler's allocated compensation is

l-PH/2792690.4 32


1 shown in Exhibit 1-A, page 39-3, row 133. Mr. Kyriss' direct payroll is shown in

2 Exhibit 2-A, row 203.

3 64. Q. Paragraph 8.j. of the Joint Petition states that in future filings seeking

4 Commission approval under Section 1102(a)(3) of the Public Utility Code to

5 acquire other water systems, AP will submit, to the extent available, the seller's

6 DEP Annual Water Supply Report, which contains data concerning storage

7 capacity, total water use, average daily demand and maximum daily demand.

8 Has the Company complied with this directive?

• b

A. Yes. Applications filed by AP for acquisitions of existing community water systems

since June 22, 2006 have included the relevant DEP Annual Water Supply data

11 concerning storage capacity, total water use, average daily demand and maximum

12 daily demand. This is illustrated on page 9 of the Company's application for

13 approval to acquire the Lakeside Acres Water Company at Docket No. A-

14 . 210104F0079. A copy of that application is provided as Attachment 7.

15 65. Q. Paragraph 8.k. of the Joint Petition states that (1) AP will use its best efforts to

16 minimize the cost of water it purchases to meet its customers' needs and to

17 pursue alternative sources of supply where doing so is feasible and cost-effective,

18 and (2) in its next water base rate case AP will provide a complete explanation of

19 the aforementioned efforts. Where is this explanation provided?

l-PH/2792690.4 33


1 A. The explanation called for by Paragraph 8.k. is provided by Mr. Tagert in AP

2 Statement No. 9.

3 66. Q. Paragraph 8.1. of the Joint Petition states that AP will remove the macadam that

4 it previously installed on the access road to its pumping station located at Chapel

5 Court in East Brandywine Township and will replace it with a semi-pervious

6 surface. In addition, AP agreed to meet quarterly with representatives of the

7 Hedgerow Homeowner's Association ("HOA") to discuss service and related

8 issues of interest to Hedgerow. Has the macadam been replaced with a semi-

9 pervious surface and has the Company met quarterly with the Hedgerow HOA?

0 A. Yes. The driveway situation at Hedgerow was resolved. Officials of AP and the

11 Hedgerow HOA met on site and decided on the changes to be made in the driveway.

12 The blacktop was removed from the area in question. Sod and seed were installed in

13 place of blacktop. The Hedgerow HOA has decided it is not necessary to continue to

14 meet on a quarterly basis, being satisfied that it has a contact at AP to go to in the

15 event of a problem.

16 67. Q. In Paragraph 8.m of the Joint Petition, AP agreed that (1) an Aqua America

17 logo rather than a AP logo would be used on all mailings made by AP to alert

18 customers to the services offered by Home Services, Inc., (2) such mailings would

19 specifically identify Home Service, Inc. as an independent entity that is not

0 affiliated with either Aqua America or AP; and (3) AP would use best efforts to

21 continue discussions with the Philadelphia Suburban Association of Plumbing

l-PH/2792690.4 34


1 Heating Cooling Contractors ("PSA") and to ensure that mailings do not include

2 language that could reasonably be construed as demeaning the availability

3 and/or reliability of local plumbers. Have these things been done?

4 A. The Company instructed Home Service, Inc. to make the changes discussed above

5 and they were made prior to the July 14, 2006 mailing. The Company met with the

6 PSA on September 20,2007 to discuss the Home Service, Inc. marketing materials.

7 PSA confirmed at this meeting that Aqua had complied with the June 2006 settlement

8 terms and conditions concerning the content and language of the Home Service, Inc.

9 mailings. This meeting was attended by Sion O'Connor, SVP of Marketing for Home

p Services, Inc., several members of PSA, including Mike McGraw, PSA President,

11 and counsel for PSA, and representatives of AP.

12 68. Q. Does that conclude your testimony at this time?

13 A. Yes, it does.

l-PH/2792690.4 35

LIST OF APPENDICES TO AP STATEMENT NO. 1

Appendix No. Description

1. Vendor Bid - Security Equipment Maintenance

2. Future Test Year Additions and Retirements

3. Rate Calculation - Woodlach Pines

4. PWA Tariff Rider

5. Services and Sundries Breakdown

6. Executive Compensation Allocation

7. Lakeside Acres Application

AP Statement Nt). 1 Attachment 1

i .

November 1, 2007

Service and Software Agreement

For

Aqua America 762 West Lancaster Avenue Bryn Mawr, PA 19010

Attn: Mr. Terry Lyons

Unlimited Technology, Inc. . 20 Senn Drive

Chester Springs, PA 19425 Voice: 610-458-8901

AP Stattfmen't No. 1 Attachment 1

Aqua America No.: 110107-IF 762 West Lancaster Avenue Date: 11/1/07 Bryn Mawr, PA 19010 Attention: Terry Lyons

Proposal: Aqua America Service Agreement

Net Price: $ 344,900.00

The following items are terms of this proposal:

Terms: 1. Included hours are Monday thru Friday between the hours of 8:00 AM and 5:00 PM

2. After hours, weekends and holidays are not included

" 3. . Preventative maintenance, routine inspections, service hours with IT and Administrative time is included

»

4. Ail labor for repairs of Diebold (past) and Unlimited installed systems are included -

5. Applicable sales tax is not included

As a condition of performance, are to be made on a progress basis. Invoice payment must be made wittiin thirty (30) days of receipt Any alteration or deviation from the above proposal Involving extra cost of material or labor will become an extra charge over the sum stated above. The proposal will become a binding agreement only after the acceptance by Customer and approved by an authorized empfoyee of Unlimited Technology, Inc. as evidence by their signatures

below. This agreement sets forth all of the terms and conditions binding upon the parties hereto; and no person has authority to make any claim, representation, promise, or condition on behalf of Unlimited Technology, Inc. which is not expressed herein.

The Terms and Conditions of Sale shown on,the attached are a part hereof

Proposal Accepted: Unlimited Technology, Inc. is authorized to proceed with the ••.

work as proposed.

Proposal Submitted: Unlimited Technology, Inc.

Purchaser Aqua America Seller Unlimited Technology, Inc.

By By . Ian Francisco

Title Title Chief Technical Officer

Date Date November 1,2007

This proposal is valid until January 1,2008

Unlimited Technology, Inc. 20 Senn Drive

Chester Springs, PA 19425 Voice: 610-458-8901 Fax; 610-458-9221

AP Statement No. 1 Attachment 1

Aqua America No.: 110107A-IF 762 West Lancaster Avenue Date: 11/1/07 Brvh Mawr, PA 19010 Attention: Mr. Terry Lyons

Scope of Service Agreement

Unlimited Technology, Inc. (UTI) proposes to maintain the systems, software and provide service for ail of the security systems and platforms installed at the 28 locations to date. Unlimited will support the day to day functions of all security programs at the Aqua America command center in Bryn Mawr, PA as well as remote sites outlined in this agreement

The agreement will consist of the following:

Software and Subsystems

dudes certifications, repairs and support of:

ICX Radar System Included in the plan

Yearly-on site inspection, recertification and tune up by an ICX qualified technician System log in and support form Scottsdale AZ DefendIR extended service of equipment, 1 year STS-350 extended sen/ice agreement 1 year

Optellios Fiber Protection System Annual maintenance of head end devices to include

Physical cleaning of head end system devices and cards to include Fiber Patrol controller Fiber Patrol processor and physical check of workstation system devices, cards' and Connectors

Minor software updates Calibration and testing with reports Acquire performance logging data to ensure performance is within acceptable limits Perform backups for settings and check for data redundancy Full database and alarm, logging check Maintenance log file storage


Chester Springs, PA 19425 Voice: 610-458-8901 Fax: 610-458-9221

AP Statement No. I Attachment 1

Aegis Graphical Control and Integration System Software upgrades and software support of the products

Software House Access Control / Alarm Monitoring System User license and seat licenses Software support and upgrades as received

Miscellaneous Support Cisco system support

Total Cost of Software and Subsystem Support

Manpower

Unlimited Technology will provide the following personnel:

Service Technician - One year full time 40 hours per week

IT Support Technician - Four months of three (3) days per week Systems Administration- Four months of three (3) days per week

ôtal Cost of UTI Manpower

Total Annual Cost of Service Agreement

$344,900.00

Unlimited Technology, Inc. 20 Senn Drive .

Chester'Springs, PA 19425 Voice: 610-458-8901 Fax: 610-458-9221


Equipment Covered: See Schedule A

Sites Covered: See Schedule B

Agreement Selected: STANDARD - Eight (8) hour business day response; Monday through Friday, 9am to 4:30pm, excluding holidays: Major Problems Only. Minor Problems shall be scheduled for mutual convenience.

Support Agreement • Eight hour PRIORITY response time to major problems Highlights Include: • Labor only

• Preventative Maintenance agreement for all locations Routine inspection and maintenance.

Additional Service:ReguIar hours (8 a.m. until 4:30 p.m., Monday through Friday, excluding holidays) at the rate of $ 90.00 per hour. All other "premium" times are at the rate of $ 125.00 per hour. All premium time worked subject to a minimum charge of 3 hours plus associated travel costs. ** These rates are subject to change with 30 days advance notice. •"UTI reserves the right to increase the value of this Support Agreement incrementally by number of sites and a maximum of 7% per year for the existing sites with 30 days written notice.

Exceptions & Clarifications

1. It is understood and agreed that the service and PM's will be completed during normal business hours, SAM to 5PM, Monday through Friday, unless otherwise noted herein.

2. Applicable taxes will be added to all amounts due; taxes will be computed based on the rates in effect at the time of each billing.

3. This proposal is provided to buyer in response to buyer's request for software and/or services from UTI and is subject to any limitations specified by buyer (e.g. Budget constraints, limited areas of coverage, etc.). Buyer understands and agrees that no warranty or guarantee can be made that a security system will provide complete protection from any loss by burglary, intrusion, fire, or otherwise and no such guarantee or warranty is provided herein. The UTI Terms and conditions (the terms and conditions") are attached to this proposal and are incorporated herein by this reference, and buyer has read the same and the remaining parts of this proposal. In case of any conflict between any preceding portion of this proposal and the terms and conditions, the terms and conditions shall control.

4. this proposal for service does not cover the following: fences and fence line maintenance, gates and gate operators, poles and underground conduits, trenching and right of ways. Alt the sites operate communication via Comcast or Verizon T1, phone tines. These communication paths are outside of our scope and not covered under this proposal: We will work with the service providers to restore communication paths, but it is understood that the communication is outside or our control. This proposal does not cover the costs of the equipment that has failed and in need of replacement or repair.


Chester Springs, PA 19425 Voice: 610-458-8901 Fax: 610-458-9221


These items will be charged additionally as well as the freight to and from the manufacturer except for the ICX equipment. Unlimited Technology will do the right thing and replace equipment that has failed to get systems back up and operational: This option is at the sole discretion of Unlimited unless Aqua management has quickly .decided other wise. The purpose of this agreement is to maintain and test the systems of Aqua America.

Upon execution of this service agreement we will schedule the Preventative Maintenance for the sites and follow a set pattern as time presents. Down time between sen/ice calls will not be used and or credited back for installations in progress or in the future. The service technician will stay proactive with work and can be used for testing and system checkout and walk tests as warranted.

Please call me with any questions.

Thank you


Chester Springs, PA 19425 Voice: 610-458-8901

. Fax: 610-458-9221

AP Statement No. 1 . Attachment 1

TERMS AND CONDITIONS OF SALE (Contract Sales)

1. REMITTANCES AO Invoices shall be due and payabteupm receipt hUnQM States c u r r ^ 5«t forth In writing by U nlimited Technology Inc., Inc (hereinafter caBed "Seller*)- The Customer, if to mquastod agrees to furnish Seller with ail infamaficn mduding

financiaS rtitemontt, necessary to maice a proper crec&t appraisal Refusal to wppVWbfmation may cause this proposal to be withdrawn. Terms of payment ofiglMfy eranted are sul^cct to tho approval of conflnuedaedil status. Prices are sutjeet to eorredfon tor error.

Z PROPOSALS Proposals are based upon straisht-fime tabor. Aiy'request by the Customer for overtime work shall be considered an extra. This proposal explms 30 days after its date, subject to the provisions of the first sentence of the paraaraphbetow entitled "Acceptance of Terms."

3. PROGRESS PAYMENTS Seller reserves the right to invoice Customer mocthiy as the work progreues, for all matertals delivered to ttie job site or to an ofrsite fadlity and for all went pertxmed orKito and cfl-ctte. Engineering, drafting and other mob(liza£on costs Inoined prior to installation shall be induded in SeSers initial Invoice and be equal to fifteen percent (15X) of the cortract price. Invokes are due upon receipt by Customer. If the Customer becomes orertfue in ar^ progress payment,

Seller, shtf be entUed to suspend wortc, thai be e n ^ to Interest at the artnu^ other legal remedies. Se&ershaB also be enfited to intarest on ail amounts retained by CustomerftompresresspaymentsoroJheiwbe. Customer agrees that he wffi

pay and/or reimburse Seller for any and all reasonable sttomeys fees which are Incurred by Seller In the collectton of amounts due and payable hereunder.

4. - CANCEUATION AND SUSPENSION Any contract resulting from this proposal is subject to cancelation or instructions to suspend work by the customer only upon agrea-nent to pay Seller adjustment charge.

6. TAXES The amount of any future sales, use. occupency. excise, or ether t ^ federal, stato, or local w t ^ Seller hereafters^ own behaff of the Customer or otherwise, with respect to the material cowered by this proposal shao be added tosueh prices and paid by the Customer.

6. LOSS, DAMAGE OR DELAY Seller shall not be liable tor any loss, damage, or delay occasioned by any causes beyond Seller's control, irtctuding, but not limited to, governmental actions or orders, embargoes, strikes, differences with woricmen, fires, floods, accidents, ortransportaflon delays. IN NO EVENT SHALL SELLER BE

LIABLE FOR ANY CONSEQUENTIAL OR SPECIAL DAMAGES.

7. WARRANTY Se&er warrants that the equipment manufactured and sen/ices furmshed by rt and covered by this proposal are tree from defects in materia! and workmanship under normal use and service and, without charge, equipment foirrf to be so defective in material or wodemartship will be repaired or replaced, If written

notice of fiaDurets received by Seller within one (1) year after data of Installation, provided said equipment has been operated In accordance with Seller's Instructions and provided such detects are not due to abuse, fire or decomposition by chemical orgalvanlc aefon. THIS EXPRESS WARRANTY IS IN UEU OF AND EXCLUDES ALL OTHER WARRANTIES, GUARANTEES. OR REPRESENTATIONS, EXPRESS OR IMPLIED. THERE ARE NO IMPLIED WARRANTIES OF MERCKANTA8IUTY

OR OF FITNESS FOR A PARTICULAR PURPOSE. Seder assumes no responsibiRy tor repairs made on SeDaTs equipment unless done by Seder's authorized personnel, or by written a utoorBy from SeBer. Seller makes no guarantee with respect to material not manufactured by it

8. PURCHASER'S REMEDIES The Customer's remedies with respect to equipment found to be defective in material or workmanship shall be Hmited exclusively to the right of repair or replacement of such defective equtpment IN NO EVENT SHALL SELLER BE LIABLE FOR CLAWS (BASED UPON BREACH OF IMPLIED

WARRANTY) FOR ANY OTHER DAMAGES, WHETHER DIRECT, IMMEDIATE. FORESEEABLE, CONSEQUENTIAL, OR SPECIAL OR FOR ANY EXPENSES INCURRED BY REASON OF THE USE OR MISUSE OF EQUIPMENT WHICH DOES OR DOES NOT CONFORM TO THE TERMS AND CONDITIONS OF ANY

CONTRACT RESULTING FROM THIS PROPOSAL

8. PATENT INFRINGEMENT Seller will hold its Customer and the Owner harmless from infringement of any United States patent owering equipment of its manutacture. This, of necessity, is limited to the equipment per se and cannot be extended to applications of such equipment in a system, except In writing by an officer of Seller. The

Customer and Owner shall advise Seller Immediatefy In the event any claims of intrtngementare brought to their attention.

10. GOVERNING LAW Any contract resulting from this proposal shall be governed by, construed, and enforced in accordance with the laws of the State of PA.

11. ACCEPTANCE OF TERMS This proposal shall become a binding contract between the Customer and Seder when accepted in writing by the Customer. Such acceptance shafl be wtth mutual understanding that the terms and conditions of this proposal are a part thereof witti the same effect as though signed by both parties

named herein and shall prevail over any Inconsistent prevision of said order.

No waiver, alteration, or modification of the terms and conditions on this and the attached hereof shall be binding unless in writing and signpd by an authorized representative of Seller.


Chester Springs, PA 19425 Voice: -6I0-458-8901 Fax: 610-458-9221


AQUA AMERICA

SCHEDULE B

Barren Hill Bristol Booster Bristol Treatment Bryn Mawr Chester Creek Croyden Booster Crum Creek Devon EdgelyWeU Field Green Lane Dam Ingrams Mil l Iron Works Mitchell Neshaminy Netherwood Newtown North Wayne Perkiomen Pickering East Pickering West Primos Ridley Secane Sidley Sprout Springton Dam Tinicum Upper Merion

AQUA PENNSYLVANIA FUTURE TEST YEAR CAPITAL ADDITIONS AND RETIREMENTS

30-Jun-08


Plant W/O Account Grp Activity No. 302100 0904 15900528063 303110 0699 15900510202 303630 0903 15734003041 304200 0514 15784026570 304200 0514 15900112520 304200 0514 15900212517 304200 0514 15900422420 304200 0515 15900502751 304200 0517 15744008981 304200 0520 15783002356 304200 0520 15784015162 304300 0512 15900512587 304300 0515 15783008847 304300 0515 15900104143 304300 0515 15900104291 304300 0515 15900104699 304300 0515 15900110228 304300 0515 15900116058 304300 0515 15900204293 304300 0515 15900204299 304300 0515 15900204722 304300 0515 15900205309 304300 0515 15900208689 304300 0515 15900210276 304300 0515 15900304684 304300 0515 15900336976 304300 0515 15900510788 304300 0515 15900533164 304300 0520 15900109441 304300 0520 15900209215 304300 0720 15714010346 .304300 0911 15900504192 304400 0515 15784036811 304400 0515 15900310056 304400 0515 15900410899 304400 0520 .15714004968 304400 0720 15900104541 304400 0720 15900310538 304400 0720 15900410110 304400 0720 15900410111 304400 0720 15900410112 304610 0720 15900115839 304610 0720 15900304371 304610 0720 15900304372 304610 0720 15900308681 304610 0720 15900501760 304610 0720 15900503498 304610 0720 15900504373 304610 0720 15900504644 304610 0720 15900506989 304610 0720 15900506990 304610 0720 15900506991 304610 0720 15900506993 304610 0720 15900507292 304610 0720 15900508959 304610 0720 15900511392 304610 0720 15900515859 304610 0799 15900508169 304610 0900 15900503522 304610 0911 15900504190 304610 0911 15900510415 304610 0911 15900510422 304620 0720 15900103855 304630 0515 15744008164 304630 0515 15783008871 304630 0515 15900407534 304630 0515 15900502765 304630 0599 15900203941 304630 0720 15734003040 304630 0720 15734027604 304630 0720 15744027537 304630 0720 15900110353

ACTIVITY DESCRIPTION Montgomery County IDC Engineer Contract-Groundwater Regs Prch Land Well & Tank Sites-Waymart MitchellRdBoosterVFD Relocate Larchmont Booster Relocate Greentree Booster Upgrade Uwchlan Booster MontgomeryAve. Booster ReplBoosterPump@Evanwood-WH CraneModifi cation Carnegie ViewBoosterUpgrade Permit & Construct Bubbling Springs P-Containment Trough Repairs Install Isolation Walls - Crum Install Isolation Wall - Ridley LockerRoom&MeetingRoom-Cru Pump Room Floor {Front Room)-Crum Loading Dock Driveway Mods- Crum Install Isolation Wall -Pickering W Install Isolation Wall - UMR Flood Protection Drive & Pit-Pick W ' ConductStudy-PickeringResi Upgrade/Complele-PickeringBoi Install PLC HL Bldg-Pick W Bristol ResidualsProJect Upgrade Driveway Lighting-Ngf£iaminy Repair Sinkhole Upper Merion Plant IT, IMPVACCESSC RUMCREEK RehabRawWaterValve-Crum ReplaceFilterOperator-UMR#6 Replace/Upgrade ventilation - RC SecurityUpgrades-GreenLa&P P-PlantUpgrades&Repairs DiEgidio Quarry Development Eagle Point Drainage Improvemenls RehabPlantEquip-R.C. Springfield Yard Modifications Miscellaneous Yard Repairs - WG Seal Coat Parking Lot- Great Valley Pave Stores Area - Great Valley Pave behind Lower Garage- GV Replace A.C. Units Springfield Replace Carpet 1st fl W ; G. WillowGrovel stFloorRenovat ReplaceGasFurnaceHeatExcha Bryn Mawr Complex-Front Bldg-PH 4 ReplaceRearBoiler UpdateFireAlarmSy stem Bryn UpgradeControlRoom-BrynMa Replacewindowtreatments ReplRoofRearBuilding-Bryn Repave Parking Lot - Bryn Mawr Improvements to Engineering Dept NewSign 'Painting, fire alarm & floor leving Replace Lighting - Bryn Mawr Bryn Mawr Renovations Space Planning - 2007 Data Center Expansion - Bryn Mawr Install Security System- Bryn Mawr Inst Sec Hot Site Redundancy-BM Visitor Management System-Bryn Mawr Store Room Upgrades ImplementElectricallmpr-WH PaintingLatonkalnterior Install Concrete Access-lngrams Mil Misc.PlantsLockOul-TagOut Systemlmprovements Improve Mast Hope Facilities-Waymar Struclural Improvements- Waymart Slructural Improvements - Wh Haven Install Guard Rail - Crum

FTY CAP ADDS FTY CAP RETIRE $114,235 $0 $31,955 $0 $31,925 $0 $28,892 $0 $781,799 $62,500 $54,066 $4,300 $132,371 $10,600 $17,265 $0 $4,985 $400 $5,715 $0 $34,833 $0 $23,489 $0 $5,000 $400 $13,277 $0 $76,206 $0 $126,641 $0 $106,657 $0 $61,524 $4,900 $56,954 $0 $77,889 $0 $2,371 $0 $21,255 $0 $66,985 $5,400 $53,317 $0 $202,338 $0 $18,920 $0 $10,000 $800 $612,253 $0 $2,489 $200 $1,610 $100 $21,273 $1,700 $381,556 $0 $8,100 $600

$551,485 $0 $25,000 $2,000 $41.540 $3,300 $210,644 $0 $31,744 $0 $12,600 $0 $29,400 $0 $26,250 $0 $46,733 $3,700 $25,963 $2,100 $51,925 $4,200 $4,154 $300

$275,175 $0 $57,118 $4,600 $20,770 $1,700 $541,222 $43,300 $21,809 $1,700 $118,389 $9,500 $98,658 $0 $51,925 $0 $8,101 $0 $1,558 $0 $67,203 $5,400 $28,860 $2,300 $14,469 • $0 $207,700 $0 $272,540 $0 $183,750 $0 $183,750 $0 $29,654 $2,400 $19,390 $1,600 $2,500 $0 $2,845 $0 $59,282 $0 $10,000 $800 $20,770 $0 $9,289 $0 $25,963 $0 $15,916 $0

11/15/2007


30-Jun-08


Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 304630 0720 15900110354 Landscape Headgate/Lawn-Crum $5,291 $0 304630 0720 • 15900136812 Replace Tower Walkway Decking $46,733 $3,700 304630 0720 15900304544 Inst Concrete Platform @ Bethayres $21,000 $0 304630 0720 15900527495 Repl Sidewalk & Driveway-Well/Bstr $31,155 $2,500 304630 0720 15900527543 Improvements to Wells & Boosters $10,941 $0 304630 0903 15900509243 Purchase951 BeattyRoad-Security $315,700 $0 304630 0911 15714004853 Security Improvements - RC $10,385 $0 304630 0911 15724003881 Security Improvements - Susquehanna $11,084 $0 304630 0911 15734004854 Security I mprovements-Waymar $10,385 $0 304630 0911 15744004855 Securitylmprovements-WhileH $20,770 $0 304630 0911 15900504158 InstPhysicalSecurrySystems- $1,339,154 $0 304630 0911 15900504174 UpgradelnfrastructureDevelop $415,400 $33,200 304630 0911 15900504184 lnstallSecurityFence@Facii $363,475 $0 304630 0911 15900510408 Upgrade Infrastructure Development $200,000 $16,000 304630 0911 15900510411 Install Security Fence at Facilites $100,000 $0 304630 0911 15900537166 InstallSecuritySystems-NE $574,291 $0 305000 0515 15900206708 ReinforceDike-Pickering $3,434 $0 305000 0515 15900304874 UpgradeSludgeQuany-Neshamin $8,315 $700 305000 0515 15900306710 ReplaceLowHeadDamBouys-Nes $7,504 $600 305000 0515 15900307509 UpgradeQuarryEntrance-Nesham $8,827 $700

305000 0515 15900312706 Expand Residual Area @ Quarry- Nesh $132,227 $0 305000 0522 15714003195 ReplBearGap#6-RoaringCk $574,314 $45,900 305000 0522 15714010162 Watershed/Dam Improvements- RC $19,851 $1,600 305000 0522 15900110054 Replace Springton Parapet $231,764 $18,500 305000 0522 15900510974 Springton Paraphet Wall Repair $8,800 $700 305000 0522 15900511524 SPRINGTONDAMREHABILITATION $359,776 $28,800 305000 0522 15900527284 Design Improvements Iron Works Dam $117,407 $0 305000 0705 15900115826 ReplaceFenceasneedeatSpri $22,185 $1,800 305000 0705 15900215833 Replace Fence @ Pick W Reservoir $10,489 $800 305000 0911 15783008945 Security I mprovementstoTanks $5,000 $0 306000 0515 15900104691 Improvements - Chester Intake $36,178 $2,900 306000 0515 15900404762 Intake Improvements - Ingrams Mill $525,941 $42,100 306000 0515 15900409217 Ingram'swetloadsdelineation $15,578 $0 306000 0699 15900527338 Stabilize Stream Banks $12,425 $0 307000 0505 15900510211 Convert frm Gas to Liquid CI2-Wells $10,500 $0 307000 0515 15900507007 ReplaceFlowControlVlves-W $45,175 $3,600 307000 0515 15900508100 ReplaceCL2GasSystems-Orelan $22,000 $1,800 307000 0517 15744008743 ReplPumpLilyStWell.Saylor $5,398 $400 307000 0517 15783008701 MarienvilleWell#1A $8,000 $0

307000 0517 15900208723 UpperMerionWellPump2 $80,000 $0 307000 0517 15900409044 ReplWellPump-SaybrookeWe! $4,166 $300 307000 0517 15900409045 ReplWellPumpAssemb-Milford $6,170 $500 307000 0521 15714006912 ReplaceBrushValleyWells-2 $164,176 $13,100 307000 0521 15714031705 IT.PENNSVIEWWELLSTATION.RC $695,004 $0 307000 0521 15734000398 PineBeachWellHouseRenovati $279,979 $22,400 307000 0521 15734001260 Const Fawn Lake Well #5-Waymart $283,478 307000 0521 15734003033 Renovate Pinecrest #1Well House-Way $533,235 $42,700 307000 0521 15734003053 ImprMiscSourceFacilities-Wa $102,140 $8,200 307000 0521 15744000386 Green Sand Fillers - ER Well #2 $8,888 $0 307000 0521 15744002281 Dril^ConstWellForestPark $234,594 $0 307000 0521 15744002559 RehabER#4Well $6,514 $500 307000 0521 15744003279 Im prove Wells@StJohns-WH $37,871 $3,000 307000 0521 15744003283 ImprEagleRockHWell $263,839 $21,100 307000 0521 15744004548 ConstructER#5Well-WhHaven $70,941 $0

307000 0521 15744007899 RehabWell-Dug Road-White $54,224 $4,300 307000 0521 15744007901 RehabWell-Hilltop-WhiteHaven $34,724 $2,800 307000 0521 15744021722 IT.BARRbi 1 EWELLHOUSE.WHTHVN $13,755 $0 307000 0521 15744035418 ReplHamiltonLillyStWell- $40,947 $3,300 307000 0521 15744035419 Constr Well @ Factoryville-W Haven $1,287 $0 307000 0521 15744035420 Improv Christian Springs Well-W Hvn $29,117 $2,300 307000 0521 15744035422 ReplaceOakHillWell-WhiteHa $304,066 $24,300 307000 0521 15744038723 ConstEagleRockWell#4 $770,267 $0 307000 0521 15900404579 Rehabilitate Well - Grandslaff $111,287 $8,900 307000 0521 15900408190 ReplaceWellDischargeLine-FI $15,317 $1,200 307000 0521 15900504245 Instrumentation Upgrades - Wells $31,155 $2,500

307000 0521 15900510453 Stonehedge Well Station Upgrade $52,391 $4,200

307000 0699 15900527339 Well Testing & Development $88,829 $0

307000 0720 15734003054 ImproveAccesstoMastHopeWe $15,578 $0 307200 0517 15900507753 ReplaceAutoControlValve-Gle $2,389 $200 310000 0141 15900510962 Rectifier Feed Replacement - Nesh. $21,000 $900 310000 0515 15783009259 Install Vent and Obtain L&l Permit $7,000 $0 310000 0515 15900220590 InstallEmergencyGenerator-UM $984,961 $0

11/15/2007


30-Jun-08

AP Statement No. 1. Attachment 2

Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE

310000 0515 15900304689 InstallGenerator-Neshaminy $1,078,743 $0

310000 0520 15714004581 InstallEmer.Gen.BearGap-R. $153,933 $0

310000 0520 15714022113 UpgradeGenerator-RoaringCree $36,348 $2,900

310000 0520 15900204189 Install Generator-Chest Valley Bstr $2,002 . $0

310000 0520 15900204531 InstallGenerator-SidleyHill $126,130 $0

310000 0520 15900204532 Install Generator-Chest Valley Bstr $53,506 $0

310000 0520 15900304535 Install Generator-Chalfont #8 Well $92,649 $0

310000 0520 15900304536 Install Generator-Chalfont #12 Well $93,149 . $0

310000 0520 15900306997 Install New Generator- Willow Grove $70,927 so'

310000 0520 15900404533 Install Generator- Bell Tavern Well $110,364 $0

310000 0520 15900404537 Install Generator-Oakboume Booster $126,000 $0

310000 0520 15900404538 Install Generator - Grandstaff Well $110,364 $0

310000 0520 15900404539 InstallGenerator-MiddletownB $110,364 $0

310000 0520 15900504187 Purch 2 Trailer Mounted Generators $131,717 $0

310000 0520 15900507721 RehabGenerators-MiscSites $41,540 $3,300

310000 0901 15714010727 Purchase Portable Generator - RC $52,500 $0

311000 0510 15734009566 Install SCADA - Pine Beach- Waymart $22,973 $0

311000 0510 15734015289 SCADA Installs/Upgrd - Waymart $128,198 $10,300

311000 0510 15900104693 Upgrade SCADA - Chester Intake $185,317 $14,800 311000 0510 15900110351 Upgrade SCADA Communication - Crum $10,664 $900

311000 0510 15900210234 Upgrade Perk Control panel SCADA $53,319 $4,300

311000 0510 15900504725 Installl-MalntUpgrades $196,229 $15,700

311000 0510 15900504894 Install SCADA in N:E. PA $207,535 $0

311000 0515 15900110951 Upgrade VFD #3-Haunted Lane Booster $21,000 $1,700

311000 0515 15900206744 Upgrade Automatic Valves-Pick West $2,285 $200

311000 0517 15734003050 PrchMiscPunipingEquip-Waym $30,857 $0

311000 0517 15734009142 RepairPump- Jefferson Heights $1,802 $100

311000 0517 15734009212 EmergPumpWorkWell#4-Waymar $19,266 $0 311000 ::0517 15744003351 Prch Misc Pumping Equip- Wh Haven $25,654 $0

311000 0517 15744008982 ReplacePump@Barrett-WH $9,385 $800

311000 0517 15744009242 ReplSumpPumps@Shickshinny- $1,039 $100 311000 ,0517 15744009247 Replaceboosterpump-HexAcr $2,840 $200

311000 0517 15744010944 Replace Pump @ Chinchilla $2,625 $200 311000 0517 15783008692 Back-up Well Pump - Oakland Beach $3,800 $300

311000 0517 15900104706 Replace Recycle Pump w/VFD-Crum $45,340 $3,600

311000 0517 15900104707 Replace Washwater pump-Crum $59,274 $4,700

311000 0517 15900104861 Rehab Raw Water Pumps - Crum $65,410 $5,200

311000 15900110352 Replace #1 Recycle Pump - Crum $15,750 $1,300

311000 <0517 15900110355 Replace WW Pumps/VFD-Crum $10,500 $800

311000 0517 15900136949 Replace Alum Transfer Pump - Crum $15,347 $1,200

311000 0517 15900204107 Repl Low Lift Pump VFD's- UMR $113,270 $9,100

311000 0517 15900204869 Rehab Deep Well Pumps - UMR $320,682 $25,700

311000 0517 15900204899 Replace Schuylkill Pumps-Pick W $154,068 $12,300

311000 0517 15900204900 Replace Perkiomen Pumps-Pick W $82,450 $6,600 311000 0517 15900204902 Upgrade Pump Motors 1,4,5 Pick W $192,113 $15,400

311000 0517 15900204927 Rehab High Srvc Pumps Pick E $1,740 $100

311000 0517 15900207726 Rehab Deep Well Pump-Upper Merion $29,098 $2,300

311000 0517 15900207820 RehabBoosterPump Motor-Pick $3,946 $300

311000 0517 15900210655 Rehab Recycle Pump - UM $42,435 $3,400 311000 0517 15900304289 UpgradeLowLiftPumps-Neshami $65,220 $5,200

311000 0517 15900304589 Repl Well Pumps #2 & 3- Edgely Well $49,433 $4,000

311000 0517 15900304688 lnstallVFD-12MGDPump-Neshami $308,831 $0

311000 0517 15900304889 Upgrade Raw Water Pumps-Bristol $68,288 $5,500

311000 0517 15900310199 Replace Edgely Well Pumps #2, #3 $25,588 $2,000

311000 0517 15900310212 Emergency Booster Pump - Bristol $30,573 $0 311000 0517 15900310349 Replace Cloths Plate Press-Bristol $3,150 $300

311000 0517 15900404248 Replace Pump Assemblies-Wells $4,633 $400

311000 0517 15900404777 Thombury Booster Pump Upgrade $23,625 $1,900

311000 0517 15900404815 Replace Transfer Pump #3 - Ingrams $49,560 $4,000

311000 0517 15900404925 Install Pump Ingrams Marshalton Lne $325,525 $0

311000 0517 15900404936 Upgrade Raw Water Pumps-lngrams $90,393 $7,200

311000 0517 15900507535 Replace Hydro Pumps-Thombury Boos $3,939 $300

311000 0517 15900507752 Replace booster pump-Embreeville $2,360 $200

311000 0517 15900507980 Replace Well Pump-Hatboro #9 Well $6,643 $500

311000 0517 15900508969 ReplaceWellPumpAssembly-Cab $10,478 $800

311000 0517 15900509444 InstallElecLine-HorseshoeBo $42,000 $0

311000 0520 15714004580 ReplCL2BoosterPump-Roaring $6,995 $0

311000 0520 15900110214 Replace Actuators, Motors, -Crum $37,886 $3,000

311000 0520 15900204905 Repl Schuylkill Intke Ck Vlv Pick W $31,229 $2,500

311000 0520 15900208086 Replace PUmp Assembly-Upper Merion $2,381 $0

311000 0520 15900304643 Repl Gate & Check Valves - Bristol $12,931 $1,000 311000 0520 15900306413 PurchasePumpforPressureTes $2,598 $0

11/15/2007


30-Jun-08

AP Statement No.-I Attachment 2

O Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 311000 0520 15900408151 Rp! Well Pump Assembly-Cranberry #4 $2,136 $0 311100 0520 15900209447 RehabVFDMotors-Pick/Sch Inta $32,130 $2,600 311400 0510 15900527593 AD,AUTOMATEDD(STRIBUTIONCNTR $73,559 $0 320000 0505 15734010253 Chlorinate Canal Acres System $31,980 $0 320000 0505 15900210191 Chlorine System Maintenance-Pick E $5,670 $0 320000 0505 15900210225 Install Chlorine System-Cynwyd Tank $5,250 $0 320000 0505 15900243770 Upgrade CL2 Equipment -Pickering E $220,733 $17,700 320000 0505 15900410208 Instl Basin Ghlorination Line-lngrm $2,625 $0 320000 0505 15900510114 Repl Chlorine Analyzer-Well&Booster $40,346 $3,200 320000 0505 15900510117 Repl CL2 Leak Detector-Well&Booster $11,550 $900 320000 0505 15900510120 Repl Leak Sensor-Plant/Well/Booster $12,705 $1,000 320000 0505 15900510170 Repl Chlorine Analyzers- Plants $22,575 • $1,800 320000 0505 15900526660 Repl Chlorine Analyzer-Well&Booster $39,904 $3,200 320000 0505 15900526662 Repl Chlorinators-Wells & Boosters $14,359 $1,100 '320000 0505 15900526746 Repl CL2 Leak Detectors-Well&Booste $10,385 $800 320000 0505 15900526755 Repl Leak Sensor-Plant/Well/Booster $1,077 $100 320000 0505 15900526807 Repl Worn Scales- Wells & Boosters $6,840 $500 320000 0510 15734010743 InstallSCADA-Masthope-Way $5,000 $0 320000 0510 157440032B0 SCADAImprovements-WhiteHav $172,055 $13,800 320000 0510 15784035459 SCADAUpgrades2006 $10,032 $800 320000 0510 " 15900504747 QEIUpgradesforSCADA $11,990 $1,000 320000 0510 15900507924 RehabSCADASatellite-S.E.PA $271,790 $21,700 320000 0515 15734035829 WaymartSystem Improveme nts $754,610 $60,400 320000 0515 15744035669 ReplGreenSand Filter-Forest $25,943 $2,100 320000 0515 15783001726 FilterMediaChangeProject $313,990 $25,100 320000 0515 15783004181 P-REPLACELAMEI.LAS(ACTJFLO) $193,000 $15,400 320000 0515 15783007927 P-TracVacRehabilitation $10,000 $800 320000' 0515 15900104150 Replace#2FilterRoomRoof-Cr $42,361 $3,400 320000 •0515 15900104303 RidleyUpgradeFilterConsole $54,857 $4,400 320000 0515 15900104695 Install Drain Line - Ridley $15,682 $0 320000 0515 16900104697 Install Bulk Chemical Tanks-Ridley $141,206 $0 320000 0515 15900105101 Upgrade filter Tranducers-Crum $22,048 $1,800 320000 0515 1&900107755 ReplaceColtector/DrWeUnits- $75,499 $6,000 320000 0515 15900108948 UpgradeBuildingExterior-Crum $30,949 $0 320000 0515 15900110298 Bulk Phosphate System - Ridley $138,630 $0 320000 0515 15900110780 Rehab Sludge Valves-Crum $1,890 $200 320000 0515 15900110943 Upgrade Valve Actuators-Ridley $3,272 $300 320000 0515 15900111506 CL2 Scrubber to Dry Media-Ridley $132,611 $0 320000 ' 0515 15900202183 Pickering#23 Filter $4,560 $0 320000 0515 15900204295 ReplaceSludgeCollector-lngra $76,004 $6,100 320000 0515 15900204305 Upgrade Filter Console PLC- Pick W $160,461 $12,800 320000 0515 15900204312 UMRUpgradeofFilterConsole $56,951 $4,600 320000 0515 15900205102 Upgrade filter transducers-Pick W $23,005 $1,800 320000 0515 15900205829 Replace Chemical Unes-Pickering $5,809 $500 320000 0515 16900207403 ChemicalAuditProject-Pick $22,206 $0 320000 0515 15900207983 PickeringSludgeQuarry $4,750 $0 320000 0515 16900304300 ReplacesludgeCollector-Brist $64,369 $5,100 320000 0515 16900304719 Pretreatment Improvements-Neshaminy $251,827 $20,100 320000 0515 16900305106 Upgrade Filter Tranducers-Nesh $8,400 $700 320000 0515 15900308866 Upgrade Plant Int. & Ext. -Bri $12,697 $1,000 320000 0515 15900510127 Replace Flow Control Valves-Wells $47,250 $3,800 320000 0515 15900512594 IT.INSTBULKCARBONSYSTEM $2,291,850 $0 320000 0515 15900540822 IT.RPLSWRLIFTSTATION-RIDLEY $74,618 $6,000 320000 0520 15714004540 lnstallCL2Scrubber-RoaringC $201,320 $0 320000 0520 15714004646 Intall Chemical Feed Equtp-RC $146,861 $0 320000 0520 15714004964 Upgrade Filters RC $20,770 $1,700 320000 0520 15714004966 UpgradeFilterValveOperators $16,356 $1,300 320000 0520 15714004969 Upgrade Modicon Equipment - RC $15,578 $1.200 320000 0520 15744009680 Repl Filters - Forest Park Well #1 $12,600 $1,000 320000 0520 15783002451 StormDamageltems2006 $7,559 $600 320000 0520 15783034322 PTracVacSludgeMeter $7,907 $0 320000 0520 15783039980 BeltFilterPressRehab $2,790 $200 320000 0520 15784000447 BeltFilterPressRehabilitati $12,597 $1,000 320000 0520 15900104182 Inst Air Scours Filters #1-24-Crum $1,386,946 $0 320000 0520 15900104585 Repl Sludge Collection Equip- Crum $68,022 $5,400 320000 0520 15900104896 Rehab Plant Equip-Crum $3,399 $300 320000 0520 15900104939 Upgrade Modicon Equip-Ridley $19,212 $1,500 320000 0520 15900104940 Rehab Plant Equipment - Ridley $34,198 $2,700 320000 0520 15900104941 Upgrd Filter Valve Operators-Ridley $19,056 $1,500 320000 0520 15900104942 Upgrade Residuals Equip-Ridley $20,770 $1,700 320000 0520 15900104977 Replace Floculator - Ridley $84,173 $6,700 320000 0520 15900108800 UpgradeAeratdr-CrumReservoir $4,050 $300

11/15/2007


30-Jun-08

AP Statement No, 1. Attachment 2


320000 0520 15900110822 Rehab CL2 Equipment-Crum $6,328 $500

320000 0520 15900111520 UpgradeFilters39406-Cmm $200,388 $16,000

320000 0520 15900120567 Upgrade Filter Valve Operator- Crum $27,915 $2,200

320000 0520 15900136951 Upgrade Modicon Equipment-Crum $17,868 $1,400

320000 0520 15900202800 Pickering WH.S.PumpReplacem $10,525,970 $842,100

320000 0520 15900204271 Filter Upgrades - Pickering East $64,699 $5,200

320000 0520 15900204848 Repl Filler Valve Operators UMR $22,432 $1,800

320000 0520 15900204852 FilterValveUpgrade Pickering $68,229 $5,500

320000 0520 15900204904 Rehab Plant Equip - Pick W $37,730 $3,000

320000 0520 15900204919 Rehab plant equipment - Pick E $45,835 $3,700

320000 0520 15900204937 Rehab Plant Equip UMR $72;615 $5,800

320000 0520 15900204938 UMRUpgradeModiconEquipment $19,212 $1,500

320000 0520 15900207018 Upgrade Modicon Equipment - Pick W $19,732 $1,600

320000 0520 15900207123 Upgrade CL2 System-Pickering West $1,054 $100

320000 0520 15900207510 Pickering/Schuylkill Screens $44,100 $0

320000 0520 15900207675 ReplaceCarbonPump-Pickering $4,981 $400

320000 0520 15900207974 ReplaceContro|Valves-Pickeri $12,763 .$1,000

320000 0520 15900207975 ReplaceCheckValves-Pick/Schy $48,498 $3,900

320000 0520 15900207977 Clearing/UpgradeDumpSite-Pic $25,963 $2,100 320000 0520 15900209168 RehabF]lters23-30-Pickering $22,413 $1,800

320000 0520 15900209169 Rehab Flash Mixer Motor-Pick East $1,776 $100

320000 0520 15900211543 Upgrade Filters UMR $75,291 $6,000

320000 0520 15900227629 Upgrade Filters - Pick W $65,860 $5,300

320000 0520 15900304260 Upgrade Filters - Neshaminy $67,503 $5,400

320000 0520 15900304302 InstallAirScourSystem-Nesha $462,120 $0

320000 0520 15900304584 Repl Sludge Collect Equip-Bristol $86,715 $6,900

320000 0520 15900304891 Upgrd Filter Vaive Operators-Brist $16,097 $1,300

320000 0520 15900304932 Upgrade Filter Valve Operators-Nesh $22,328 $1,800

320000 0520 15900304933 Rehab Plant Equipment-Neshaminy $81,469 $6,500

320000 0520 15900307121 Upgradelimesilos-lngramsMil $9,004 $700

320000 0520 15900308284 UpgradeCL2Equipment-Bristol $9,347 $700

320000 '0520 "15900327628 Upgrade Filters - Bristol $35,309 $2,800

320000 0520 15900336978 Upgrade Modicon Equip - Nesh $29,774 $2,400

320000 0520 15900404586 Repl Sludge Collect Equip-lngrams $68,022 $5,400

320000 0520 15900404814 Upgrade Filter Valves - Ingrams $25,547 $2,000

320000 : 0520 15900404934 IngramsMillUpgradeModiconE $20,173 $1,600

320000 0520 15900404935 Rehab Plant Equipment - Ingrams $32,147 $2,600

320000 - 0520 15900508719 UpgradePlantChlorination-Mis $34,790 $2,800

320000 0520 15900524727 EQ.CLARIFLOWBASIN.PICKRNWTP $3,834,206 $0

320000 0599 15900204728 PickeringStormWaterDiversio $194,468 $0

320000 0599 15900507009 Chlorine Scrubber Contracts- Plants $25,963 $0

320000 0605 15900221512 Upgrd Ghlorination Equip-Pick E & W $7,789 $600

320000 0605 15900310978 Neshaminy chlorination equipment $6,159 $0

320000 0605 15900504134 Chlorine System Maintenance-Pick E $5,193 $0

320000 0610 15714003548 Purchase Remote Site Metering Pump $8,308 $0

320000 0610 15714004066 PurchaseBackflowPreventors-R $10,385 $0

320000 0610 15714029007 Chemical Feed Equipment- Roaring Ck $25,963 •$0 320000 0610 15734008167 Prch Chemical & Treatment Equip-Way $5,193 $0

320000 0610 15744029061 ChemicaiFeedEquipment-WH $7,885 $0

320000 0610 15900210179 Replace Turbidimeters- Pick East $17,850 $1,400 320000 0610 15900210186 Change Filter Media - Myers Tract $47,250 $3,800

320000 0610 15900210200 Replace Flowmeter Probes-Pick West $13,650 $1,100

320000 0610 15900210204 Rebuild Evaporator - Pickering West $8,400 $700

320000 0610 15900210205 Rebuild Evaporator - Pickering East $8,400 $700

320000 0610 15900236224 Upgrade Chemical Feed Sys - Pick W $1,869 $100

320000 0610 15900236288 U MERION PLANT-UPGR CARBON SYSTEM $1,580 $100

320000 0610 15900310195 Replace PACL Pumps - Bristol $3,675 $300

320000 0610 15900504275 F.T. Poly System-Ridley $16,097 $0

320000 0610 15900504284 ReplacePhosPumps-Ridley $4,154 $300

320000 0610 15900504285 Purchase System Sampling Apparatus $10,385 $0

320000 0610 15900504294 Replace Chlorine Analyzers - Edgely $9,793 $800

320000 0610 15900504297 Replace Analyzer Panel - Ingrams $4,154 $300

320000 0610 15900504301 Upgrade Poly Pumps - Pick West $12,462 $1.000

320000 0610 15900504304 PickWesiUpdateTurbs $56,079 $4,500

320000 0610 15900504307 Repl Spare Hypochlorite Pump - UMR $2,596 $200

320000 0610 15900504308 Replace Alum Feed Pumps - Pick West $83,080 $6,600

320000 0610 15900504310 Repl Basin Inlet Sample Sys-Pick E $3,116 $200

320000 0610 15900504311 Rpl Basin Inlet CI2 Analyzers-Plant $20,770 $1,700

320000 0610 15900504316 Upgrade Filter Top Polymer - UMR $2,077 $200

320000 0610 15900504318 LimeSysUpgrade $4,673 $400

320000 0610 15900504320 Upgrade Chemical Feed Pumps-lngrams $6,543 $500

320000 0610 15900504321 Upgrade Chemical Feed Pumps - UMR $6,023 $500

11/15/2007


30-Jun-08


•

•


320000 0610 15900504322 Upgrade Chemical Feed Pumps- Pick E $1,869 $100

320000 0610 15900504323 Upgrade Chemical Feed Pumps- Ridley $4,985 $400

320000 0610 15900504324 Alum . System Piping Upgrade - Crum $3,635 $300

320000 0610 15900504325 ReplaceSlurryPumps-Neshaminy $19,212 $1,500

320000 0610 15900504328 Replace Fluoride Pumps - Ridley $3,894 $300

320000 0610 15900504329 Replace Chlorine Analyzers - Plants $21,809 $1,700

320000 0610 15900504330 Replace Alum Transfer Pumps- Pick W $19,212 $1,500

320000 0610 15900507012 Replace Turbidimeters - Wells $32,354 $2,600

320000 0610 15900510133 Replace Service Pump - Wells $1,260 $100

320000 0610 15900510138 Repl Chem Feed Pumps-Wells&Booster $22,575 $1,800

320000 0610 15900510150 Upgrade Turbidimeters - Wells • $47,250 $3,800

320000 0610 15900510171 Rebuild Portable Strankos $9,350 $700

320000 0610 15900510207 Upgrd Lime Slurry Mixers - Plants $3,150 $300

320000 0610 15900510387 Replace Chemical Mixers $34,511 $2,800

320000 0610 15900526752 Repl Chem Feed Pumps-Wells&Boosters $20,234 $1,600

320000 0610 15900526753 Repl Chart Recorders-WellsSBooster ' $25,447 $2,000

320000 0615 15900103991 Purchase Hydrogeologist Equipment $5,193 $0

320000 0615 15900510151 Purchase System Sampling Aparatus $15,750 $0

320000 0615 15900510152 Repl/Upgrade Dept Lab/Test Equip • $5,775 $500 320000 0520 15783000989 FluorideAnalyzerRehabiittati $1,730 $0

320000 0520 15783029200 PHydrocycloneRebuild $1,802 $0

330000 0145 15734029152 PaintWoodlochSpringsTank $198,571 $0 330000 0145 15734035817 Paint Mountainhome Tank - Waymart $185,578 $0

330000 0145 15783004108 P-Tank Touch-Up Painting - SV $25,000 $0

330000 0145 15783004155 P-Lake Latonka Tank Upgrades - SV $15,000 $1,200

330000 0145 15783008966 P-Touchup Painting East State St $5,000 $0

330000 0145 15783008968 P-Touchup Painting Homewood $5,000 $0

330000 0145 15784015161 P Carnegie View Tank Painting -SV $965,000 $0

330000 0145 15900104274 Paint Hunter Street Tank $300,737 $0

330000 0145 15900210651 Paint Wash Water Tanks - UM $79,607 $0

330000 0145 15900237223 PaintGladwynTank $397,816 $0

330000 0145 15900237233 Paint Pickering Wash Water Tank #2 $11,632 $0

330000 0145 15900337230 Paint Moreland Tank $224,546 $0

330000 0145 15900404317 Paint Collegeville Tank $37,475 $0

330000 0145 15900506737 Rehab Tank-Hoopes Park Tank $9,304 $744

330000 0145 15900508715 UpgradeTankExterior-ValleyH $1,662 $0

330000 0515 15900304805 Neshaminy $53,853 $0 330000 "0515 15900412589 Constr 2 Tanks & Booster-Honeybrook $106,221 $0

330000 0522 15714009123 Repairstovalve-BearGap#2- $5,193 $400

330000 0525 15734036283 ConstTank-Tanglewood North $10,736 $0

330000 0525 15744000594 PennLakeTank&WellHouse $453,289 $0

330000 0525 15744005237 Replace Hydro-Tank - Hex Acres $22,561 $1,800

330000 0525 15744021724 Replace Tank@Rivercrest-WH $54,550 $4,400

330000 0525 15744021731 Const Tank @ Chinchilla/Stanton-W H $13,684 $0

330000 0525 15744029059 EagleRockTank $1,137,438 $0

330000 0525 15744033555 Design & Construct Tank-Pinecrest $1,064 $0 330000 0525 15744035415 ConstTank@Tambur/HexAcres $13,684 $0

330000 0525 15744035416 OneidaTankReplacement $633,262 $50,700

330000 0525 15900405451 Analyzes 1 nspectBrandywineT $2,320 $0

330000 0525 15900416050 Construct Tank - Franklin Area $31,918 $0

331000 0106 15900527306 Lower, Replace, Relocate Mains $221,300 $10,000

331000 0107 15744007245 SaddleRidgeMainExtension-Mi $19,077 $0

331000 0107 15900136721 MaintoTinicumFireHouseSO $184,406 $0

331000 0107 15900527324 Mains Company Expense $516,250 $0

331000 0108 15744008782 EagleRockMain $50,770 $0

331000 0108 15900109245 Ext10772S,RidleyTwpMainEx $34,997 $0

331000 0108 15900209257 ExtlOSSIWupsizeto^" $6,797 $0

331000 .0108 15900309240 lnstall18ft8"Bensalem $9,300 $0

331000 0108 15900310936 Cherry Avenue, Bensalem $12,085 $0

331000 0108 15900527330 Partial Contribution-Developer Ext $295,034 $0

33.1000 0110 15714003185 ShamokinStreetMainRepl-RC $30,427 $1,400

331000 0110 15714003187 Trevorton BPS Suction Main Repl $10,864 $500

331000 0110 15714007621 BurnsideTransmissionMainRep $38,438 $1,700

331000 0110 15714009031 PoplarSt,KulpmontMain-RC $102,184 $4,600

331000 0110 15714035798 PennsviewMainReplacement $278,261 $12,500

331000 0110 15724022305 OLIVE ST FR CHEMUNG-HARRISON $7,978 $400

331000 0110 15724022306 N. Lehigh from Cayuga to Mohawk $149;960 $6,700

331000 0110 15724022308 W.LockhartfromFranklintoF $7,146 $300

331000 0110 15724035749 Replace RiverCrossing $232,077 $10,400

331000 0110 15734003034 Thornhurst Main Replacement $27,082 $1,200 331000 0110 15734007066 Tanglewood Lakes MR - Waymart $19,160 $900

331000 0110 15734008679 ButtemutLane.TanglewoodLak $208,850 $9,400

11/15/2007


30-Jun-08



331000 0110 ' 15734009046 MillCreekStreamCrossing-Mt $39,663 $1,800

331000 0110 15734010645 Price'sDrive,Mountainhome $245,702 $11,100

331000 0110 15734010931 Second Avenue, Jefferson Heights $103,850 $4,700

331000 0110 15734021780 MountainHomeMainReplacement $201,305 $9,100

331000 0110 15734027597 Tanglewood North Main Replacements $95,270 $4,300

331000 0110 15744004556 Oneida Main $126,133 $5,700

331000 0110 15744035410 PVC 8, Galvanized Main Replacements $37,119 • $1,700

331000 0110 15744036007 Meadowcrest Main Replacement $105,111 $4,700

331000 0110 15784003996 C-MR North, Mill to End $5,988 $300

331000 0110 15784004005 C-MR Shenango, Church to Alley $21,311 $1,000

331000 0110 15784004006 C-MRCIark,SharpsvilletoS $225,000 $10,100

331000 0110 15784004008 C-M RDIVISION, HAYWOODTOHOEZ $267,125 $12,000

331000 0110 15784004009 C-MRMCCLURE,KINGTOGEORGE $198,750 $8,900

331000 0110 15784004010 C-MR State Street to Bridge $56,057 $2,500

331000 0110 15784008280 C-MR2007OaklandBeachProj $100,000 $4,500

331000 0110 15900104491 SouthAvenue.Glenolden $252,419 $11,400

331000 0110 15900104493 RoseTreeRoad.Middletown $230,672 $10,400

331000 0110 15900104494 PrivateRoadoffCedarGrove, $128,021 $5,800

331000 0110 15900104500 NorthLineRoad,Newtown $697,173 $31,400

331000 0110 15900104502 LaurelRoad,Darby $543,135 $24,400

331000 0110 15900104503 Hawthorne Road, Marple $37,105 $1,700

331000 0110 15900104511 ChesterRoad.Swarthmore $973,521 $43,800

331000 0110 ' 15900104512 CalconHookRoad.DarbyTownsh $123,022 $5,500

331000 0110 15900104768 Plush Mill Rd, N. Providence (CO) $60,292 $2,700

331000 0110 15900105537 Clifton Avenue, Aldan, Collingdale $50,023 $2,300

331000 0110 15900105538 Sproul Road, Swarthmore $57,251 $2,600

331000 0110 15900106759 Hinkson Boulevard, Ridley Park $4,137 $200

331000 0110 15900106786 East Langhorne Road, Haverford $10,655 $500

331000 0110 15900106923 Rogers Lane, Nether Providence $182,106 $8,200

331000 0110 15900106929 Custer Avenue, Glenolden $14,985 $700

331000 01-10 15900107080 SharonAvenue.Darby $694,961 $31,300

331000 oiio 15900107453 BunnontRoadmainreplacement $1,059,092 $47,700

331000 0110 15900107959 Carre Avenue, Tinicum $45,562 $2,100

331000 0110 15900108705 SaxerAvenue.Springfield $63,300 $2,800

331000 0110 15900109293 WestparkLane.UpperDarby $376,375 $16,900

331000 0110 15900111372 East Berkley Avenue, Clifton Heights $144,728 $6,500

331000 oiio 15900111373 West Wyndiffe, Clifton Heights $162,697 $7,300

331000 .0110 15900136842 MR,6900'12"BALTIM'OREPIK,CLIFT $1,378,541 $62,000

331000 0110 15900204422 Woodland Avenue, Malvem (CO) $32,000 $1,400

331000 0110 15900204439 RiverRoad.UpperMerion $1,003,232 $45,100

331000 0110 15900204443 RemingtonRoad, LowerMerion $194,042 $8,700

331000 0110 15900204448 Park Terrace, Lower Merion $33,509 $1,500

331000 0110 15900204450 OverbrookParkway.LowerMerio $981,203 $44,200

331000 0110 15900204461 Holland Avenue, LowerMerion $98,251 $4,400

331000 0110 15900204463 HarritonRoad,LowerMerion $93,106 $4,200

331000 0110 15900204466 Greenfield Terrace, Lower Merion $6,397 $300

331000 0110 15900204471 FranklinA venue, LowerMerion $82,321 $3,700

331000 0110 15900204480 AbrahamsLane.Radnor $86,353 $3,900

331000 0110 15900206741 West Avenue MR, Radnor $4,749 $200

331000 0110 15900206894 Eagle Road, Radnor $348,357 $15,700

331000 0110 15900207136 SwedelandRoadMainReplacemen $752,666 $33,900

331000 0110 15900208082 Roberts Road#2, LowerMerion $47,936 $2,200

331000 0110 15900208583 Greenhill Lane, Lower Merion $37,572 $1,700

331000 0110 15900208640 Bowman Avenue # 1 , LowerMerion $16,320 $700

331000 0110 15900208720 Bowman Avenue #2, LowerMerion $32,199 $1,400

331000 0110 15900208729 Elm Avenue, Lower Merion $51,886 $2,300

331000 0110 15900209116 RobertsRoad#3, LowerMerion $195,008 $8;800

331000 0110 15900210940 Summit Street, Upper Merion $151,331 $6,800

331000 0110 15900230770 Latches Lane, Lower Merion $1,550,000 $69,800

331000 0110 15900236249 Grove Place. Narberth $105,512 $4,700

331000 0110 .15900301254 MillRoadBridgeCrossing $6,809 $300

331000 0110 15900303917 Lycoming Avenue, Abington (C O) $75,763 $3,400

331000 0110 15900304408 Ashbourne Road (#2), Cheltenham $54,324 $2,400

331000 0110 15900304414 Bath Road, Bristol Twp $9,499 $400

331000 0110 15900304416 CentralAvenue,Cheltenham $440,123 $19,800

331000 0110 15900304436 NorthAvenue,Cheltenham $545,156 $24,500

331000 0110 15900304438 Nylsor Avenue, Abington $7,686 $300 331000 0110 15900304457 WestElmRoad.Plymouth $181,205 $8,200

331000 0110 15900304752 FoxChaseRoad,Abington $1,676,840 $75,500

331000 0110 15900306767 RicesMillRoad#2,Cheltenham $592,788 $26,700

331000 0110 15900306884 AshboumeRoad#1 .Cheltenham $476,548 $21,400

331000 0110 15900307922 Park Avenue, Cheltenham $24,710 $1,100

11/15/2007


30-Jun-08


9 Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 331000 0110 15900308730 Harrison Street, Bristol Boro $71,412 $3,200 331000 0110 15900308731 WindsorA venue, Cheltenham $276,607 $12,400 331000 0110 15900308789 Mather Road, Jenkintown $76,443 $3,400 331000 0110 15900308805 Cedar Street. Jenkintown $25,221 $1,100 331000 0110 15900308972 Runnymede Avenue. Jenkintown $149,827 $6,700 331000 0110 • 15900309048 Bethlehem Pike, Springfield (Montco) $217,130 $9,800 331000 0110 15900311240 School House Lane, Whitemarsh $678,620 $30;500 331000 0110 15900311241 Springfield Avenue, Springfield (Montco) $243,555 $11,000 331000 0110 15900311519 1st Street, Whitemarsh $350,565 $15,800 331000 0110 15900335802 JOSHUA RD. WHITEMARSH (CO) $20,434 $900 331000 0110 15900404472 Miner Street, West Chester $213,476 $9,600 331000 0110 15900406335 HaycreekRoad,Robeson $273,119 $12,300 331000 0110 15900507623 2007 MR-TI Reserve $1,127,170 $50,700 331000 0113 15714003186 Locust Gap Main Replacement $59,447 $2,700 331000 0113 15714010279 Shamokin Street Main Replacement $528,530 $0 331000 0113 15744000207 N.E,Mains-Engineering&Des $49,247 $0 331000 0113 15744008163 OakHill-PhasellMR $18,022 $0 331000 0113 15744010492 Factoryville Galvanized MR $318,817 $0 331000 0113 15744035411 NE Pennvest Main Repl $909,444 $40,900 331000 0113 15784010316 C-MR SR 18, SR 468 TO SR 208 $1,100,000 $0 331000 0115 15744010439 Stanton/ChinchillaTie-ln $5,000 $200 331000 0116 ' 15714009030 SaylorSt,AtlasDead-EndLoop $72,695 $3,300 331000 0116 15714029141 App Rd - RG/MM Trans Reinforcement $75,013 $0 331000 0116 15734003036 FawnLakeTransmissionMain $157,837 $0 331000 0116 15734037257 MAST HOPE INTERCONNECT TO FAWN LAK $3,700 $0 331000 0116 15744003348 Connect Dead End Mains $103,850 $4,700 331000 0116 15784021730 C-MR Unimart Alley Existing 6 to 6 $6,445 $0 331000. 0116 15900108963 ProvidenceRoad, Media $76,997 $0 331000 • 0116 15900207855 Spring Mill Road (2), LowerMerion $14,449 $0 331000 0116 15900208699 CrumCreekLane.Newtown $59,844 $6 331000 .0116 15900304426 Fleming Avenue, Abington $33,754 $0 331000 0116 15900308519 Patane Avenue, Abington $2,707 $0 331000 0116 15900404460 Biddle Road, Uwchlan $57,942 $0 331000 0116 15900406885 Strasburg Road. Phase III, W.Brad. $177,885 $0 331000 0120 15900103922 Schuyler Road, Springfield Delco $114,056 $0 331000 0120 15900103923 HarmilRoad.Marple $622,500 $0 331000 0120 15900103924 EdmondsAvenue.UpperDarby $900,000 $0 331000 "0120 15900111582 Rogers 8. Plush Mill Roads, Nether Prov. • $105,000 $0 331000 0120 15900203933 FarWOOdRoadC/L-PrepWork $1,725;000 $0 331000 0120 15900203937 West Avenue C/L, Radnor $175,846 $0 331000 0120 15900207622 CoopertownRoadC/L,Haverford $493,500 $0 331000 0120 15900304482 RadcliffeAvenue,Abington $1,661,736 $0 331000 0120 15900304484 ArgyleRoad,Cheltenham $957,430 $0 331000 0120 15900304487 JacfcsonAvenue.Abington $644,440 $0 331000 0120 15900307631 Lukens Lane C/L, Upper Moreland $285,156 $0 331000 0125 15714010219 Main Breaks - Roaring Creek $55,317 $2,500 331000 0125 15724010454 Main Breaks - Susquehanna $3,519 $200 331000 0125 15734015267 Main Breaks - Waymart $35,200 $1,600 331000 0125 15744027519 Main Breaks-White Haven $54,270 $2,400 331000 0125 15784010139 D Main Breaks that Result in M.RepI $61,822 $2,800 331000 0125 15900100638 Main Breaks-Southern $821,181 $37,000 331000 0125 15900200639 Main Breaks-Western $605,220 $27,200 331000 0125 15900300635 Main Breaks-Eastern $482,437 $21,700 331000 0125 15900400636 Main Breaks-Great Valley $117,223 $5,300 331000 0130 15714010245 PennDot Highway Relocation $25,963 $1,200 331000 0130 15734015268 PennDot Highway Relocation $5,193 $200 331000 0130 15744027520 PennDot Highway Relocation $5,193 $200 331000 0130 15900204401 Relocate12"mainatAmerican $97,987 $4,400 331000 0130 15900302547 Bristol Pike, Rt. 13 @ DeLuca Homes $45,182 $2,000 331000 0130 15900436769 Shefee Boulevard - VAN $162,828 $7,300 331000 0132 15714010201 Cameron Bridge Main Relocation $242,477 $10,900 331000 0132 15900104073 Crum Creek Road Bridge $13,501 $600 331000 0132 15900107056 TurnerRoadRailCrossing $21,857 $1,000 331000 0132 15900122513 Septa Grade Crossings $20,770 $900 331000 0132 15900204074 Gulph Road Bridge at Trout Run $58,389 $2,600 331000 0132 15900207552 BalligomingoRoad Relocation . $5,000 $200 331000 0132 15900208943 DucK Under. Rt. 401 at Phoenixville $10,000 $500 331000 0132 15900208944 DucK Under, Rt. 401 w/o Church Rd $10,000 $500 331000 ,0132 15900236715 1-76 Relocation @ Rt 202 $102,780 $4,600 331000 0132 15900236778 Rt.202BridgeatChurchroad $201,509 $9,100 331000 0132 15900304072 Bristol Pk @ Bensalem Blvd $32;960 $1,500 331000 0132 15900307885 SusquehannaRoadtie-insatRR $68,750 $3,100

11/15/2007


' 30-Jun-08

AP .Statement N0..1. Attachment 2

Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 331000 0132 15900307970 BeaverDamRoadrelocation $55,000 $2,500 331000 0132 15900307971 BensalemBlvd.relocationfor $50,000 $2,300 331000 0132 15900308079 Mechanicsville/GallowayRoadD $30,000 $1,400 331000 0132 15900309316 WashingtonLaneandMeadowbroo $48,000 $2,200 331000 0132 15900310934 Otter Street Bridge Reconstruction $112,542 $5,100 331000. 0132 15900402738 ShadysideRoadRelocate700'o $140,000 $6,300 331000 0132 15900407798 Shiloh Road relocation for Sewer $3,152 $100 331000 0132 15900409197 Shiloh Road, Westtown 2 relocations $88,000 $4,000 331000 0132 15900527427 Township Project $20,000 $900 331000 0132 15900536709 Valley Green Road Bridge $41,175 $1,900 331000 0135 15714010210 Valve Replacements - Roaring Creek $30,470 $1,400 331000 0135 15724010474 Valve Replacements - Susquehanna $13,159 $600 331000 0135 15734015269 Valve Replacements - Waymart $18,671 $800 331000 0135 15744027521 Valve Replacements - White Haven $14,889 $700 331000 0135 15784010138 Repl Leaking & Inoperable Valves-SV $10,258 $500 331000 0135 15900127356 Valve Replacements - S.E. PA $406,718 $18,300 331000 0135 15900200753 Valve Replacements-Western $35,685 $1,600 331000 0135 15900300641 Valve Replacements-Eastern $4,499 $200 331000 0140 15900507008 CrumCreekRectifiertfl Replac $3,432 $200 331000 0140 15900507015 CrumCreekRectifier#2Replac $3,432 $200

331000 0140 15900507020 SproulRdTankRectifierRepla $3,640 $200 331000 0140 15900507021 FerryLaneRectifierReplaceme $3,255 $100 331000 0140 15900507023 N1 GSystemRectifier#1 Repair $27,835 $1,300 331000 0140 15900507024 N1GSystemRectifier#4Repair $24,086 $1,100 331000 0140 15900507025 N1 GSystemRectifier#6Repair $24,086 $1,100 331000 0140 15900507026 T45SwedesfordRoadAnodelnst $33,280 $1,500 331000 0141 15900504781 CathodiC Protection-Non-DSIC $135,987 $0 331000 0150 15900408191 Extl 875GEastMarlborough $45,003 $0 331000 0150 15900410773 Ext105286G $385,154 $0 331000 0198 15714003525 Repl Centralia PRV- RC $56,645 $2,500 331000 0198 15714035827 Repl Trout Run PRV Station- PC $79,003 $3,600 331000 0198 15744029051 PRV Replacements -White Haven $15,578 $700 331000 0198 15900104495 CandlewoodandSproul.Marple $69,301 $0 331000 0198 15900104501 AshlandSiGreene.UpperDarty $79,900 $0 331000 0198 15900106745 Primos Booster (altitude valve) $18,693 $800 331000 0198 15900135964 Beatty&SproulRegulator $168,919 $0 331000 0198 15900204498 SpringMillS.Mt.PleasantPRV $91,650 $0 331000 0198 15900204510 River Rd. & Ballagamingo (PRV & Vau $99,423 $0 331000 0198 15900204909 Upgrade Electr Relief Vive Pick E $10,511 $500 331000 0198 15900204930 Surge Relief valves on 36" Pick W $159,588 $0 331000 0198 15900222393 Relocate30"@FreedomFoundat $36,750 $1,700 331000 0198 15900235956 Anthony Wayne & Walker Pit (CO) $8,000 $0 331000 0198 15900235958 Woodbine Ave PRV (CO) $4,000 $0 •331000 0198 15900304492 MorelandTank(AltitudeValves $74,401 $3,300 331000 0198 15900304504 NorthLane&Righter(PRV&Va $82,599 $0 331000 0198 15900304513 Upper Moreland Tank (Altitude Valve $39,525 $1,800 331000 0198 15900404223 Marshalton Manor Regulation Pit $54,712 $0 331000 0199 15714010179 Install New Valves - Roaring Ck $18,155 $0 331000 0199 15714029129 Install/Repl Blow-offs- RC $10,385 $500 331000 0199 15734002870 MtCobb/JeffersonHgtsStudy $20,770 $0 331000 0199 15734003038 InstallPRVMasthope $294,700 $0 331000 0199 15734006671 Mapping of Pinecrest System $1,864 $0 331000 0199 15734009047 Tanglewood N Storage & Well Study $5,506 $0 331000 0199 15734029021 Install Blow-offs - Waymart $32,664 $0 331000 0199 15734029023 Inst PRV & Air Rel Valves (New)-Way $31,155 $0 331000 0199 15734029025 New Valves - Waymart $32,317 $0 331000 0199 15744000333 MappingforTambur.Hex&Hill $10,813. $0 331000 0199 15744008162 PennvestPostConstructionCos $22,500 $0 331000 0199 15744011283 Install New Blow-offs - White Haven $13,125 $0 331000 0199 15744027523 Install New Valves-White Haven $4,454 $0 331000 0199 15744029053 Install Air Rel & PRV(New)-Wh Haven $4,866 $0 331000 0199 15744029055 Install New Blow-offs-White Haven $14,631 $0 331000 0199 15784035568 D-Blowoffs - SV $9,943 $0 331000 0199 15900127361 Install New Valves - S.E. PA Div $105,829 $0 331000 0199 15900127362 Minor Changes - Blow-Offs -S.E. PA $11,071 $0 331000 0199 15900136482 Clear Right of Ways - S.E. PA $16,540 $0

331000 0199 15900436855 Route 52 Pipeline (Tie-In) $1,312,375 $59,057 331000 0199 15900506992 PreparationofAs-builts $266,996 $0 331000 0199 15900511560 Pipe Evaluation Model Consulting $103,850 $0 331000 0199 15900536724 Paint Pipe Bridges- S.E. PA $43,513 $0 331000 0515 15734000064 ProvideWatertoWayneCoPris $327,314 $0 331000 0515 15900522422 Aerial Pipeline Crossing Rehab $20,770 $0

11/15/2007


30-Jun-08


•

Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 331000 0110 15784035517 C-MRWBUTLER,PI 1 1 1OSASAFRA $1,216 $0 331000 0110 15900231040 MR.gSS'.ROBERTS.L.MRIONJ^gW $6,798 $0 331000 0199 15900306071 NewValve.10629-E,8",Johns $1,141 $0 331000 0110 15900405527 ext2320GUpsizeto12n $14,040 $0 331000 0199 15900406055 INSTALLVALVE6"NEWLINEVAL $2,534 $0 331000 0199 15900499998 Rt.5216"tie-inPhase2- $70,549 $0 331000 0199 15900499999 Rt.5216"tie-in,Phase1Des $11,943 $0 331000 0199 15901006079 1 nstallvalve6"tnstallVal $1,976 $0 331000 0199 15901006086 . OM,BO,300Lehigh,Springfield $2,395 $0 331000 0199 15901006087 OM,BO,715&717MtVemon $3,244 $0 331000 0199 15901006088 OM, BO ,58GolfRd, UpperDarby $3,606 $0 331000 0199 15902006084 10839W10"INSTALL1 ffVALVEB $5,292 $0 331000 0199 15902006094 OM.e'Valve.BeaconHill $2,193 $0 331000 0199 15903006076 OM,2"airvent,OldLincoln $5,833 $0 331000 0199 15903006077 OM,6",629AshmeadRd $2,453 $0 331000 0199 15903006078 OM,2"BO,1085Randolph,Abington $1,013 $0 331000 0199 15903006079 OM,2"BO,Plymouth@Greenview $1,904 $0 331000 0199 15903006081 OM,16"valve,OldRt13&Otter $8,196 $0 331000 0199 15903006082 OM, 1 -1 /2"main ,600F)tchRd $4,529 $0 331000 0199 15903006083 OM,Repl2"Main,100FitchRd $6,824 $0 331000 0199 15903006084 replaceB.0.2"replaceB.O. $2,419 $0 331000 0199 15904006056 OM.e'TI.WMinerScBrandywine $4,034 $0 331000 0199 15904006057 OM I6"C&P,WMiner&Brandywine $4,000 $0 331000 0199 15904006058 OM,6"C&P,Bamard&Brandywine $5,541 $0 331000 0199 15904006059 OM,8nC&P,GeigertownWellLine $2,963 $0 331000 0199 15904006060 OM,6"C&P,Everhart&Chestnut $8,814 $0 333000 0305 15714010180 Install New 3/4" Services- RC $36,471 $0 333000 0305 15714010181 Install Larger Services- Roaring Ck $16,665 $0 333000 0305 15724010448 Install New 3/4" Services- Susq $33,000 $0 333000 0305 15724010449 Install New Larger Services - Susq $4,743 $0 333000 0305 15734015282 New 3/4" Services - Waymart $160,821 $0 333000 0305 15734015283 New Larger Services - Waymart $2,345 $0 333000 0305 15744027528 New 3/4" Services - White Haven $244,461 $0 333000 0305 15744027529 Install New Larger Service-Wh Haven $7,720 $0 333000 0305 15784010373 D Install Services New Customer- SV $71,322 $0 333000 0305 15900204726 Install New Services < 4" - Western $857,928 $0 333000 0305 15900204727 Install New Services >= 4"- Western $495,287 $0 333000 0305 15900404723 Install New Services <4"-Gr Valley $651,698 $0 333000 0305 15900404724 Install New Services >=4"-Gr Valley $509,906 $0 333000 0305 15900510312 Inst New Services - >/= 4"-Southern $154,616 $0 333000 0305 15900510366 Install New Services < 4" -Southern $281,053 $0 333000 0305 15900512508 Cost to Inspect New Services- SE PA $520,065 $0 333000 0305 15900515930 Install New Services < 4"- Eastern $683,004 $0 333000 0305 15900515932 Install New Services >/= 4"-Eastern $244,214 $0 333000 0310 • 16714010212 Replace 3/4" Services - Roaring Ck $53,432 $4,275 333000 0310 16714010213 Replace Larger Services- Roaring Ck $4,758 $381 333000 0310 15724010476 Replace 3/4" Services- Susquehanna $15,361 $1,229 333000 0310 15724010477 Replace Larger Services-Susquehanna $3,381 $270 333000 0310 15734015284 Replace 3/4" Services - Waymart $74,081 $5,927 333000 0310 16734015285 Replace Larger Services- Waymart $2,932 $235 333000 0310 16744027530 Replace 3/4" Services - White Haven $41,994 $3,360 333000 0310 16744027531 Replace Larger Services-Wh Haven $3,596 $288 333000 0310 16784010374 D Replace Existing Services-SV $24,485 $1,959 333000 0310 15900204730 Renew Services <4"-Western Div $476,713 $38,137 333000 0310 16900204733 Renew Services >= 4" - Western Div $61,597 $4,928 333000 0310 16900404737 Renew Services - <4" - Great Valley $296,270 $23,702 333000 0310 15900404738 Renew Services >4" - Great Valley $44,435 $3,555 333000 0310 16900510370 Renew Services- >/= 4" - Southern $29,109 $2,329 333000 0310 15900510380 Renew Services <4" - Southern $403,583 $32,287 333000 0310 15900511728 Renew Services - >/= 4" - Eastern $32,332 $2,587 333000 0310 15900515933 Renew Services - < 4" - Eastern $335,072 $26,806 333000 0315 16714029127 Service Change Overs -Roaring Ck $253,781 $20,303 333000 0315 16724010475 Service Change Overs (renewal) Susq $32,195 $2,576 333000 0315 15734015286 Service Change Overs - Waymart $113,325 $9,066 333000 0315 15744027532 Service Change Overs - White Haven $90,002 • $7,200 333000 0315 15784003028 C-SR North, Mill to End $1,569 $125 333000 0315 15784003030 C-SR Alley, Shenango to 2nd $3,750 $300 333000 0315 15784004161 C-SR Walnut, Mill to Sharon Rd $6,103 $488 333000 0315 15784004162 C-SR McClure, King to George $63,750 $5,100 333000 0315 15784004164 C-SR Division, Haywood to Hoezel $56,250 $4,500 333000 0315 15784004165 C-SR Mary,Sharon-N Castle to Rombol $14,387 $1,151 333000 0315 15784004168 C-SR Shenango, Church to Alley $9,375 $750

11/15/2007


3D-Jun-08



333000 0315 15784004169 C-SR OAKLAND, MEEK TO HULL $37,500 $3,000

333000 0315 15784004170 C-SR Clark. Sharpsville to Shenango $7,500 $600

333000 0315 15784007960 C-SR MARIENVILLE SERVICE TRANSFERS $37,288 $2,983

333000 0315 15784007966 C - SR West Butler Pitt to Sass $8,411 $673

333000 0315 15784007969 C - SR West Park Walnut to E Townsh $11,250 $900

333000 0315 15784008282 C - SR 2007 Oakland Beach Projects $33,750 $2,700

333000 0315 15784010113 C-SR CASE. STATE TO LINDEN $33,750 $2,700

333000 0315 15784010116 C-SR WENGLER, DIVISION TO GEORGE $39,375 $3,150

333000 0315 15784010118 C-SR CENTER, LAKEVIEW TO MONNIE $22,500 $1,800

333000 0315 15784010119 C-SR OAKMONT, OAKWOOD TO RT 18 $22,500 $1,800

333000 0315 15784010121 C-SR OAKLAND BEACH, OAKWOOD TO OAKM $28,125 $2,250

333000 0315 15784010126 C-SR OAKWOOD. OAKMONT TO OAKLAND BE $16,875 $1,350

333000 0315 15784010128 C-SR E BEAVER, OTTER TO WILSON $56,250 $4,500

333000 0315 15784021747 C-SR Unimart Alley Existing 6 to 6 $1,859 $149

333000 0315 15900204739 Service Renew/Rehab <4"- Western $1,174,430 $93,954

333000 0315 15900204740 Service Renew/Rehab >=4"-Westem $44,640 $3,571

333000 0315 15900404741 Service Renew/Rehab <4"- Gr Valley $654,873 $52,390

333000 0315 15900404742 Service Renew/Rehab >=4"-Gr Valley $29,567 $2,365

333000 0315 15900511908 Service Renew/Rehab <4"- Southern $1,062,386 $84,991 333000 0315 15900511909 Service Renew/Rehab >= 4"- Southern $256,951 $20,556

333000 0315 15900534797 Service Renew/Rehab >= 4"- Eastern $133,940 $10,715

333000 0315 15900536010 Service Renew/Rehab <4 B - Eastern $2,493,582 $199,487

333000 0399 15744003288 NE PennVest Service Chg Overs - WH $197,700 $0

333000 0399 . 15744010876 Terrace Avenue Services $10,000 $0

334000 0205 15744027525 Replace Larger Meters- White Haven $2,100 $168

334000 0514 15900510430. Upgrade Beechwood Booster $60,669 $4,900

334000 0520 15714009239 Roaring Creek Insertion Meter $83,080 $0

334400 0225 15900512498 DSIC - AMR System $586,523 $0

334400 0225 15900516139 DSIC Retro Fit Install for R/F Sys $23,817 $0

334400 0515 15783025959 PTelemeteringforForestCo $20,070 $0

334500 0205 15714010214 Replace 5/8" Meters - RC $34,704 $2,776

334500 0205 15714010215 Replace Larger Meiers-Roaring Ck $17,042 $1,363

334500 0205 15724010478 Replace 5/8" Meters-Susquehanna $26,133 $2,091

334500 0205 15724010479 Replace Larger Meters - Susquehanna $13,978 $1,118

334500 0205 15734015278 Replace 5/8" Meters- Waymart $19,238 $1,539

334500 0205 15734015279 Replace Larger Meters- Waymart $3,127 $250

334500 0205 15744007086 Repl Meters County Club Gardens-WH $53,131 $4,250

334500 0205 15744027524 Replace 5/8" Meters-White'Haven $30,203 $2,416

334500 0205 15784007032 C-Meter Replacement Oakland Beach $61,842 $4,947

334500 0205 15784010377 S Meter Replacement -SV $56,208 $4,497

334500 0205 15900512475 DSIC - 5/8" Replacement Meters $592,868 $47,429

334500 0205 15900512476 DSIC - 3/4" Replacement Meters $18,233 $1,459

334500 0205 15900512477 DSIC - 1 " Replacement Meters $14,185 $1,135

334500 0205 15900512478 DSIC - 1 1/2" Replacement Meters $130,397 $10,432

334500 0205 15900512479 DSIC - 2" Replacement Meters $111,908 $8,953




334500 0205 .15900512483 DSIC - 8" Replacement Meters $56,769 $4,542

334500 0205 15900512484 DSIC -10" Replacement Meters $18,145 $1.452

334500 0210 15714010182 Install New 5/8" Meters - RC $11,436 $0

334500 0210 15714010183 Install New Larger Meters - RC $8,524 $0

334500 0210 15724010450 Install New 5/8" Meters - Susq $8,387 $0

334500 0210 15724015036 Install New Larger Meters-Susq $5,591 $0

334500 0210 15734006667 Install New Meters @ New Acq-Waymar $3,739 $0

334500 0210 15734015280 Install New 5/8" Meters-Waymart $12,782 $0

334500 ' •0210 15734015281 Install New Larger Meters- Waymart $1,535 $0

334500 0210 15744002423 Install New Meters in Thornhurst-WH $2,293 $0

334500 0210 15744006668 New Meters - Newly Acquired System $88,688 $0

334500 0210 15744027526 Install New 5/8" Meters-Wh Haven $20,871 $0

334500 0210 15744027527 Install New Larger Meters-Wh Haven $6,777 $0

334500 0210 15784010376 S-New Meters for New Customers - SV $34,059 $0

334500 0210 15900512488 Non-DSIC - 5/8" Meters - New $690,221 $0

334500 0210 15900512489 Non-DSIC - 3/4" Meters - New $3,162 $0

334500 0210 15900512490 Non-DSiC - 1" Meters - New $100,481 $0

334500 0210 15900512491 Non-DSIC - 1-1/2" Meters - New $78,908 $0

334500 0210 15900512492 Non-DSIC - 2" Meters - New $58,452 $0




334500 0210 15900512496 NON-DSIC - 8" Meters - New $46,398 $0

334500 0210 15900512497 Non-DSIC -10 " Meters - New $15,341 $0

11/15/2007


30-Jun-08

AP -Statement No. 1-Attachment 2


334500 0210 15900512510 Prch Supplies Meter Repair-Register $46,905 $0

334700 0299 15714003192 Construct Pennsview Meter Pits- RC $15,578 $0

334700 0299 15744007085 PurchaseMobileCollectionKit $48,533 $0

334700 0299 15784010378 S-Meter Reading Equip Replace-SV $24,716 $0

334700 0299 15900536371 AMR Installs of RF System (#93433) $245,045 $0

335000 0405 15714008103 InstallHydrant-WhiteRockA $167,485 $0

335000 0405 15714010184 Install New Hydrants -RC (inactive) $7,841 $0

335000 0405 15714010313 Inst New Hydrants White Rock (2008), $170,100 $0

335000 0405 15714010314 Install New Hydrants RC (2008) $3,150 $0

335000 0405 15724010451 NewHydrants-Susquehanna $6,893 $0

335000 0405 15724011284 Install New Hydrants Susquehanna $2,834 $0

335000 0405 15734015287 Install New Hydrants- Waymart $2,596 $0

335000 0405 • 15744027533 Install New Hydrants- White Haven $4,696 $0

335000 0405 15784010136 D Install New Hydrants - SV $16,565 $0

335000 0405 15900400109 New Hydrants - Great Valley Div. $43,125 $0

335000 0405 15900504744 New Hydrants S.E. PA- All Divisions $356,598 $0

335000 0410 15714010216 Replace Hydrants - Roaring Creek $21,897 $1,800

335000 0410 15724010480 Replace Hydrants -Susquehanna $15,886 $1,300

335000 0410 15734015288 Replace Hydrants- Waymart $5,371 $400

335000 0410 15784004173 C-HR Walnut, Mill to Sharon Rd $3,050 $200

335000 0410 15784004177 C-HR McClure, King to George $4,000 $300'

335000 0410 15784004178 C-HR Division, Haywood to Hoezel $4,000 $300

335000 0410 15784004179 C-HR Mary,Sharon-N Castle to Rombol $3,472 $300

335000 0410 15784004180 C-HR Clark, Sharpsville to Shenango . $3,050 $200

335000 0410 15784007961 C-HR MARIENVILLE HYDRANT REPLACEMEN $3,000 $200

335000 0410 15784007967 C - HR West Butler Pitt to Sass $2,130 $200

335000 0410 15784008283 C - HR 2007 Oakland Beach Projects $2,500 $200

335000 0410 15784010150 D-Hydrant Replacement Funds $10,392 $800

335000 0410 15784010154 C-HR WENGLER, DIVISION TO GEORGE $1,375 $100

335000 0410 15784010156 C-HR CENTER, LAKEVIEW TO MONNIE $1,375 $100

335000 0410 15784010157 C-HR OAKMONT, OAKWOOD TO RT 18 $1,375 $100

335000 0410 15784010158 C-HR,E BEAVER, OTTER TO WILSON $2,750 $200

335000 0410 15784021759 C-HR Unimart Alley Existing 6 to 6 $1,000 $100

335000 0410 15784021768 C-HR Cherry, Forest to Oak Lane $1,375 $100

335000 0410 15900127367 Replace/Relocate Hydrants-All SE PA $121,647 $9,700

335000 0415 15900512156 Eliminate No-Drain Hydrants-SE PA $592,174 $47,400

335000 0420 15900100919 Change 2 to 3 way hydrants-Southern $29,605 $2,400

335000 0420 15900512157 Repl 2-way Hydrants w/ 3-way-SE PA $31,610 $2,500

335000 0499 15900207869 BlanketOtherHydrantWork-We $1,078 $0

335000 0405 15784001182 D-HydNewGardenWay $1,682 $0 335000 0405 15784001219 D-HydKerrwood $5,305 $0

335000 0405 15901001594 RelocateFHI-594 $4,305 $300

335000 0405 15901009458 NH,lnstallfh9-458radnorTwp $1.350 $0

335000 0405 15901077204 NewFH@RidleyCreekRd $4,697 $0

335000 0405 15902047236 inslallfh47-236fortwp $2,937 $0

335000 0405 15904067248 Relocate FH67-248 $4,632 $400

339000 0517 15900207400 BoilerPump8.WaterHeater-P $1,886 $0

340000 0710 15784015472 Office Furniture $5,358 $0

340000 0710 15900311596 DispatchConsoleControls $3,683 $0

340000 0710 15900501370 NewFurniture-BrynMawrComple $849,375 $0

340000 0710 15900504012 Prch Office Furniture & Files- C&PA $11,735 $0

340000 0710 15900504558 PurchaseNewlSFumiture $166,775 $0

340000 0710 15900506986 Replace Office Furniture $8,630 $700

340000 0710 15900509151 Purchase Furniture - Dist Engineer $10,385 $0

340000 0715 15714003200 Purchase OCE Printer/Scanner- R C $25,963 $0

340000 0715 15714022117 Purchase Office Equipment- RC $2,834 $0

340000 0715 15734003035 Purch OCE Printer/Scanner-Waymart $25,963 $0

340000 0715 15744003285 Purch OCE Printer/Scanner-Wh Haven $25,963 $0

340000 0715 15781008220 A-Hp Scanjet 8250 $1,000 $0

340000 0715 15784008232 D-DigitalCameras $1,200 $0

340000 0715 15900336806 MBO Paper Folder $1,350 $0

340000 0715 15900501371 Audio/Visual Equip-Bryn Mawr Complx $89,504 $0

340000 0715 15900501372 Appliancefomewconstruction $18,358 $0

340000 0715 15900504011 Purchase Procut Paper Cutter $27,502 $0

340000 0715 15900504013 Purch File Cabinet-Negatives/Prints $1,246 so 340000 0715 15900504014 PurchaseDigitalCamera $1,560 so 340000 0715 15900510454 HP Color Plotter $11,340 $0

340100 0900 15714011578 Network Infrastructure Enhancements $2,077 so 340100 0900 15744009147 Purchase GoBook & Bracket-WH $6,231 $0

340100 0900 15784011577 Network Infrastructure Enhancements $3,323 $0

340100 0900 15900104907 Upgrade Toughbook Computers $77,888 $6,200

340100 0900 15900310540 Prch/upgrd Toughbook Computers-WG $75,600 $0

11/15/2007


30-Jun-08

AP-Statement No. 1 Attachment 2


340100 0900 15900409754 Color Printer for Great Valley $4,725 $0

340100 0900 15900501780 IS Switches & Routers -Other $62,310 $0

340100 0900 15900502888 4507R Supervisor Card - Bryn Mawr $29,078 $0

340100 0900 15900503064 Catalyst Switches for Bryn Mawr $50,405 $0 340100 0900 15900503355 Aqua Spread - FIS $1,239,482 $0 340100 0900 15900503393 Aqua Spread - CIS $2,147,758 $0 340100 0900 15900503428 Aqua Spread - IS $1,584,589 $0

340100 0900 15900503526 MAC Systems and Software $4,881 $0

340100 0900 15900504224 HydraulicModelsoftwarepurch $124,620 $0 340100 0900 15900504651 Aqua Spread - Meritage $408,025 $0 340100 0900 15900504818 IVR Tunning $14,108 $0 340100 0900 15900506693 GIS/AM/FM-Soft Costs $66,842 $0 340100 0900 15900507672 Consulting; Exchange $60,190 $0

340100 0900 15900507738 Sen/ice Link $141,510 $0 340100 0900 15900508106 COE2007 $16,205 $0

340100 0900 15900508209 CISArchivePurge $117,925 $0

340100 0900 15900508317 ISSecurityProject $39,355 $0 340100 0900 15900508540 LawsonLicensing $380,820 $0 340100 0900 15900508592 NETWORKWIRING-PAremotes $150,000 $0 340100 0900 15900508722 Service Link Phase 2-Workforce Mgt $103,850 $0

340100 0900 •15900508878 Bannerlnterfaces $377,360 $0

340100 0900 15900508911 BannerReports $35,378 $0

340100 0900 15900509755 Color Printer for Purchasing $4,725 $0 340100 0900 15900509997 Bryn Mawr Data Center Redesign $525,000 $0

340100 0900 15900511603 GIS/AM/FM-HARD COSTS $210,902 $0

340100 0900 15900511638 Printers - New & Replacement $16,849 $0

340100 0900 15900515337 Replace Network Servers - Bryn Mawr $42,606 $3,400 340100 0900 15900515338 Replace Network Servers - Remote $51,925 $4,200 340100 0900 15900535656 Records - On Base Web Server Module $42,579 $0

340100 0900 15900535698 Router $3,976 $0

340100 0900 15900535948 BANNER CIS RELATED PROJECTS $293,968 $0

340100 0900 15900539643 IS.PROJECT MERITAGE FIS $5,209 $0

340100 0911 15900504188 PrchComputerlnfrastructure-N $129,812 $0

340100 0911 15900511467 Inst Security System Tanks-Phase 1 $945,000 $0 340100 0911 15900511472 Inst Security System Tanks-Phase 2 $787,500 $0 340100 0911 15900511473 Inst Security System Tanks-Phase 3 $525,000 $0 340100 0911 15900511477 Inst Security System Wells-Phase 2 $472,500 $0 340100 0911 15900511530 Inst Security System- Bryn Mawr $315,000 $0 340100 0911 15900511534 Install Security Systems NE (RC) $157,500 $0 340100 0900 15900511489 SOFTCOSTSPOWERPLAN $64,643 $0 340100 0900 15900535949 SOFTCOSTSBANNERCIS $2,751 $0

340412 0900 15714015041 Desktop PCs - Roaring Creek $3,323 $0 340412 0900 15724010481 Desktop PCs - Susquehanna $1,662 $0 340412 0900 15734036512 DesktopPCs-Waymart $4,985 $0 340412 0900 15744036514 DesktopPC-White Haven $4,985 $0 340412 0900 15900504893 Desktop PCs for New Staff $31,155 $0 340412 0900 15900511634 Desktop PC Replacement Program $61,241 $0 340413 0510 15900504702 Software Purchase-Emergency Control $40,002 $0 340413 0900 15784004159 E-Update Hydraulic Model - SV $58,300 $0 340413 0900 15900104557 Integrate Meter Mgt Systm w/ Banner $77,888 $0 340413 0900 15900508601 IVANTAGE UPGRADE $16,483 $0 340413 0900 15900521956 M O M S , Additional Features $10,385 $0

340413 0900 15900522221 REAL ESTATE TRACKING SYSTEM $10,374 $0

340413 0900 15900536723 SOFTWARE; SOFTWARE DISTRIBUTION $22,735 $0

341100 0805 15784036481 REPLACE UTILITY TK #SVT-26 $45,614 $9,100 341100 0805 15900103981 ReplaceVehicle#208 $34,271 $6,900

341100 0805 15900103982 Replace Veh #209 $34,271 $6,900 341100 0805 15900103984 ReplaceVehicle#250 $37,253 $7,500

341100 0805 15900103985 ReplaceVehicle#270 $31,121 $6,200

341100 0805 15900103986 ReplaceVehicle#277 $34,271 $6,900 341100 0805 15900103988 Replace Veh #281 $34,271 $6,900 341100 0805 15900103990 Replace Veh #RC18 $34,271 $6,900 341100 0805 15900104208 ReplaceVehicle#537 $78,926 $15,800

341100 0805 15900104236 Replace Utility #WH14 $48,300 $9,700 341100 0805 15900104339 Replace Pick-Up #WH2 $41.436 $8,300

341100 0805 15900107581 ReplaceVehicle#565 $31,121 $6,200

341100 0805 15900107582 Replace Vehicle #571 $84,119 $16,800

341100 0805 15900107583 Replace Vehicle #572 $84,119 $16,800

341100 0805 15900107584 RepiaceVehicle#582 $84,119 $16,800 341100 0805 15900107585 Replace Vehicle #RC3 $50,887 $10,200 341100 0805 15900107586 Replace Vehicle#SVT-14 $81,760 $16,400 341100 0805 15900107587 Replace Vehicle #WH11 $35,309 $7,100

11/15/2007


30-Jun-08

AP Statemenl No. 1» Attachment 2

Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 341100 0805 15900107588 ReplaceVehicle#WH7 $35,309 $7,100 341100 0805 15900107589 Replace Vehicle#WU1 $35,309 $7,100 341100 0805 15900110213 Replace Utility #345 $36,750 $7,400 341100 0805 15900110218 Replace Pick-Up #337 $49,350 $9,900 341100 0805 15900110220 Replace Utility #RC2 $57,750 $11,600 341100 0805 15900110222 Replace Utility #PW15 $34,650 $6,900 341100 0805 15900110226 Replace Utility #PW13 $31,500 $6,300 341100 0805 15900110230 Replace Pick-Up #PW11 $34,650 $6,900 341100 0805 15900110232 Replace Pick-Up #PW17 $34,650 $6,900 341100 0805 15900110796 PrchVehicleforNewlnspector $30,000 $0 341100 0805 15900110797 PrchVehicleNewlnspectof-Spf $30,000 $0 341100 0810 15900310287 Replace Gator - Neshaminy $15,750 $3,200 341100 0815 15900103926 Replace Veh #007 $20,770 $4,200 3*1100 0815 15900103927 Replace Veh #017 $20,770 $4,200 341100 0815 15900103931 Replace Veh #018 $20,770 $4,200 341100 0815 15900103932 Replace Veh #019 $20,770 $4,200 341100 0815 15900103939 Replace Veh #027 $20,770 $4,200 341100 0815 15900103944 Replace Veh # 043 $20,770 $4,200 341100 0815 15900103945 Replace Veh #045 $20,770 $4,200 341100 0815 15900103946 Replace Veh #052 $20,770 $4,200

34,1100 0815 15900103947 Replace Veh #063 $20,770 $4,200 341100 0815 15900103948 Replace Veh #064 $20,770 $4,200 3^1100 0815 15900103949 Replace Veh #067 $20,770 $4,200 341100 0815 15900103952 Replace Veh # 091 $20,770 $4,200 341100 0815 15900103954 Replace Veh #112 $20,770 $4,200 341100 0815 15900103956 Replace Veh #117 $20,770 $4,200 341100 0815 15900103957 Replace Veh #119 $20,770 $4,200 341100 0815 - 15900103959 Replace Veh #145 $20,770 $4,200 341100 0815 15900103960 Replace Veh #152 $20,770 $4,200 341100 0815 15900103961 Replace Veh #158 $20,770 $4,200

341100 0815 15900103962 Replace Veh #220 $20,770 $4,200 341100 0815 15900103963 Replace Veh #254 $20,770 $4,200 341100 0815 15900103965 Replace Veh #255 $20,770 $4,200 341100 0815 15900103966 Replace Veh #256 $20,770 $4,200 341100 0815 15900103970 Replace Veh #257 $20,770 $4,200 341100 0815 15900103971 Replace Veh #264 $20,770 $4,200 341100 0815 15900103972 Replace Veh #265 $20,770 $4,200 341100 0815 15900103973 Replace Veh #272 • $20,770 $4,200 341100 0815 15900103975 Replace Veh #342 $20,770 $4,200 341100 0815 15900103976 Replace Veh #RC24 $20,770 $4,200 341100 0815 15900103977 Replace Veh #SVT-15 $20,770 $4,200 341100 0815 15900103979 Replace Veh #SVT-238 $20,770 $4,200 341200 0515 15783008179 P-BatteryChargerlnstallFork $1,900 $0 341200 0810 15900104225 Replace Forklift #843 $44,656 $8,900 341200 0810 15900104418 Replace Forklift #844 $41,436 $8,300 341200 0810 15900104528 Replace Trailer #827 $20,719 $4,100 341200 0810 15900104700 Purch John Deere Gator & Cart- Crum $26,638 $0 341200 0810 15900104704 Purchase Forklift-CrumCreek $48,810 $0 341200 0810 15900209202 John Deere Gator-Pickering WTP $14,902 $0 341500 0805 15900103980 ReplaceVehicle#133 $31,121 $6,200 343000 0899 15900109290 PurchaseChlorinationSkid $2,282 $0 343000 0901 15900104120 Prch Inground 3 Pt Lift-Springfield $65,000 $0 343000 0901 15900104122 Upgrade Lift #3 -Springfield $15,000 $1,200 343000 0901 15900104129 Purchase Tire Machine- Springfield $12,300 $0 343000 0901 15900104132 Purchase Wheel Balancer-Springfield $7,999 $0 343000 0901 15900104135 Purchase Master Tech Scan Tool $11,300 $0 343000 0901 15900104774 Prch Emission Analyzer-Willow Grove $7,270 $0 343000 0901 15900110559 Tire Machine and Balancer $25,200 $0 343000 0901 15900110560 Lift Repair/Upgrade $21,000 $1,700 343000 0901 15900526804 Repl Tools for Instrument Techs $3,638 $300 343200 0901 15714003550 Purch New Tapping Machine- RC $30,758 $0 343200 0901 15714010191 Purchase Working Tools- RC $12,929 $0 343200 0901 15714010331 Purchase Flow Master - Roaring Ck $63,000 $0 343200 0901 15724008153 Purchase Tools & Equipment-Susqueh $5,888 $0 343200 0901 15734015294 Purchase Woriting Tools-Waymart $7,237 $0 343200 0901 15744027538 Purchase Working Tools-Wh Haven $4,112 $0

343200 0901 15783008589 P-PurchaseMegOhmMeter $3,000 $0 343200 0901 15783008872 PlantToolChest $1,200 $0 343200 0901 15784008250 D-TS800CutoffSaw $1,300 $0 343200 0901 15784008256 D-RiversideTP3HDitchPump $1,500 • $0 343200 0901 15784008262 D-ReedDrillingMachine $2,400 $0 343200 0901 15784015152 ToolsandequipmentforC.S. $33,051 $0

11/15/2007


30-Jun-08

AP Statement No. 1. Attachment 2


343200 0901 15784020944 D-Distribution Dept Tools- SV $24,920 $0

343200 0901 15784020993 P-Production Dept Tools • SV $25,545 $0

343200 0901 15784021676 P-Marienvilie Sys Working Tools-SV $1,984 $0

343200 0901 15900103828 PurchasePlateTampers $7,789 $0

343200 0901 15900103829 Purchase Tool Cabinets $7,270 $0

343200 0901 15900103831 Purchase Reed Cutters $6,231 $0

343200 0901 15900103832 Purchase2KWattGenerator $8,100 $0

343200 0901 15900103833 Purchase2 , ,&3''DiaphragmPum $14,539 $0

343200 0901 15900103834 Purchase14"GasSaws $9,347 $0

343200 0901 15900103836 PurchaseWandLocators $12,462 $0

343200 0901 15900103837 PurchaseMetroTech801 $22,847 $0

343200 0901 15900103838 Purchase 3" Gophers $8,827 $0

343200 0901 15900103839 Purchase H-604 Motors $8,308 $0

343200 0901 15900103840 Purchase Shell Cutters $15,578 $0

343200 0901 15900103841 PurchaseDe-ChlorinationEquip $13,501 $0

343200 0901 15900103843 Purchase30lbRockDrills $3,635 $0

343200 0901 15900103845 Purchase90lbBreaker $5,193 $0

343200 0901 .15900103847 PurchaseAirRammers $12,462 $0

343200 0901 15900103848 Purchase Backfill Tampers $4,154 $0 343200 0901 15900103853 PurchaseDigitalCameras $2,077 $0

343200 0901 15900103854 RepairTapMachines&WachSaw $31,155 $2,500

343200 0901 . 15900103857 Purchase Pressure Testers $10,385 $0 343200 0901 15900104137 PurchaseTech2ScanTool $9,700 $0

343200 0901 15900104769 ReplaceShopTools $18,335 $1,500

343200 0901 15900106295 PrchFlowMetricCorrelator $52,237 $0

343200 0901 15900110081 Purchase (3) Balloon Light Stands $11,025 $0

343200 0901 15900110082 Purchase "B" Tap Machines $15,750 $0

343200 0901 15900110083 Purchase Reed Cutters $6,300 $0 343200 0901 15900110093 Purchase 3" Gophers $8,925 $0

343200 0901 15900110094 Purchase H-604 Motors $15,750 $0

343200 0901 15900110096 Purchase De-Chlorination Equipment $13,650 $0

343200 0901 15900110098 Purchase 30 lb Rock Drills $8,925 $0

343200 0901 15900110100 Purchase 90 lb Breaker $5,250 $0

343200 0901 15900110490 Xmic Electronic Ground Microphone $4,515 $0

343200 0901 15900110731 Upgrade Meter Test Equipment $21,000 $1,700

343200 0901 15900110732 Purchase Magnetic Locators $6,300 $0

343200 0901 15900115856 Replace walk behind mower-Green Lan $11,280 $900

343200 0901 15900310526 Purchase Pressure Recorders $13,650 $0

343200 0901 15900310536 Purchase Hot Meter Boxes $12,600 $0

343200 0901 15900509220 PurchaseDataLoggers $2,687 $0

343200 0901 15900510145 Repl Tools for Instrument Techs $5,460 $400 343200 0901 15900512505 Purchase Magnetic Locators $6,231 $0

343200 0902 15714010340 Repl Safety Equipment - RC $10,500 $800

343200 0902 15714010840 Purchase Safety Equipment - RC $7,900 $0

343200 0902 15784010386 P-Safety Tools - SV $2,967 $0

343200 0902 • 15784035585 D-Safety Tools- SV $2,000 $0 343200 0902 15900103830 Purchase Air Blowers $6,231 $0

343200 0902 15900103849 PurchaseWorkZoneSigns $37,386 $0

343200 0902 15900103850 PurchaseTrafficCones $14,331 $0 343200 0902 15900103851 PurchaseBarricades $16,201 $0 343200 0902 15900103856 PurchaseShoringEquipment $17,135 $0 343200 0902 15900104901 PurchaseSolarArrowBoard $12,462 $0 343200 0902 15900315594 Purch Ergonomic Workstation & Tool $3,841 $0 343200 0902 15900327319 Purch Confined Space Entry Equip $5,509 $0

343200 0902 15900504910 Purchase Satellite Phones $51,925 $0 343200 0902 15900504912 PrchEmergencyResponseEquip $75,580 $0

343200 0902 15900504913 PurchaseConfinedSpaceMonito $20,770 $0 343200 0902 15900504914 PurchErgonomicWorkstation& $41,540 $0 343200 0902 15900504915 Prch Work Zone Safety Equipment $25,963 $0

343200 0902 15900504916 Prch Confined Space Entry Equipment $31,155 $0 343200 0902 15900504918 PrchAEDUnits&ResponseEqui $28,270 $0

343200 0902 15900507014 Upgrade CL2 Emergency Kits $13,335 $1,100

343200 0902 15900510400 Prch Work Zone Safety Equipment $36,750 $0

343200 0911 15900510770 Purchase Meltric Plug Sets $31,155 $0

343200 0901 15784002414 EquipmentforShenangoCustSe $2,307 $0

344000 0520 15714010345 Replace Analyzers - RC Plant $8,400 $0

344000 0615 15714010175 Purchase Laboratory Equipment $12,117 $0 344000 0615 15744008165 PurchaseLabEquipment-White $3,116 $0 344000 0615 15784010382 P-ProcessConlrol&AnalysisE $10,000 $0 344000 0615 15900103987 Purch Env Affairs Monitoring Equip $3,116 $0 344000 0615 15900337219 Data Loggers $6,244 $0 344000 0615 15900504075 Repl Refrigerator for Research Lab $1,869 $100

11/15/2007


30-Jun-08

APStatement No. 1 Attachment 2

Plant W/O Account Grp Activity No. ACTIVITY DESCRIPTION FTY CAP ADDS FTY CAP RETIRE 344000 0615 15900504076 Purchase Automated Shaker $1,454 $0 344000 0615 15900504077 Purchase TKN Digestion Unft $7,270 $0 344000 0615 15900504079 Mtcroscopesystemforalgaean $25,963 $0 344000 0615 15900504116 Replace Zeta Meter - Neshaminy $13,189 $1,100 344000 0615 15900504154 Replace Titrators - Bristol $6,335 $500 344000 0615 15900504272 Replace Spectrophotometer - Ridley $4,673 $400 344000 0615 15900504283 Replace Zeta Meter - Ridley $18,174 $1,500 344000 0615 15900504319 Replace Lab pH Meter - Ridley $1,064 $100 344000 0615 15900504327 Replace Jar Test Unit - Pick E $3,635 $300 344000 0615 15900506998 Prch Uninterruptible Power Supplies $2,596 $0 344000 0615 15900506999 Replace Misc Lab Equipment $6,281 $500 344000 0615 15900507000 Replace Source - Mass Spectrometer $2,077 $200 344000 0615 15900507001 LIMS Training & Upgrades $10,385 $800 344000 0615 15900507002 lonChromatographysystem $44,915 $0 344000 0615 15900507006 ReplacepH Meters-Wells $10,177 $800 344000 0615 15900507013 Repl Amperometric Titrators - Plant $16,876 $1,400 344000 0615 15900507016 Purchase Research Instrumentation $20,770 $0 344000 0615 15900507992 SterilizingOvenforMicrobiol $4,100 $0 344000 0615 15900510141 Replace pH Meters - Wells $11,760 $900 344000 0615 15900510143 Repl Damaged Instruments-Plant&Well $18,900 $1,500

344000 0615 15900510144 Replace Broken Equipment-Plants $13,650 $1,100 344000 0615 15900510574 Purchase Ammonia Distillation Unit $5,250 $0 344000 0615 15900510575 Replace IC Autosampler $5,250 $400 344000 0615 15900510576 Replace Milli-Q Water System $9,450 $800 344000 0615 15900510581 Prch Uninterruptible Power Supplies $2,625 $0 344000 0615 15900521621 Repl Damaged Instruments-Plant&Well $7,373 $600 345100 0805 15900104331 Replace Water Wagon Tk #536 $86,144 $17,200 345100 0810 15900104214 ReplaceBackhoe#546 $81,003 $16,200 345100 0810 15900104217 ReplaceBackhoe#569 $81,003 $16,200 345100 0810 • 15900104219 ReplaceBackhoe#596 $81,003 $16,200 345100 0810 15900104523 Replace Backhoe #528 $75,240 $15,000 345100 0810 15900107591 ReplaceBackhoe#SVBH-2 $78,926 $15,800 345100 0810 15900108013 UpgrdPickeringFuelTankFitt $10,385 $0 345100 0810 15900108688 UpgradeCrane-PipeTruck#58 $9,803 $0 345100 0810 15784000332 ReplaceBackhoe#SVBH2 $80,288 $6,400 346000 0715 15784004388 Telephony; Avaya - Sharon $40,651 $0 346000 0715 15900503061 Telephony; Avaya - Willow Grove $60,233 $0 346000 0715 15900503062 Telephony; Avaya - Bryn Mawr $358,283 $0 346000 0715 15900506987 Replace 2-Way Radios $2,077 $200 346000 0715 15900506988 UpgradePhoneSystem $41,770 $0 346000 0900 15900501781 CONSULTING - DATA COMMUNICATIONS $20,770 $0 346000 0900 15900503065 Power Expansion, B Mawr Phone Room $10,385 $0 346000 0900 15900507652 Contractor; Telephony $200,193 $0 346000 0900 15900510500 Network wiring $80,248 $0 347000 0520 15734003051 PrchMiscMechanicalEquipment $20,770 $0 347000 0520 15744003268 Prch Misc Mechanical Equip-Wh Haven $39,325 $0 347000 0520 15900204920 PickeringEastUpgradeModicon $20,770 $0 347000 0520 15900206877 Replace Space Heaters-Pickering $1,023 $100 347000 0520 15900304591 Repl Sump Pump Main Bldg-Neshaminy $7,737 $600 347000 0520 15900304886 Bristol UpgradeModiconEquipm $19,029 $1,500 347000 0520 15900307858 Upgrade HVAC-Bristol $16,824 $1,300 347000 0520 15900506996 ProcessControlSpareParts $51,925 $0 347000 0599 15900503466 Emergency Plans, SOP & O&M's-Plants $48,766 $0 347000 0705 15900515831 Repl Fence @ Various Well & Booster $20,770 $1,700 347000 0810 15714009405 Prch400GalStainlessSteelT $2,205 $0 347000 0900 15900503063 Fireproof Safe for Tape Storage $5,193 $0 347000 0901 15900512503 Upgrade Meter Test Benches $5,193 $400 347000 0911 15900108855 PurchaseFireHydrantRings $5,608 $0

Total $138,483,517 $4,964,352

11/15/2007


Aqua Pennsylvania, Inc.

Woodloch Pines Contract

The Woodloch Pines contract covers 4-2" meters

Take-or-Pay 1.2 Million Gals. Excess Consumption

Monthly Water Rates

Contract Tariff Rate

Rate at Present

$ 4,800.00

$4.00/1,000 Gal.

Minimum Charge

Minimum Allowance

97.50 114.50

Volumetric Charge

First 4,000 Gal.

Excess Consumption

First 10,000 Gal.

Next 23,300 Gal.

Next 300,000 Gal.

Over 333,300 Gal.

$6,494/1,000 Gal.

$5,712/1,000 Gal.

$4,763/1,000 Gal.

$4,366/1,000 Gal.

$7.80/1,000 Gal. $6.85/1,000 Gal. $5.68/1,000 Gal. $5,177/1,000 Gal.

Gallons per Month

Monthly Water Revenue & Capital Expended

Contract Tariff Rate

Rate at 6/22/06

1,500,000 6,000.00 7,110.74

1,800,000 7,200.00 8,420.54

Tariff Rate

at Proposed

" ~ 8,439.61* 9,992.71

110:5fi29Cp\Treasury\Rates\PENNSYLVANIA\2OO7 Aqua PA Rate Case\WoodlochPinesrates.xls

AP Statement No. 1 Attachment 4 i

Supplement No. 82 To Aqua Pennsylvania, Inc. Water-PA. P.U.C. No. 1

Page No. 19E

RIDER

PURCHASED WATER ADJUSTMENT

In addition to the net charges provided for in this Tariff, a [charge of 0.00%] [credit of

(0.00%)] -will apply to all bills issued, excluding public fire hydrants, on and after January 21,

2008.

I. . General Description

Purpose: The purpose of the Purchased Water Adjustment (PWA) is to

adjust customers' bills to reflect changes in the Company's cost to purchase water.

Eligible Cost Changes: Eligible cost changes are changes in the Company's

cost of purchased water that are caused by changes in the rates of non-affiliated suppliers from .

which the Company purchases water for resale to its customers.

IL Computation of the PWA

Calculation ofChanges in Purchased Water Costs: Whenever a non-afSliated

supplier changes the rates it charges for water sold to the Company for resale to the Company's

customers, the Company shall compute the change in its cost of purchased water. If the

calculation shows an increase in the Company's cost of purchased water, relative to its Baseline

Cost, the Company may file a tariff supplement setting forth a PWA charge to be included on

customers' bills to recover such increase. If the calculation shows a decrease in die Company's

cost of purchased water, relative to its Baseline Cost, the Company shall file a tariff supplement

setting forth a PWA credit to reduce customers' bills for such decrease.

Issued; November 21, 2007 Effective: January 21,2008


Supplement No! 82 To Aqua Pennsylvania, Inc. Water-PA. P.U.C. No. 1

Page No. 19F

Baseline Cost: The Baseline Cost is the annual level of purchased water

costs allowied as an operating expense in the Company's last preceding base rate proceeding.

- Baseline Consumption: The Baseline Consumption is the level of

consumption, by supplier, that formed the basis for calculating die Baseline Cost in the

. Company's last preceding base rate proceeding.

Baseline Rates; The Baseline Rates are the rates, by supplier, that formed

the basis for calculating the Baseline Cost in the Company's last preceding rate proceeding.

Computation of Change: Changes in the Company's cost of purchased water

will be calculated as follows:

(1) For each supplier whose rates have changed, the cost of purchased water

will be computed by applying the supplier's new rates to the Company's Baseline Consumption

from that supplier.

(2) For suppliers whose rates have not changed, the cost of purchased water

will be computed by applying the suppliers' Baseline Rates to die Company*? Baseline

Consumption from such suppliers.

(3) The costs computed in (1) and (2), above, will be summed to calculate the

Company's new annual cost of purchased water.

(4) The Company's new annual cost of purchased water will be compared to

the Company's Baseline Cost. If the new annual cost of purchased water is below the Baseline

Issued: November-21,2007 Effective: January 21,2008

AP Statement No.; 1 Attachment 4 \

SiqiplementNo. 82 To Aqua Pennsylvania, Inc. Water-PA. P.U.C. No. 1

Page No. 19G

Cost ("Eligible Decrease") the Company must file a new PWA reflecting a credit on customers*

bills. If the new annual cost of purchased water is above the Baseline Cost ("Eligible Increase"),

Company may, in its sole option, file a new PWA reflecting a charge on customers* bills.

Computation of PWA Credit or Charge: The PWA credit or charge will be

expressed as a percentage carded to two decimal places and will be applied to the effective

portion of the total amount billed to each customer under the Company's otherwise applicable

rates and charges,, excluding amounts billed for public fire protection service, the Distribution

System Improvement Charge C*DSIC") and the State Tax Adjustment Surcharge (ttSTAS"). To

calculate the PWA Charge or Credit, die Eligible Increase or Eligible Decrease, as applicable,

will be divided by the Company's projected applicable revenue from sales of water for a

prospective 12-month period commencing on the date the PWA Credit or Charge is to become

effective.

HI. Filings

Not more that 30 days after the effective date of any change in the rates of any

supplier whose costs are included in the Company's Baseline Cost, the Company shall file with

the Commission a computation of the change in the Company's cost of purchased water. If the

computation shows an Eligible Decrease, the Company must also file a new PWA to implement

a PWA credit on customers' bills to become effective 15 days after the filing is made, with the

Commission unless the Commission directs otherwise. If the computation shows an Eligible

Increase, Company may, in its sole option, file a new PWA to implement a PWA charge on

customers' bills to become effective 15 days after the filing is made with the Commission unless

Issued: November 21,2007 3 Effective: January 21,2008

AT statement wo. i! Attachment $

Supplement No. S2 To Aqua Pennsylvania, Inc. Water-PA. P.U;C. No, 1

Page No. 19H

the Commission directs otherwise. At the time each filing is made with the Commission, copies

thereof shall also be served upon die Office of Trial Staft the Office of Consumer Advocate and

the Office of Small Business Advocate.

IV. Safeguards

Cap im PWA Charge: A PWA charge may not exceed 3% of the amount billed to

customers under otherwise applicable rates and charges.

Audits/Reconciliation: The PWA will be subject to audit at intervals determined

by the Commission. It will also be subject to an annual reconciliation based on a reconciliation

period consisting of the twelve months ending December 31 of each year. Hie revenue increase

or decrease billed under a PWA charge will be compared to the Company's Eligible Increase or

Eligible Decrease, which shall be prorated as appropriate i f the PWA Charge or Credit was in

effect for less tTian one year. The difference between the billed revenue increase or decrease and

flie Eligible Increase or Eligible Decrease (prorated as appropriate) will be recouped or refunded,

as appropriate, in accordance with Section 13 07(e) over a one-year period commending on April

1 of each year. . ,

New Base Rates: The PWA will be reset at zero as of the effective date of new base

rates that reflect die Company's actual purchased water costs.

Customer Notice: Customers shall be notified of a PWA charge or credit or changes

in any existing PWA charge or credit by including appropriate information on the first bill they

receive following the implementation o£ or change in, any PWA charge or credit

Issued: November 21,2007 Effective: January 21,2008

AQUA PENNSYLVANIA, INC. MANAGEMENT and SERVICE FEES

PRIOR TY vs CURRENT HTY


July 2004 -June 2005

July 2006 -June 2007

Service (Aqua Services. Inc.) Accounting $1,230,057 $1,843,537 Engineering $83,287 $178,302 PA-PA CoosuUing Study $10,700 $0 Environmental Compliance $15,503 $161,871 Communications $0 $49,090 General Capital $67,648 $0 Human Resources $705,058 $971,236 Information $578,764 $714,451 Purchasing Services $0 $194,463 Legal $89,293 $166,559 Manageatent $823,054 $303,550 Officer $1,953,675 $2,932,300 Shareholder $170,027 $121,541 Capital $624,359 $1,154,861 Deferred Rate Cases ' $5,304 $929 Deferred Other $6,903 $6,387 Other $100 ($5,858)

Sundrv (Aaua Services. Inc.) $2,451,833 $2,918,687

Transfers (Aqua Ohio) $42,633 $44,406

Customer Service (Aaua Services. Inc.) (A) 4,317,049

(A) CustomerService expenses included in various other lines in 2004 to 2005, not an allocated billout based on customer count


CURRENT COMPENSATION

SUMMARY COMPENSATION TABLE

The following Summary Compensation Table shows compensation paid or earned by the Company's Principal Executive Officer, Principal Financial Officer and the'next three most highly compensated executive officers of the Company during the fiscal year ended December 31,2006.

Change in Peosfoa

Value and Non-Eqoity Non-qualified

Incentive Deferred Stock Option Plan Compensation All Other Total

Name and Salary Bonus Awards Awards Compensation Earnings Compensation Compensation Principal Position ^ Year ($)(!) ($) QQCOffl fflffXS) (mM (S)(7) <S)<8) (S)

Nicholas DeBenedictis.. * 2006 417,120 — 272,610 424,748 346,909 333,285 189,688 1,984360 Chief Executive Officer (Principal Executive

Officer)

David P. Smeltzer 2006 217,810 — 102,090 98,386 76,077 54,092 47,549 596,004 Chief Financial Officer (Principal Financial

'Officer)

Roy H. Stahl 2006 247,167 — 120,880 130,266 96398 114,803 66,833 776,347 Chief Administrative Officer and General

Counsel

Karl M. Kyriss 2006 189,215 — — 66,505 58,033 83,568 28,273 425,594 President Aqua

Mid-Atlantic

Richard R. Riegler 2006 183,361 — 6,993 66,787 39,475 54,630 34,167 ' 385,413 VP. Engineering

and Environmental Affairs

(1) Salary and Non-equity Incentive Plan Compensation amounts include amounts deferred by the individual.

(2) Amounts for stock awards represent the dollar amount recognized for financial statement reporting purposes for the-fair value of stock awards granted in 2006 as well as prior fiscal years, in accordance with SFAS 123R. These amounts reflect the Company's accounting expense for these awards and do not correspond to the actual value that will be recognized by the named executives.

The assumptions used in calculating the fair market value under SFAS 123R are set forth in the Employee Stock and Incentive Plan footnote to the Company's audited financial statements in the Company's Annual Report on Form 10-K.

(3) Amounts for option awards represent the dollar amount recognized for financial statement reporting purposes for the fair value of option awards granted in 2006 as well as prior fiscal years, in accordance with SFAS 123R. These amounts reflect the Company's accounting expense for these awards and do not correspond to the actual value that will be recognized by the named executive.-

The assumptions used in calculating the fair market value under SFAS 123R are set forth in the Employee Stock and Incentive Plan footnote to the Company's audited financial statements in the Company's Annual Report on Form 10-K. The fair value of options was estimated at the grant date using the Black-Scholes Option Pricing Model. Estimated values are based on assumptions as to such variables as interest rates, stock price volatility, dividend yield and the expected term of the options. Such assumptions are set forth in the Employee Stock and Incentive Plan footnote to the Company's audited financial statements in the Company's Annual Report on Form 10-K.

18

AP Statement No. 1 Attachment 6.

(4) Amounts are based on the the following number of shares of restricted stock taken into account pursuant to SFAS 123R in 2006 but were awarded in 2004,2005 and 2006:12,611 shares to Mr. DeBenedictis; 6,056 shares to iAi. Stahl; 4,944 shares to Mr. Smeltzer; and 444 shares to Mr. Riegler

' (5) Amounts are based on the following, number of stock options taken into account pursuant to SFAS 123R in 2006, but were awarded in 2003,2004,2005 and 2006:88,517 options for Mr. DeBenedictis; 27,222 options for Mr. Stahl; 19,991 options for Mr. Smeltzer; 12,916 options for Mr. Kyriss; and 13,669 options for Mr. Riegler.

(6) Non-Equity Plan Incentive Compensation is shown for the year in which the compensation is earned, regardless of when paid.

(7) - Includes: (a) earnings on deferred compensation that are above-market (above 120% of the federal long-term rate) of $40,440 for Mr. DeBenedictis; $1,246 for Mr. Stahl; $617 for Mr. Smeltzer; and $42 for Mr. Riegler; and (b) changes in the cash surrender value of life insurance policies under the deferred compensation plan, including $32,369 for Mr. DeBenedictis; $3,619 for Mr. Stahl; and $5,264 for Mr. Riegler. The .change in pension value is based on the aggregate change in the actuarial present.value of the named executive officer's accumulated benefit under all defined benefit and actuarial pension plans (including supplemental plans) from the pension plan measurement date used for financial statement reporting purposes in the Company's audited financial statements for the prior completed fiscal year to the pension plan measurement date used for financial statement reporting purposes in the Company's audited financial statements for the covered fiscal year.

(8) Includes: (a) dividends on restricted stock grants pending their vesting or forfeiture, including $12,268 for Mr. DeBenedictis; (b) amounts contributed by the Company to the Executive Deferral Plan representing the amount of the Company's Matching Contribution under the Company's 401(k) Plan that could not be contributed to the 401(k) Plan as a result of the Internal Revenue Code restrictions on the amount a participant can Contribute as a salary deferral to the plan; (c) dividend equivalents paid to the named executives during the year of $164,876 to Mr. DeBenedictis; $53,348 to Mr. Stahl; $26,313 to Mr. Smeltzer; $20,860 to. Mr. Kyriss; and $25,902 to Mr. Riegler; (d) the premiums on group term life insurance benefits for the named executives; and (e) Company Matching contributions to the Company's 401(k) plan.

Dividends on shares of restricted stock pending the release of the stock from restrictions are paid to the grantee and these amounts are included in the All Other Compensation column set forth above. Amounts deferred by participants in the Company's Executive Deferral Plan earn interest at the rate of the prime rate plus 1% or may be used to purchase life insurance under a flexible premium universal life insurance policy, with any cash value under such policies being invested in a variety of investment funds offered by the insurance carrier under the policy.. The above-market eamings.on deferred compensation included in the Change in Pension Value.and Non-Qualified Deferred Compensation Earning column are computed based on the basis of increases in the cash value of the insurance policies held under the Plan and the interest earned in any month during which the average interest rate at the prime interest rate plus 1% exceeded 120% of the average of the federal long-term rate for that month.

19


B. ACQUISITION OF THE ASSETS

9. The Assets to be acquired by Aqua are described in Schedule 1.1 of the

attached Agreement. The PWSID number for the Lakeside system is PA6200014, and

on March 13, 2007, the Department of Environmental Protection's website (at

ihttp://www.drinkingwater.state.Da.us/dwrsbroker/broker.exe) reflected that the two (2)

Lakeside wells both had pumping capacities and safe yields of 144,000 GPD and

432yOOO-GPD, respectively. "Survey Information" for the Assets indicated average

delivery, maximum delivery and design capacities of 17,000 GPD, 22,000 GPD, and

106,000 GPD, respectively, and total storage of 2,000 gallons. The Assets are .

currently interconnected with Aqua's Oakland Beach system.

10. The purchase price is Two-hundred fifty thousand ($250,000.00.) dollars.

11. Lakeside and Aqua are not affiliated with each other. The purchase price

was based on arms' length negotiations. Aqua will use cash on hand or obtained

through established credit arrangements to pay the purchase price for the Assets.

C. THE COMMENCEMENT BY AQUA OF WATER SERVICE TO THE PUBLIC IN THE REQUESTED TERRITORY

12. As part of Aqua's acquisition of the Assets, Aqua is seeking the right to

serve the Requested Territory.

13. Upon completion of the proposed acquisition of the Assets by Aqua,

Lakeside will cease having ownership responsibility of the Assets.

14. Upon Commission approval of this Application and completion of the

proposed transaction, Aqua will begin to provide water service in its own name to the

customers in the Requested Territory. The Rules and Regulations that will govern the

AP STATEMENT NO. 2



Docket No. R-00072711

DIRECT TESTIMONY OF DAVID P. SMELTZER

With Regard To The Acquisition Of Certain Smaller Water Systems, Aqua Pennsylvania's

Proposed Capital Structure And Return On Equity Considerations

November 21, 2007

l-PH/2793841.1

AQUA PENNSYLVANIA, INC. DIRECT TESTIMONY OF DAVID P. SMELTZER

I. INTRODUCTION AND SCOPE OF TESTIMONY

2 1. Q. What is your name and business address?

3 A. David P. Smeltzer. My business address is 762 W. Lancaster Avenue, Bryn Mawr,


5 2. Q. By whom are you employed and in what capacity?

6 A. I am employed by Aqua America, Inc. as Chief Financial Officer ("CFO")- I am also

7 Senior Vice President Finance & CFO of Aqua Pennsylvania, Inc. ("AP" or the

8 "Company").

9 3. Q. Please summarize your educational background and business experience.

0 A. I graduated from La Salle University in 1980 with a Bachelor of Science degree in

11 Business Administration, majoring in Accounting, and received my C.P.A. Certificate

12 from the Commonwealth of Pennsylvania in 1982. I was employed by KPMG Peat

13 Marwick, Certified Public Accountants ("KPMG'O, from June 1980 until March

14 1986, when I joined Philadelphia Suburban Water Company ("PSW"), the corporate

15 predecessor to AP. While employed by KPMG, I worked initially as a Junior

16 Accountant, advancing thereafter to Senior Accountant and Manager. My

17 assignments varied, including financial, manufacturing and public utility clients. I

18 was hired by PSW as Controller, was promoted in 1991 to Vice President Rates &

19 Regulatory Affairs, and in 1999 to my present position. In these capacities, I have a

0 broad base of experience in the utility finance and regulatory areas.

l-PH/2793841.1


'1 4. Q. Are you a member of any professional organizations?

2 A. Yes, I am a member of the American Institute of Certified Public Accountants, the

3 Pennsylvania Institute of Certified Public Accountants, and the National Association

. 4 of Water Companies ("NA WC"). I am past Chairman of the Pennsylvania Chapter of

5 the NAWC, its Rates & Revenue Committee and the NAWC's Rates & Revenue

6 Committee.

7 5. Q. Have you testified previously on behalf of the Company?

8 A. Yes. I have testified before the Commission on numerous prior occasions, including

9 base rate proceedings spanning nearly the past twenty years.

6. Q. What is the purpose of your testimony?

11 A. The purpose of my testimony is as follows: (1) to explain and support the derivation

12 of certain of the Company's rate base and expense claims in this proceeding relating

13 to the acquisition of smaller water companies; (2) to describe the Company's

14 proposed capital structure; and (3) to recommend the appropriate return on equity to

15 be utilized in this proceeding in light of the analysis of Mr. Paul R. Moul (AP

16 Statement No. 4) and other considerations.

17 II. ACQUISITION OF SMALLER SYSTEMS

18 7. Q. Mr. Smeltzer, has AP acquired any smaller water systems since its last rate

19 proceeding at Docket No. R-00051030?

l-PH/2793841.1


A. Yes, it has. In fact, AP has taken over and is now operating eight systems that were

2 not included in its claimed revenue requirement in that case. Moreover, we expect to

3 close on several other systems during the balance of 2007 and the first half of 2008.

4 8. Q. Please characterize the nature of the service being provided by these systems at

5 the time of their acquisition by the Company.

6 A. In virtually all instances, the owners lacked the technical expertise and/or financial

7 resources needed to provide safe, adequate and reliable water service. Some systems

8 were plagued by water quality problems; others frequently experienced water

9 . shortages. Stated simply, service, in my judgment, was inadequate.

0 9. Q. Did the Company have to pay a "premium" to acquire these systems?

11 A. Yes and no. In some cases, we paid an amount more than the depreciated original

12 cost (DOC) of the assets in question; in others, we paid less than DOC.

13 10. Q. How does the Company propose to treat these acquisitions for rate purposes?

14 A. Consistent with Section 1327 of the Public Utility Code, we have booked DOC in the

15 case of systems acquired at less than DOC and have amortized the difference between

16 DOC and purchase price as an offset (i.e. reduction) to revenue requirement. These

17 amortizations, or "negative" acquisition adjustments, are listed on page 34 of Exhibit

18 1-A and are discussed further by Mr. Griffin (AP Statement No. 1). Where we paid

19 more than book value, we have requested a return on and return of purchase price.

l-PH/2793841.1


1 11, Q, Section 1327 enumerates certain criteria that an acquiring company must meet

2 in order to include an acquisition "premium" in rate base. Do you believe that

3 the acquisitions for which you propose "positive" acquisition adjustment

4 treatment satisfy those criteria?

5 A. Yes, I do. The four specific acquisitions falling into the "positive" acquisition

6 adjustment category, as well as the proposed amortization of premiums associated

7 therewith, are set forth on page 33 of Exhibit 1-A. Appendix A to my testimony

8 . consists of a series of schedules which describe how each of the four acquisitions

9 (Garbush, CS Water, Country Club Gardens and Lakeside Acres) satisfies the

10 requirements of Section 1327.

1 12. Q. How did AP determine the DOC of the various systems acquired since its last

12 case?

13 A. We carefully reviewed the books and records of the acquired companies and

14 conducted physical investigations of the facilities in service. The results of those

15 analyses were documented in the form of original cost studies, which were previously

16 filed with the Commission and served on the Offices of Trial Staff, Consumer

17 Advocate and Small Business Advocate. Copies of those studies are also being

18 submitted with this rate filing as AP Exhibit 3-A.

l-PH/2793841.1


III. CAPITAL STRUCTURE RATIOS

2 13. Q. Mr. MouPs proposed rate of return, as set forth in Exhibit 4-A, is based on a

3 projected future test year-end capital structure consisting of 49.2% long-term

4 debt and 50.8% common equity. How were these figures derived?

5 A. Consistent with past practice, the starting point was the Company's actual

6 capitalization at the end of the historic test year. The respective amounts of long-term

7 debt and common equity at June 30, 2007 were then adjusted to reflect anticipated

8 changes during the future test year. In sum, AP's total permanent capitalization is

9 expected to increase by approximately $142 million, or 12.1%, over that period.

10 14. Q. What accounts for that increase?

11 A. Several factors. AP's long-term debt balance is anticipated to grow by about $70.3

12 million as the result of the issuance of new and the retirement of existing debt series.

13 The net effect of these financings is a reduction in the Company's embedded long-

14 term debt cost rate from 5.97% to 5.88%. The Company's common equity is

15 projected to increase by a nearly identical amount, i.e. $71.4 million, by virtue of

16 common equity infusions from its parent, Aqua America, totaling $45.0 million and

17 future test year retained earnings of $26.4 million. Details regarding all of these

18 changes are provided on Schedule 5 of Exhibit 4-A.

19 15, Q. How do AP's claimed capital structure ratios compare to its actual capital

20 structure at the end of the historic test year?

1 A. As illustrated on page 71 of Exhibit 1-A, they are essentially the same.

M,I-L'279384I,l


1 IV. RETURN ON EQUITY CONSIDERATIONS

2 16. Q. Please explain how the Company derived its requested equity allowance in this

3 filing.

4 A. In AP Statement No. 4, Mr. Moul has recommended a range of 11.25% to 11.75% for

5 the cost of equity. I have chosen to utilize 11.75%, or the top of Mr. Moul's

6 recommended range, for this proceeding.

7 17. Q. Please explain why you believe the Company is entitled to an equity return at the

8 top of Mr. Moul's range.

9 A. For many years, AP has provided its customers with excellent water service at

0 reasonable rates. This has not come about by accident, but instead is the product of a

11 dedicated and knowledgeable workforce which is constantly seeking to improve

12 quality and control costs. To this end, the Company has accepted the challenge of

13 acquiring troubled or weaker water systems in an effort to promote the Commission's

14 goal of water supply regionalization and has implemented a program to facilitate the

15 payment of water bills by its low income residential customers. AP is an

16 acknowledged leader in the water utility industry and, in my opinion, its exemplary

17 performance should be recognized through the equity return rate authorized in this

18 proceeding. Indeed, this type of incentive should further induce the Company to

19 continue to seek out ways of providing better service and encourage other utilities to

20 do the same.

l-PH/2793841.1


1 18. Q. Could you be more specific with respect to the measures undertaken by the

2 Company which you believe should enter into the Commission's determination

3 of an appropriate equity return rate?

4 A. Certainly. In my view, the Company's performance in the following areas fully

5 supports a return at the top of the range:

6 1. Water Quality. Long before there ever was a Safe Drinking Water Act

7 ("SDWA"), much less the 1986 and 1996 amendments to that statute, AP

8 provided full treatment and filtration of its surface water supplies. In fact, the

9 Upper Merion Plant, which was completed in 1993, was the only facility AP

10 was required to construct to comply with the SDWA and that project was

| l made necessary only after the Upper Merion source of supply, a groundwater-

12 fed limestone quarry, was declared under the influence of surface water by the

13 DER. As a result of that determination, the Company was required to provide

14 additional chemical treatment and dual media filtration at Upper Merion even

15 though an established system of purification (by means of micro-strainers and

16 chlorination) was already in place. As a consequence, AP customers have

17 long enjoyed a safe water supply and have been spared the large rate increases

18 that are necessary to support more recently constructed filtration facilities. AP

19 is in compliance with all existing Federal and State drinking water standards.

20 In addition, customer complaints regarding the taste, odor or appearance of

21 the Company's product have been minimal. I believe this attests to the

ongoing commitment of AP's management to the safety and quality of the

l-PH/27938<il.I 7


1 product it delivers to its customers. It is this same commitment to quality that

2 has AP allocating significant capital resources to the rehabilitation of its

3 infrastructure.

4 2. Cost Containment. The Company continually looks for ways to control

5 operating costs. While the acquisitions over the past several years have

6 contributed to the overall gains in productivity, there has also been a

7 conscious effort by management to review staffing needs and operating

8 procedures with the purpose of improving service while controlling costs. To

9 this end, AP performs a strategic review of its workforce complement and key

10 cost drivers at least annually (more frequently in certain areas).

11 The Company has also taken advantage of refinancing opportunities and

lowered interest rates on its long term debt from a weighted cost of 8.5% at

13 year end 1994 to 5.88% as proposed in this filing. In addition, through its

14 parent. Aqua America, the Company has implemented an extremely

15 successful Customer Stock Purchase Program which has kept the costs of

16 raising equity capital to a minimum. At present, a substantial amount of Aqua

17 America's stock is owned by AP customers.

18 3. Reasonable Rates. As the result of its cost containment efforts and quality

19 management, AP has been able to keep its rates affordable, notwithstanding a

20 tremendous investment in new and replacement plant in the past several years.

21 The Company's reasonable rates have been cited by Standard & Poors as one'

of the Company's strengths.

l-PH/2793841.1


1 4. Customer Service. For many years, AP has provided its customers with a

2 high level of customer service. In recent years, AP created a new and

3 expanded management team in its customer service department, including a

4 new Vice President, Manager and Supervisor. These individuals, through a

5 combination of new technological and management initiatives, have further

6 improved the Company's customer service operations, addressing and

7 improving (1) many of its key call center statistics (2) overdue accounts

8 receivable and (3) bad debt expense. Continuing a long history of excellence,

9 AP's customer service operations continually strive for the highest level of

10 performance.

5. Acquisition of Troubled or Weaker Water Systems. In the last 15 years,

12 AP has acquired many water supply systems previously operated by municipal

13 entities or private companies. While several of these systems were included

14 on the Commission's "ripe" water company list, many others exhibited

15 problems that would have put them in this category in the near future. Upon

16 acquiring these systems, AP made immediate improvements in quality, supply

17 and customer service. At the same time, existing customers have enjoyed the

18 benefits of improved efficiency and the spreading of fixed costs over a larger

19 customer base. From a more macro viewpoint, the regionalization of water

20 systems will allow for consistent, reliable water service, which, in turn,

21 improves the economics and quality of life of the region. The Company

22 intends to continue to acquire systems and provide solutions to the long-term

23 water supply requirements of an even larger portion of Pennsylvania.

l-PH/2793841.1 9


1 • Attached hereto as Appendix B is a sampling of customer letters and recent

2 newspaper clippings regarding AP's exemplary service to newly acquired

3 customers.

4 6. A Helping Hand - Low-Income Customer Assistance Program. AP

5 implemented a program in 1994 designed to facilitate the payment of water

6 bills by its low income residential customers. This program is called A

7 Helping Hand. It is the first program of its kind offered by any investor-

8 owned water utility in Pennsylvania and has been looked at as a model by

9 other utilities. This program provides water audits, appropriate repairs where

10 necessary and, upon the identification of qualified customers, the partial

^ 1 1 forgiveness of prior arrearages.

12 7. Infrastructure Rehabilitation. Over ten years ago, AP embarked on a

13 substantial capital program intended to ensure long-term viability of its

14 underground piping infrastructure through significant annual investments in

I15 infrastructure rehabilitation (main replacements and main cleaning and

1'6 lining). Having previously rehabilitated less than 0.1% of its infrastructure on

17 an annual basis, the Company was on a schedule to rehabilitate its aging

18 system over approximately 1,000 years. Recognizing that the life of pipe

19 approximated 100 years, it was imperative that the infrastructure that was

20 installed during the Company's first 100 years of service be replaced during

21 its second 100 years of service. Since that time, AP has dramatically

increased its infrastructure rehabilitation program to the point where it now

l-PH/2793841.1 10


1 meets or occasionally exceeds its 1% annual rehabilitation target. Unlike

2 numerous other water systems in the country, AP has positioned itself well to

•3 ensure continuity of service through a sound utility infrastructure for the

4 foreseeable future.

5 The foregoing programs confirm the Company's determination to provide its customers

6 with the highest quality service at the lowest possible price and should be taken into account by

7 the Commission in establishing the appropriate equity return.rate in this case.

8 V. CONCLUSION

9 19. Q. Mr. Smeltzer, please summarize why you believe the Commission should grant

10 the Company's requested rate increase.

h A. Only with the approval of an adequate ROE can the Company hope to continue to

12 address the formidable tasks of rehabilitating its infrastructure, acquiring and

13 repairing troubled systems, and maintaining quality service. The Commission has

14 given clear signals that service quality is a critical component in establishing rates.

15 The Commission should now give a signal that it is prepared to assist utilities in

16 maintaining excellent service quality by approving AP's requested rate increase.


18 A. Yes. it does.

l-PH/2793841.1 1 1

Appendix A To AP Statement No. 2

Schedule 1

SATISFACTION OF THE CRITERIA ESTABLISHED BY §1327(A) FOR INCLUDING IN RATE BASE A POSITIVE ACQUISITION ADJUSTMENT

Garbush Water Company

Section 1327(a) Criteria Satisfied (Y/N)

Explanation

(1) the property is used and useful in providing water or sewer service;

Yes On October 19, 2005, Aqua Pennsylvania ("Aqua") acquired the water System Assets ("Assets") of Garbush Water Company ("Seller"), which was a public utility regulated by the PUC. Both before and after the acquisition, the Seller's Assets were used and useful in providing water service.

(2) the public utility acquired the property from another public utility, a municipal corporation or a person which had 3,300 or fewer customer connections or which was nonviable in the absence of the acquisition;

Yes Prior to Aqua's acquisition of Seller's Assets, Seller was providing water service to 80 customers in Jackson Township, Luzerne County, Pennsylvania.

l-PH/2314643.1

(3) the public utility, municipal corporation or person from which the property was acquired was not, at the time of acquisition, furnishing and maintaining adequate, efficient, safe and reasonable service and facilities, evidence of which shall include, but not be limited to, any one or more of the following:

(i) violation of statutory or regulatory requirements of the Department of Environmental Resources or the commission concerning the safety, adequacy, efficiency or reasonableness of service and facilities;

(ii) a finding by the commission of inadequate financial, managerial or technical ability of the small water or sewer utility;

(iii) a finding by the commission that there is a present deficiency concerning the availability of water, the palatability of water or the provision of water at adequate volume and pressure;

(iv) a finding by the commission that the small water or sewer utility, because of necessary improvements to its plant or distribution system, cannot reasonably be expected to furnish and maintain adequate service to its customers in the future at rates equal to or less than those of the acquiring public utility; or

(v) any other facts, as the commission may determine, that evidence the inability of the iina?f 'wJafer or sewer utility to furnish or maintain adequate, efficient, safe and reasonable

Yes Seller's source of supply consisted of two (2) wells. The Seller's distributions system, which consisted of dual 2" plastic and galvanized steel pipes (one on each side of the roads), could not be flushed because of a lack of valves in the system. As a result, dirty water complaints were received from customers. The Seller's well station was also deficient in that the roof of the building was in dilapidated condition and jeopardized the treatment equipment located inside.

(4) reasonable and prudent investments will be made to assure that the customers served by the property will receive adequate, efficient, safe and reasonable service;

Yes Since acquiring Seller's Assets, Aqua has installed three (3) two-inch (2") blow-off valves in order to be able to efficiently flush the system and respond to customer concerns on water quality. Aqua has also replaced the roof of the well station to ensure the structural integrity of the building and the reliability of the treatment equipment housed inside. Aqua also replaced its meters on customer service lines and installed a chemical feed pump at the well station.

(5) the public utility, municipal corporation or person whose property is being acquired is in agreement with the acquisition and the negotiations which led to the acquisition were conducted at arm's length;

Yes Aqua and Seller entered into an Assets Purchase Agreement dated March 21, 2005, which was negotiated at arm's length. On May 10, 2005, Aqua and Seller filed a Joint Application with the PUC requesting the approvals necessary for the proposed transfer. By Order entered August 15, 2005 at Docket Nos. A-210104F0061 and A-211035F2000, the PUC granted the approvals requested in the Joint Application.

(6) the actual purchase price is reasonable; Yes The purchase price for Seller's Assets was $100,000 and was

negotiated at arm's length. The purchase price represents an investment by Aqua of $1,250 per customer, which is significantly lower than Aqua's average investment per customer based upon its depreciated original cost of utility plant in service.

(7) neither the acquiring nor the selling public utility, municipal corporation or person is an affiliated interest of the other;

Yes The Seller is not an affiliated interest of Aqua.

l-PH/2314643.1

(8) the rates charged by the acquiring public utility to its pre-acquisition customers will not increase unreasonably because of the acquisition; and

Yes The proposed annual amortization of $56,100 for the four systems in question represents less than 0.02% of the Company's proposed revenue requirement. See also item (6), above.

(9) the excess of the acquisition cost over the depreciated original cost will be added to the rate base to be amortized as an addition to expense over a reasonable period of time with corresponding reductions in the rate base.

Yes The excess of the acquisition cost .over depreciated original cost has been included in Aqua's rate base claim in this case and will be amortized over 20 years commencing on the date new base rates become effective.

l-PH/2314643.1


Schedule 2


CS Water and Sewer Associates


Explanation


Yes On January 20, 2006, Aqua Pennsylvania ("Aqua") acquired the Water System Assets ("Assets") of CS Water and Sewer Associates ("Seller"). Both before and after the acquisition, the Seller's Assets were used and useful in providing water service.


Yes Prior to Aqua's acquisition of Seller's Assets, Seller was providing water service to 965 customers in Lackawaxen Township, Pike County, Pennsylvania

I-PH/2314643.1

(3) the public utility, municipal corporation or person from which the property was acquired was not, at the time ,of acquisition, furnishing and maintaining adequate, efficient, safe and reasonable service and facilities, evidence of which shall include, but not be limited to, any one or more of the following:





(v) any other facts, as the commission may determine, that evidence the inability of the fertaff v afer or sewer utility to furnish or maintain adequate, efficient, safe and reasonable

Yes Seller's source of supply consisted of five (5) wells, although only three (3) were permitted, and at the time of the acquisition, the system was being served by one (1) of the wells that was not permitted. All of these wells have low yields that were insufficient to meet the demands of Seller's customers during peak periods, especially weekends, and water outages were experienced on a regular basis. Deficiencies also existed in the electrical services to the well houses, the pump controls and the chlorination equipment. The Seller's storage was also in poor condition and at a location that could not hydraulically provide service to some of the homes at the highest elevations. The tank also had a serious deficiency in that its roof vent was missing which left an open portal on the top of tank. The Seller's distribution system was also problematic, having several leaks that required immediate repair, numerous valves to be replaced, and blow-offs to be installed.

See also the Settlement Agreement attached to the PUC's Order entered October 6, 2005, at Docket Nos. A-210104F0055 and A-210667F2000. In the Order it was noted that Seller was not in compliance with the PUC's rules and regulations requiring universal metering since prior to 2000. The Masthope Mountain Community Property Owners Council ("POC") supported this settlement to ensure that the "inadequate service and poor condition of [Seller's] facilities" would be addressed through the list of improvements which were outlined at Appendix A of the Settlement Agreement. The Office of Consumer Advocate ("OCA") also supported this settlement in similar fashion.


Yes Since acquiring Seller's Assets, Aqua has conducted several water audits to find and repair leaks throughout the distribution system, severed a connection to a un-permitted well, constructed an interconnection with an adjoining system to alleviate the storage and quantity deficiencies, made numerous electrical improvements to the well stations, replaced chlorination equipment, inspected and made repairs to the Seller's storage tank, and is currently in the process of replacing numerous pressure reducing stations and adding SCADA controls.


Yes Aqua and Seller entered into an Assets Purchase Agreement dated October 29, 2004, which was negotiated at arm's length. On January 12, 2005, Aqua and Seller filed a Joint Application with the PUC requesting the approvals necessary for the proposed transfer. In connection with the filing of the Joint Application, the Masthope POC and OCA filed protests on February 11, 2005 and February 14, 2005, respectively. On September 23, 2005, Aqua, Seller, Masthope POC and OCA filed a Settlement Agreement which was subsequently attached to the PUC's Order entered October 6, 2005, at Docket Nos. A-210104F0055 and A-210667F2000, wherein the PUC granted the approvals requested in the Joint Application.

(6) the actual purchase price is reasonable; Yes The total purchase price for Seller's Assets was $1,400,000 and

was negotiated at arm's length. The purchase price represents an investment by Aqua of approximately $1,450 per customer, which is significantly lower than Aqua's average investment per customer based upon its depreciated original cost of utility plant in service.

1-Phl/2314643.1




Yes The proposed annua! amortization of $56,100 for the four systems in question represents less than 0.02% of the Company's proposed revenue requirement. See also item (6), above.


Yes The excess of the acquisition cost over depreciated original cost has been included in Aqua's rate base claim in this case and will be amortized over 20 years commencing on the date new base rates become effective.

l-PH/23i4643.1


Schedule 3


Country Club Gardens Water Company


Explanation


Yes On November 29, 2006, Aqua Pennsylvania ("Aqua") acquired the Water System Assets ("Assets") of Country Club Gardens Water Company ("Seller"), which was a public utility regulated by the PUC. Both before and after the acquisition, the Seller's Assets were used and useful in providing water service.


Yes Prior to Aqua's acquisition, Seller was providing service to 416 customers in Lower Macungie, South Whitehall and Salisbury . Townships, Lehigh County, Pennsylvania

l-PH/2314643.1


Yes Seller's sources of supply consisted of a total of nine (9) wells for the three (3) independent systems. The Country Club Gardens system was served by three (3) wells, however, one of those wells is not permitted and not in operation. The Maple Hills system has two (2) wells and the Spring House Farms system is served from four (4) wells. All of the systems have deficiencies identified by PA DEP. Most notably are deficiencies in storage. The Country Club Gardens and Spring House Farms systems are served from non-pressurized tanks that are buried, substandard in terms of PA DEP and general industry design standards. The Maple Hills system has less than the required average day demand in storage. All three systems are reliant on electrical power to deliver water to the distribution system, yet none have emergency generators that would prevent water outages during periods of power failure. It should also be noted that many of the wells serving these systems are located within confined spaces, below grade, and within well stations that are in very poor structural condition.

l-PH/23t4643.1



(iii) a finding by the commission that there is a present deficiency concerning the availability of water, the palatability of water or the provision of water at adequate volume and pressure:


(v) any other facts, as the commission may determine, that evidence the inability of the small water or sewer utility to furnish or maintain adequate, efficient, safe and reasonable service and facilities;

l-PH/2314643.1-


Yes Since acquiring Seller's Assets, Aqua has conducted research in order to prepare system maps, which did not exist at the time of Aqua's acquisition of the systems. Aqua has also completed alternative analyses and preliminary designs on each of these systems in order to determine the most feasible ways to bring these systems up to PA DEP design standards.


Yes Aqua and Seller entered into an Assets Purchase Agreement dated July 31, 2005, which was negotiated at arm's length. On September 16, 2005, Aqua and Seller filed a Joint Application with the PUC requesting the approvals necessary for the proposed transfer. By Order entered October 20, 2006 at Docket Nos. A-210104F0066 and A-210620F2000, the PUC granted the approvals requested in the Joint Application.

(6) the actual purchase price is reasonable; Yes The purchase price for Seller's property was $100,000 and was

negotiated at arm's length. The purchase price represents an investment by Aqua of approximately $240 per customer, which is significantly lower than Aqua's average investment per customer based upon its depreciated original cost of utility plant in service.



I-PH/2314643.1



(9) the excess of the" acquisition cost over the depreciated original cost will be added to the rate base to be amortized as an addition to expense over a reasonable period of time with corresponding reductions in the rate base.

Yes The excess of the acquisition cost over depreciated original cost has been included in Aqua's rate base claim in this case and will be authorized over 20 years commencing on the date new base rates become effective.

l-PH/2314643.1


Schedule 4


Lakeside Acres Water Company


Explanation

(i) the property is used and useful in providing water or sewer service;

Yes Aqua Pennsylvania ("Aqua") plans to acquire the Water System Assets ("Assets") of Lakeside Acres Water Company ("Seller"), which was a Pennsylvania non-profit corporation, before year-end 2007. Both before and after the pending acquisition, the Seller's Assets were used and useful in providing water service. Seller's Assets are interconnected with Aqua's Oakland Beach system, which was on former Commissioner Shane's list of potentially troubled systems.


Yes Prior to Aqua's pending acquisition, Seller was providing service to 173 customers in Sadsbury Township, Crawford County, Pennsylvania.

I-PH/2314643.1


Yes Seller's sources of supply consist of two (2) wells. Seller has no plans to replace its Certified Operator. Distribution mains within Seller's system consist of 4" and 6" transite and PVC lines that will need to be replaced in the future. The 2,000 gallon buried pressure tank is in poor condition with the exterior being badly corroded. The system lacks an emergency generator power and depressurizes in event of a power outage. The Seller lacks access to sufficient funds to make these necessary improvements.

l-PH/2314643.1 4

(0 vioiation of statutory or regulatory requirements of the Department of Environmental Resources or the commission concerning the safety, adequacy, efficiency or reasonableness of service and facilities;




(v) any other facts, as the commission may determine, that evidence the inability of the small water or sewer utility to furnish or maintain adequate, efficient, safe and reasonable service and facilities;

l-PH/2314643.1

•


Yes Upon acquisition of Seller's Assets, Aqua will cause the emergency interconnection between Seller's system and Aqua's Oakland Beach system to become a permanent interconnection in the event that either system experiences any quality, quantity, or operational issues. This permanent interconnection will eliminate Aqua's need to fund, develop, construct and place into service a second well and treatment facilities within its Oakland Beach system; which Aqua estimates would have cost in excess of the purchase price for Seller's Assets. The pennanent interconnection will also provide Oakland Beach finished water storage to the Lakeside system.


Yes Aqua and Seller entered into an Assets Purchase Agreement dated February 11, 2007, which was negotiated at arm's length. On March 23, 2007, Aqua filed an Application with the PUC requesting the approvals necessary for the proposed transfer. By Order entered July 11, 2007 at Docket No. A-210104F0079 the PUC granted the approvals requested in the Application.

(6) the actual purchase price is reasonable; Yes The purchase price for Seller's property was $250,000 and was

negotiated at arm's length. The purchase price represents an investment by Aqua of approximately $1,445 per customer, which is significantly lower than Aqua's average investment per customer based upon its depreciated original cost of utility plant in service. The purchase price is also estimated to be less than the cost to fund, develop, construct and place into service a much needed second well and treatment facilities within its Oakland Beach system.

(7) neither the acquiring nor the selling public utility, municipal corporation or person is an


l-PH/2314643.t

affiliated interest of the other;

I-PH/2314643.1




Yes The excess of the acquisition cost over depreciated original cost has been included in Aqua's rate base claim in this case and will be authorized over 20 years commencing on the date new base rates become effective.

I-PH/2314643.1

^-Â %uMu^ (UU^

0 ise fs ml yoUjjmA- to yv^Ls ^

fen, and to ail f/zof areajar oj

even as many as tRe Jiord our god shall call. SXcts 2:39

Appendix B

'Rejoicing in Cjod^s great and-precious promises

tfiis Cfiristmas,

y/7 / f ^

Message Page 1 of 1 !

Appendix B Maenza, Terry M. ••

Subject: FW: ATTN: Nicholas Di Benedictus CEO I l i

From: Wilkins, Eileen [mailto:[email protected]] Sent: Fri 11/10/2006 4:01 PM • i To: custserv Cc: Roberts, Tom; [email protected] Subject: ATTN: Nicholas Di Benedictus CEO .

Good day Nicholas, i We are neighbors and customers of yours who live on the Crum Creek reservoir. This past summer I was in j contact w/your company because I noticed one of your pipes leaking into our yard. I took this opportunity to also connect w/you folks about our collective problem w/the Canadian geese. Tom Roberts addressed the water leak immediately introduced me to Craig Marleton. .

Craig was helpful, polite and shared his wise perspective on dealing w/the nuisance. During our conversation I mentioned a loss we suffered because of some brutal storms over July 4th of this year. Our canoe was blown into the water and disappeared. This was especially sad as this canoe means'a great deal to us as we take it on \ family vacations and are not in the financial position to replace it 1 asked Craig to please contact me if indeed he saw it during his time in the field and around the reservoir. He kindly agreed to keep a watchful eye. j

Our prayers were answered this week as the recent storms apparently jarred the fiberglass canoe out from its j hiding spot. It appeared upside down and stuck to the sandy bank out in the middle of the water about 100 feet 1

from land. As happy as my husband and I were to see the canoe, we were faced w/a huge problem of how to \ get .ft. We surmised that wading into the water would not be a viable plan as we may not safely return ourselves and the canoe to the land. So I called the only person that thought could help us, Craig.

Like us, Craig was surprised that the canoe surfaced again and agreed to do his best to recover the canoe from j sitting in your "product". We offered the lost and found reward we set aside for the recovery and Craig completely dismissed it as he would simply be glad to help, if indeed he couid. Today, Craig called me to i confirm that his efforts were successful and our canoe is back in our possession! j

i

Our friends and colleagues delight in this story and the fact that Aqua PA took this matter on and returned our 1

property to us. Its uncommon to encounter such a positive response in business and Craig is an outstanding representative of your good company. I'm grateful to his professional consideration and personal commitment to do right by us as a customer and neighbor. Craig exemplifies all the best qualities a company would hope to have in a great employee.

i

With gratitude, Eileen 1

s

11/14/2006

Appendix B

' 360 Clover Lane .ShavcrtownÂ 18708-9685

A s October 2006

Aqua Pennsylvania, Inc. 50 East 'Woodhaven Drive White Haven, PA 18661

Gentlemen,

The first thing on my mind is THANK YOU. We have lived in the Midway ManoLêa for 21 years and finally we have a water company that not only does 'somerthing, they do it right

Wc had our main water lines replaced a few years back. The drainage through our back yards was terrible. A few of us complained, Your company sent a representative to discuss the problem with us. A few months later, when the weather was better, the problem was corrected and we have not had a problem since.

This past spring and summer you had service crews install new water lines and fire hydrants on Manor Drive and Dug Road. The crews were very professionals and "courteous. They left Manor Drive looking better than when they started. The fire hydrants are greatly appreciated by everyone.

. Your, company capped off the well that we were connected to on Crane Road. At first 1 was skeptical about transferring our side of Harris Hill Road to the Midway Manor well. [ I was very wrong. Our water quality and tfie water pressure have never been better. 1 j used to replace my. whole house water filler once every 2 monthB. Now I change it twice .' a year. In 6 months, it does not get nearly as dirty as it used, to get in 2 months.

Now that I gave all the kudos that I can think of right now, I have a suggestion. . We traveled through North Carolina this past summer and saw quite a few interesting water towers- A few had the cities names painted on them in attractive colors. Some had

• the local high.school name and insignia in the school colors. The most interesting one was painted like a bowl of ripe apples. You could see it for miles because of the flat . landscape. Everyone in our caravan heading to the beach had comments about all the water towers especially the apple bowl. I should have taken pictures of it but it always brings a smile when I think of it . . *

Appendix B

Your company has built a new water tower on a local mountain. We can. sec it through the trees and occasionally while driving in the Back Mountain. Since you are going to paint it anyway, wouldn't it be great for the area to give it some pizzazz. I do not have any great suggestions for painting the tower except a nice picture of my Mustang or of another vintage Mustang or Corvette (excuse me, I like cars). Even your Company's logo and colors with something relating to the Back Mountain would give the area something Lo he proud of. The tower already looks cool rising above the trees.. You have an opportunity to make it outstanding.

Thank you for taking the time to read my comments.

Sincerrely9

Appendix B'

Scranton Times Tribune October 22,2007

Pike projects to cost nearly $1 million

BY MEGAN REHER . STAFF WROER

' LACKAWAXEN TOWNSHIP" —Eeeping up frith the growth in Pike County, Aqua Pennsylvania Inc. has'neariy $1 mil-lioirin upgrades plaimed for two nearby residential developments. The upgrades', will affect about 5,4"D0 residents in Fawn Lake Forest.and Masthope POC.

Fawn Lake Forest will see $450,000 worth of upgrades. Including a new well, well station and. about 2,000 feet of pipe, said Terry Maenza, Aqua spokesman.

The company's $500,000

upgrade at Masthope, he said,' will make water pressure uniform across the development It also includes installing a "centralized data control system" that will allow Aqua to remotely moni tor the Masthope system from the company's Hawley. site, Mr, Maenza said.'

• The upgrades for both developments shouldhe irraffect by Spring. Mr. Meanza said the company does not anticipate any service mterruptions during the work."

"It will absolutely enhance the quality of the system of Masthope " said Janet Marsh, Masthope office manager. AqUa.said'there are.about 3,200 residents in Masthope. Ms. Marsh said there currently are 1,200 developed lots and 400.undeveloped lots of poten-.

. tial growth in title community Aqua planed the upgrades

for Fawn Lake to accommq-•clate growth in the develop-.ment of abouta OQ residents and improve water quality, •water pressure and service - reliability, Mr. Maenza said. Efforts to reach Fafrn Lake representat ives were unsuccessfuL

"You have to keep up with-" the infrastructure,". Mr. Maepzasaid.

Infirastructure development and upgrades are nothing new in. Pike County, said Michael

. Mrozinksi, assistant county, planningdirecton

"We're seeing-it countywide, and it may continue as many of the communities add more and more homes," he said. Based on population percentage increase, Pike is the ftst-

. est-growing county in the state, said Sally Corrigan county planning director: .

With many residential communities on septic systems, Mr. Mrosinski said sewer, •upgrades are important

"As the county grows, and continues to grow, we need to look at more central sewage," he said.-

Appendix B

BUCKS COUHTY COURIER TIMES PmLi.YBUR5S.CaM

MONDAY I ^ DECEMBER 4,2006 ^

Decade hasn't watered down treatment plant ByKWAME J5BASI PATTERSON COURIER TIMES

Qeaner drjnking water and systematic upgrades are the result of a 10-year relationship between Aqua Pennsylvania and Bristol, according to borough and • Aqua officials.

Next month will mark the 10-year anniversaryôf Aqua Pennsylvania's acquisition of. the Bristol Water Treatment Plant on Radcliffe Street.

After-purchasing the plant for $25 million from the borough in 1996, Aqua officials-said they spent about $10.5 million to upgrade the entire,; iio-year-old facility

Nancy Roncetti, water sop-ply manager for Pennsylvania's Department "erf"' Environmental Protection^ " Southeast Region, said her depEtrtmeht evaluates the per-, fprmance of Bucks County water plants' filtration units:

Last year, the DEP gave Aqua's Bristolfacility a "commendable" grade — the

• highest given by the state department.

However, there-'were ho noncompliance or poor :grades given to the facility when-it was maintained by the borough, she added.

During Aqua's rehabilitation project, which began in ;

1999 and'finished hi May, upgrades.were made to the treatment of watefto improve its quality and to the. buBding to eliminate structural problems associated with age, according to David Marozzi, assistant superintendent of the Bristol plant.

"Every piece erf1 equipment has been replaced," he said.

And residents can taste the difference.

Ann, who refused to provide'her last-name, has lived . iiyBristolfbr 79 years. She said the tap water tastes much better and is clearer .than it was 10 years ago.

"It.was cloudy'before, but. my water bill is much Higher

Assistant plant superintendent Dave Marozzi, standing in ttie lower level of Aqua Pe'nnsylvania'S'BHstol.water plant, says every, piece of equipment in the facility has recently been replaced. JAY CBAWFOBO / COURIER TIMES

now," she said. . Rosemary, another Bristol native who refused to give her.last name, said the'water has gotten'better over the years and doesn't taste.so "chemicaL"

The plarit,:under the borough's control, was.operat-•ing on O-year ld equip; ,ment, such as the three main water pumps that carry water from the Delaware River into the facility.

"Everything you drank in Bristol came through those pipes," Marozzi said.

In die event of a:chlorine leak. Aqua installed a chlorine scrubber, which, takes away or neutralizes potentially dangerous airborne gases.

" For years, the fadlity has used chlorine from several 2,000-pound tanks to-help kill bacteria in the'water. Before' the acquisition, no real safety measures were in place in the event of a chlorine leak other than.evacuation, according to plant officials.,

"[Chlorine] was a number one concern because of the residential neighborhood right across the street," Marozzi saicL,"If a tank" cracked, yqn'd be dead."

Qther improvements ihdjide installation of instru-me'ht panels that monitor water; particle and chemical levels as well as computer software that runs the entire operation by one click of a button.

•'This is now a state-of-the-art facility," said Terry Maenza, Aqua America Inc's senior "communications specialists

- BUt that wash't the case • 10 .years ago,.according.to borough officisds who said Bristol faced morejthan $1 million>ih debt -if . it .were to. bring the facility up to -federal and state, regulations and to take care of deferred maintenance problems.

There were pipe and water leaks, all over the place, according to Marozzi, who also worked at the plant under the borough.

In 1996, the council had two options — borrow money to Sx the place, which would have resulted in increased taxes, or sell it off The municipality and Aqua reached a.purchase"agreement Dec 31 of. that year

As part of the deal, the water company was given the green light-to impose a 10-year phase-in of increased water rates that would put borough residents' water bills in line with other Aqua customers in the county. The

phase-in, however, left some residents, including council President Ralph DiGuiseppe, in.sticker shock.

In September, DiGuiseppe voiced his concern about his higher water bills at a council meeting.-He siaid several residents had contacted him about tie. increased fees. As a result, the council called for a meeting with "Aqua officials.

Based on.the meeting, DiGuiseppe said many residents didn't understand Aqua's increases were part of the purchase agreement.

*1 was also unaware of the situation, but people have to. understand this is a business that invested (more tharij $20 milliori in the facility and theyfre just recouping, their cdsfts/'tie saiti. ' The borough's rates are still the" lowest in the county"

Overall, DiGuiseppe said it's been a great partnership between the borough and Aqua over the years,

The company has even agreed to replace or reline all of the water lines in the borough and work with Bristol officials to repiave the streets, replace or relocate:Cre hydrants, add new service connections and install radio frequeiicy meters on homes, borough officials-said.

"We think we have a very good working relationship with the borough and the council and we hope to be here another 110 years," Maenza said, Kwame Abast Patterson can be reached at 21S-949419SwkpaHeisonephillyBurtffi.com

'07 budget holds tax'line Page 1 of 1 Appendix B

miESLSADM com

Posted on Fri, Dec. 15, 2006

KINGSTON TOWNSHIP

'07 budget holds tax line

By CAMILLA FIOYI Times Leader Corre'spontfent

KINGSTON .TWP, - The board of supervisors unanimously passed the 2007 budget at Wednesday's meeting.

The $2.9 million spending plan calls for no tax Increases and provides for a new 10-ton plow/recycling truck. Supervisor Jeff Box estimates the new vehicle will cost around $120,000. The millage rate will remain at 10 mills.

A mill Is a $1 t a * on every $1,000 of assessed property value.

Box cbmnieridecj the board folr "Working h'anj.t^ restore the financial Jntegrity of the township" and he also thanked Assistant Township Manager lâthy Sfei»sBarf .f6r preparing the bijdget.'

Alsb.Wednesday night," Matthew Kmger of Ivy Drive: said he Is grateful for the fire hydrant that Aqua Pennsylvania recently Installed in frbrit of his property; He said the three hydrants installed in the Maplecrest subdivision are an asset to tiis: hel g hborhdbd '.•

Jim Keller, who also lives.on Ivy Drive/thanked Box and Zoning Officer Bill Eck for persuading the water company to move one.of the hydrants to the side of his property, rattier than in the middle as originally planned.

Township solicitor Ben Jones I I ] said instaliation of the hydrants would have a significant impact on the cost of homeowner's insurance, adding that premiums would decrease for residents living near a hydrant. Aqua Pennsylvania has installed'18 hydrants-along its water line on and around Manor Drive, Chairman Dave Jenkins said.

Keller also thanked the.police department;for Its/quick response to a burglar alarm set off at.his home the day after Thanksgiving^Keller said he and hisfamlly were oiit 6f.t6wn.when the alarm went off.'

In.'otfier business^- the board approved' a resolution to.protest the rate increase of Comcast Cable. "They havetVt even had a chance to,change the name on the bills, before Imposing a rate increase," Box said.

Supervisors will hpld.ah organiiationaI'meeting Jan.;2 at 7 p.m. The'next public work session will be held Jan. 8 at 7 p.m. in prepar'atipn for the regular meeting'on'Jan. 10.

£ ICVIi. Vimrt I.c:uk: ;U!ti w i n jjrvio< i a i i ^ s AH ftijli;'. K^MTX-.-I!

http:.//www.tini ^ 1-2/20/2006

10 D^Pare County Daily Times Thursday, July 19. 2007 Appendix B

• Parts of Baltimore Avenue> iiiClifton Heights arcclosed while, water mains are installed. By JOHN M . ROMAN [email protected]

CLIFTON HEIGHTS - Many, butiinesses along Baltimore Avenue west of Scottdale'

„ Road_are_t aid ng^ a .waitfliid-see_.attitudeL-.about how" tHoy'll be affected onceva mile water main project ;bf' Aâa-PennBylvariia etai-te heading their jroy.-

Aqua GXpects the project to be completed in November with fintil paving- set' '.tor.' spring of. next year.

On the east side of Scottdale Road, a poi^ tion of the $1.3 million project has just been completed between Scottdale Road, "and Mart in Drive in Lansdowne, where, a "road closed" sign and detour has .been posted at Scottdale Road.

A variety of supplemental signs posted at Oak. Avenue for eastbound traffic 'on\ Baltimore Avenue indicate a detour ahead' at Scottdale .Road, but busineascs such as'. Kmart and Walt's Steaks are open. Actually, all busmeasea Were open up to Scottdale Road.

The avenue that cuts through/the -heart-of the tiny borough is dotted mostly with.a •wide range of buainesses, including- auto* repair- shops, sandwich shops, a funeral 'home, .ctrugstores, restaurants, tavernsi among-others, 'fhe Clifton.Heights Fire-Co', is near the intersection of Springfield Road and relatively few homes front the avenue.

Paul Paglairo, 42, and Mason HuddoB; 49, fM-ownco's: of Walt's Stealt .ShopV 329 Baltimore Ave., said they took oyer.* the business four years ago although, i t wae started i n 1939 by "Walt Koncir.

'We survived through World War I I , the Korean War, Vietnam, Desert Storm.and wc will survive Aqua," Huddell said;.

A t a Clifton Heights Business Association meeting in the spring they were toid one lane would be kept open at all times for access, he said. " I f they keep

i P i l p I

Times tfaff/ERICHAfrrUNE Paul Pailiano, left, and Mason Hudetl; owners of Walt's Steak Shop, don't expect the road work along Baltimore Avenue to hurt business.

one lane open we're going to be fine."' "We're hoping our loyal-customers that

-know'their way around town will use-what-.ever side streets necessary, to get to" ua,r

Huddell said. Longtime regular customers Phil- and

Pfcggy Zimmerman of Collingdale said they loiow all the back streets and will go out of th'cir way to get to Walt's.

"They're dedng all these streetei'at the same time - it's ridiculoue,'' Peggy said.

Steve Oddi and Mike Barycki, coshers of Delco Auto Service, at the corner of .Glenwood Avenue, said they were lucky because customers have access to side streets such as Glenwood and Broadway avenues.

" I f you have a small business-that spe-cialired in something that you may frequent once a year, a service, and a customer doesn't like the inconvenience, they're going to go somewhere else," Barycki said.

"The job's got to be done, but i f 8 going to be an inconvenience and loss of income for a lot of small businessesi" he said. "We have an ongoing customer base so we shouldn't, have a problem " • Ernie Jackson, owner of Furio's.Deli and

CaK in a small shopping strip, said, "they're doing i t in sectibhs and phases so we're not going to; be hurt that much."

Jackson said most of his customers know

owners how to use nearby side streets, but businesses in the niiddle of the project where there arp few side streets "will be hurt the most.

"New water mains arej a necessity; we don't want them.breaking,and:floodirig our businesses out," he.said.-.

Jennifer 'Ward, manager of The Canine Works, 240 Baltiihbre'Ave.,'a.'pet grooming

. shop,. said, J'fcQnuwhat. Aqua-told-US,-thDy-will close half of the street at a tune so that there's always accesa to - all businesses along the block."'

" I can only hope thaf s what they'll do," she said.

A supervisor for Delmont' Utiiitios, the contractor for the project;-, said Wednesday excavating-work began this week on a section opposite the-Kmart parking lot and .they wiU be laying.pipe'today.

Starting the week of July 2, Aqua began installing about 6,900 feet of 12-inch ductile iron pipe along Baltimore Avenue between Martin- Drive in Lanedowne aiid Oak Avenue in CUfton Heights. Most of the cement and cast-iron .pipe that Aqua will replace is between* 90 and 100 years old.

Crews wiU work weekdays and some Saturdays between 9 a.m. and 3 p.m. During construction hours, the. affected streets will be closed to through traffic and motorists are urged to use. alternate routes.

"About 1,200: feet of nuun. installation has been done so farj about oneâxth of the way done,' Maenza "isaid: Wednesday. '"We're going to malts sure that there is access for local businesses during the project"

PA Environment Digest - PA Environment Digest Page I of J Appendix B

EPA Honors Aqua Pennsylvania for Rebuilding Bristol Water Plant

During a special ceremony this week with federal, state and local officials, the U.S. Erivironmentai protection Agency recognized Aqua^Penhsyivania, Inc. with the 2006 Award for Sustainable Public Health Prptedpn fpr rebuilding the Bristol. Water Treatment Plant, which.supplies; drinldng water to.apprcorimately 30,000 local residents.

In presenting the award, Jbn Capacasa,;director of the: Water Protection Division for EPA's rnidrAtlahtib region, said; "We apfjlaiid Aqua Pennsylvania for demonstrating outstanding leadership to protect the pubfic's health by making critically needed tmprovemehts to the community's drinking water system."

Located in Bristol Borough, Bucks County the. plant began to provide service in E S J ^ B S ^ •1874 and required a complete overhaul when Aqua acquired the municipal water Pennvesi. Aqua photo system in 1996. The.company invested approximately $10 milltdn to rehabilitate and upgrade.the •facility, with $5.9 million of the total financed with.a low-interest loan from the Pennsylvania Infrastaicture Investment Authority.'

EPA recognized Aqua oh the i^mrnehdatiqri Of PehriVEST officials. "We proudly nominated Aqua'for ite ability and willingness to tackle the needs of r e g l ^ d ; jroubled,water.syste"rhs, such as the Bristol facility, which require both the capital and expertise to.bring them.up to environmental standards;" said PennVEST Chairman Joseph Mankp..

Aqua Chairman arid Chief Executive Officer Nicholas DeBenedictis accepted the award; "This honor means a great deal to usj because it recognizes Aqua's commitment to addressing environmental issues and improving water quality. Furthermore, we take pride in using low-interest financing effectively to reduce interest expense, which helps control rates for customers while enabling us to address more capital improvement needs."

Aqua began the plant's overhaul in 1999 and completed the project in May 2001. Improvements included automating the filters and.controls, installing equipment to remove solids from the.water, upgrading chlorination and electrical systems, integrating a central computer system, and replacing leaking roofs. The project reduced the potential for filter failure and .dischargV of contaminants and eBminated 'structurai safely hazards.

Under EPA's Drinking" Water .State Revolving'Fund prograrh, the agency provides grants to the states, which in tynv use'the funds to provide Idw-mterest ipahs for drinking water projects: these projeds "support the Safe Drinking Water, Act by. protecting.public health. In Pennsylvania;'the program is managed by PENNVEST in cooperation with the Department of Environmental Protection. - - -

5m/2Q07

. QO.TQPrec^ltifl.Article (SoToNextArticle

• Return to This PA Environment Digest's Main Page EulLVeisian'

http://Www.paenvir6nmemdige^ 5/14/2007

AP STATEMENT NO. 3



Docket No. R-00072711

DIRECT TESTIMONY OF RICHARD L. DRAGER

With Regard To Service Company Costs

November 21, 2007

AQUA PENNSYLVANIA, INC. DIRECT TESTIMONY OF RICHARD L . DRAGER

1. Q. What is your name and business address?

2 A. Richard L. Drager. My business address is 762 W. Lancaster Avenue, Bryn Mawr,


4 2. Q, By whom are you employed and in what capacity?

5 A. I am employed by Aqua Services, Inc. as Senior Rate Analyst.

6 3, Q. Please briefly describe your business experience.

7 A. Prior to joining Aqua Services in June 2006,1 was employed briefly as Senior

8 Financial Analyst for the NCO Group and prior to that as Region Business Manager

9 for DecisionOne Corp. From December 1974 to November 1994,1 was employed by

^ ^ 0 General Waterworks in a series of progressively responsible roles culminating with

• 11 Region Controller. General Waterworks had operations in 13 states and I was

12 responsible for the internal financial reporting, forecasting, budgeting and variance

13 analysis for all companies in my Region.

14 4. Q. Please describe your educational background.

15 A. In 1974,1 graduated from Drexel University with a Bachelor of Science in Commerce

16 and Engineering Sciences, majoring in Finance.


18 A. The purpose of my testimony is to explain and support Aqua Pennsylvania's ("AP" or

the "Company") claims for services provided by its affiliate, Aqua Services, Inc.

AQUA PENNSYLVANIA, INC. DIRECT TESTIMONY OF RICHARD L. DRAGER

1 More specifically, I sponsor adjustments to customer service costs, as set forth on

2 page 27 of Exhibit No. 1 -A, and management fees, as set forth on page 39 of Exhibit

3 No. 1-A.

4 6. Q. When and why was Aqua Services created?

5 A. Until the late 1990's Philadelphia Suburban Corporation's (now Aqua America's)

6 operations were confined to a single state, i.e. Pennsylvania. While certain costs were

7 allocated from PSC to Philadelphia Suburban Water Company (now AP) and vice

8 versa, the allocation process was relatively straight-forward and easily managed. In

9 the past eight years, Aqua America's operations have expanded considerably as a

10 result of the 1999 merger with Consumers Water Company (CWC) and the

^ ^ 1 subsequent acquisition of DQE's AquaSource systems. The expansion into new

12 , states required the allocation of costs across multiple jurisdictions by multiple

13 entities. More importantly, it provided an opportunity to achieve synergies through

14 the consolidation of support staff. In short, Aqua America concluded that by housing

15 certain corporate service functions under a single roof, it could ensure the provision

16 of those services at the lowest possible cost.

17 7. Q. What services are provided by Aqua Services?

18 A. The services, which are set forth in an affiliated interest agreement previously filed

19 with the Commission and provided with this rate filing in response to minimum filing

20 requirement OE6, cover a full range of corporate support services, including, but not

1 limited to, accounting, administration, communications, corporate secretarial,


engineering, financial, human resources, information systems, legal, procurement,

2 rates and regulatory compliance, risk management and water quality.

3 8. Q. How are the costs of those services charged out to Aqua America's subsidiaries?

4 A. Aqua Services' personnel keep daily time records and, where appropriate, their time

5 and related overheads are directly assigned to the subsidiary for which they are

6 working. Where costs are incurred in rendering services to multiple companies in

7 common and cannot be identified and related exclusively to a particular company,

8 they are allocated to all such companies based on the number of customers served by

9 each company at the end of the immediately preceding calendar year.

10 9. Q. Are any changes in the allocation of costs anticipated?

11 A. Yes. At present, a customer who receives both water and wastewater service from an

12 Aqua America subsidiary is counted twice (i.e., treated as two customers) for

13 purposes of developing Aqua Services' allocation factors. Effective January 1, 2008,

14 a dual service customer will be counted as 1.5 customers.

i*5—10: Q: Has the new aUocation methodology been taken into account in"calcuIating"AP's~

16 claims for Aqua Services costs in this rate filing?

17 A. Yes, it has.

18 11. Q. Please explain the adjustment to Customer Service Fees appearing on page 27 of

19 Exhibit 1-A.


A. In 2006 and 20007, customer service personnel previously housed in individual

2 operating subsidiaries were transferred to a new Aqua Customer Operations (ACO)

. 3 division within Aqua Services. Because this transition occurred during the historic

4 test year and was not completed until this past Spring, I have utilized actual billing

5 data for the months of June, July and August to develop an annualized amount. That

6 figure was then adjusted to reflect the full year effect of the projected 4.0% general

7 wage increase to become effective April 1, 2008.

8 12. Q. Please explain the adjustment to Management Fees appearing on page 39 of

9 Exhibit 1-A.

10 A. The historic test year Management Fees expense was adjusted to annualize the 4.0%

^ ^ 1 general wage increase effective April 1, 2007 and the full year effect of the projected

12 4.0% general wage increase to become effective April 1, 2008.

1-3—i1-3.—Q. Do-you-have-any-further-comments? '•

14 A. Yes. I would note that Mr. Griffin, in attachments to his testimony (AP Statement

15 No. 1), has provided a detailed breakdown of AP:s requested allowance for Aqua

16 Services costs, as well as a comparison of its current claims for services and sundries

17 to the corresponding claims advanced by the Company in its last water base rate case.


19 A. Yes, it does.

AP STATEMENT NO. 4


DIRECT TESTIMONY OF PAUL R. MOUL

WITH REGARD TO COST OF CAPITAL

BEFORE THE

PENNSYLVANIA PUBLIC UTILITY COMMISSION

DOCKET R-00072711

November 21. 2007

• Aqua Pennsylvania. Inc. Direct Testimony of Paul R. Moul

Table of Contents

Page No.

INTRODUCTION AND SUMMARY OF RECOMMENDATION 1

WATER UTILITY RISK FACTORS 6

FUNDAMENTAL RISK ANALYSIS 9

CAPITAL STRUCTURE RATIOS 14

COST OF SENIOR CAPITAL 18

COST OF EQUITY-GENERAL APPROACH 19

DISCOUNTED CASH FLOW ANALYSIS 20

RISK PREMIUM ANALYSIS 34

CAPITAL ASSET PRICING MODEL 41

COMPARABLE EARNINGS APPROACH 45

CREDIT QUALITY AND CONCLUSION 48

Appendix A - Educational Background, Business Experience and Qualifications

Appendix B - Ratesetting Principles

Appendix C - Evaluation of Risk

Appendix D - Cost of Equity - General Approach

Appendix E - Discounted Cash Flow Analysis

Appendix F - Interest Rates

Appendix G - Risk Premium Analysis

Appendix H - Capital Asset Pricing Model

Appendix I - Comparable Earnings Approach

GLOSSARY OF ACRONYMS AND DEFINED TERMS

ACRONYM DEFINED TERM

AFUDC Allowance for Funds Used During Construction

AA Aqua America, inc.

AP Aqua Pennsylvania, Inc.

b Represents the retention rate that consists of the fraction of earnings that are not paid out as dividends

P Beta

b XT Represents internal growth

CAPM Capital Asset Pricing Model

CCR Corporate Credit Rating

CE Comparable Earnings

DCF Discounted Cash Flow

DDBP Disinfectants/Disinfection By-Products

EPA Environmental Protection Agency

ESWTR Enhanced Surface Water Treatment Rule

FOMC Federal Open Market Committee

9 Growth rate

GAAP Generally Accepted Accounting Principles

GDP Gross Domestic Product

IDB Industrial Development Bonds

IGF Internally generated funds

Lev Leverage modification

M&A Merger and Acquisition

MTBE Methyl Tertiary Butyl Ether

MTN Medium Term Notes

PPUC Pennsylvania Public Utility Commission

r Represents the expected rate of return on common equity

Rf Risk-free rate of return

GLOSSARY OF ACRONYMS AND DEFINED TERMS

ACRONYM DEFINED TERM

Rm Market risk premium

RP Risk Premium

s Represents the new common shares expected to be issued by a firm

S X V Represents external growth

S&P Standard & Poor's

SDWA Safe Drinking Water Act Amendments of 1996

UWR United Water Resources

V Represents the value that accrues to existing shareholders from selling stock at a price different from book value.


INTRODUCTION AND SUMMARY OF RECOMMENDATION

1 1. Q. Please state your name, occupation, and business address.

2 A. My name is Paul Ronald Moul: My business address is 251 Hopkins Road,

3 Haddonfield, New Jersey 08033-3062. I am Managing Consultant of the firm P. Moul

4 & Associates, an independent financial and regulatory consulting firm. My educational

5 background, business experience, and qualifications are provided in Appendix A that

6 follows my direct testimony.


8 A. My testimony presents evidence, analysis and a recommendation concerning the

9 appropriate cost of common equity and overall rate of return that the Pennsylvania

10 Public Utility Commission ("PPUC" or the "Commission") should recognize in the

11 determination of the revenues that Aqua Pennsylvania, Inc. ("AP" or the "Company")

12 should realize as a result of this proceeding. My analysis and recommendation are

13 supported by the detailed financial data set forth in AP Exhibit 4-A, which is a multi-

14 page document that is divided into thirteen (13) schedules. Additional evidence, in the

15 form of appendices follows my direct testimony. The items covered in these

16 appendices deal with the technical aspects of my testimony. My testimony is based

17 upon my first hand knowledge of AP, consisting of information obtained from meetings

18 with the Company's management and Company-specific data, which is widely

19 disseminated within the financial community.

20 3. Q. Based upon your analysis, what is your conclusion concerning the cost of

21 common equity and overall rate of return for the Company in this case?

22 A. Based upon my independent analysis, my conclusion is that the Company should be

23 afforded an opportunity to earn a rate of return on common equity within the range of

24 11.25% to 11.75%. From this range, the Company has proposed an 11.75% rate of

1


1 return on common equity. The Company's proposed rate of return on common equity

2 is comprised of the midpoint of my range (i.e., 11.50%) plus twenty-five basis points

3 (i.e., 0.25%) in recognition of the exemplary performance of the Company's

4 management, as a provider of high quality customer service, as a low cost provider of

5 water service, and as a leader in the consolidation of small troubled water companies

6 in Pennsylvania. As shown on Schedule 1, I have provided the weighted average cost

7 of capital, which includes my recommended cost of equity. The calculation of the

8 weighted average cost of capital requires the selection of appropriate capital structure

9 ratios and a determination of the cost rate for each capital component. In the case of

10 the capital structure ratios, the components are taken from the future test year ended

11 June 30, 2008. The resulting 8.86% overall rate of return, when applied to the

12 Company's rate base, will provide a compensatory level of return for the use of capital

13 and, if achieved, will provide the Company with the ability to attract capital on

14 reasonable terms.

15 4. Q. In your opinion, what factors should the Commission consider when setting the

16 Company's cost of capital in this proceeding?

17 A. The Commission should consider the ratesetting principles that I have set forth in

18 Appendix B. In this regard, the Commission's rate of return allowance must be set to

19 cover the Company's interest and dividend payments, provide a reasonable level of

20 earnings retention, produce an adequate level of internally generated funds to meet

21 capital requirements, be commensurate with the risk to which the Company's capital is

22 exposed, support reasonable credit quality, and allow the Company to raise capital on

23 reasonable terms.

24 5. Q. Please briefly describe the Company.

25 A. As of year-end 2006, AP provided water service to over 400,000 customers in the five

2

0 DIRECT TESTIMONY OF PAUL R. MOUL

1 counties that represent the Philadelphia suburbs, as well as in the northwestern,

2 central, and Pocono Mountains regions of Pennsylvania. Since the Company's last

3 rate case, it added 8,145 customers. The Company meets its customers' needs from

4 surface and ground water supplies and from purchases.

5 AP has taken a leadership position in the consolidation of separate water

6 utility systems throughout Pennsylvania. While the Company's first major acquisition

7 occurred in 1985 with the purchase of the assets of Great Valley Water Company, AP

8 has completed 128 acquisitions since 1991. Some of these acquisitions included

9 multiple systems. Also, Aqua America, Inc. ("AA"), the parent company of AP,

10 acquired Consumers Water Company, which expanded the Company's service area

11 beyond Southeastern Pennsylvania. AA also acquired the water utility assets of Aqua

12 Source, Inc. on July 31, 2003, and Heater Utilities and Florida Water Services in 2004.

13 The benefits of regionalization accrue to all of the Company's constituencies -

14 - new customers benefit from the Company's management expertise which enhances

15 service reliability and water quality of the acquired systems; existing customers benefit

16 from the economies of scale derived from adding new customers; the Company's

17 employees benefit from a wider scope of responsibilities and opportunities for

18 professional development; and investors benefit from the additional growth of the

19 Company.

20 6. Q. How have you determined the cost of common equity in this case?

21 A. The cost of common equity is established using capital market and financial data relied

22 upon by investors to assess the relative risk, and hence the cost of equity, for a water

23 utility such as AP. In this regard, I relied on four (4) well-recognized measures of the

24 cost of equity: the Discounted Cash Flow ("DCF") model, the Risk Premium ("RP")

25 analysis, the Capital Asset Pricing Model ("CAPM"), and the Comparable Earnings

3


1 ("CE") approach.

2 7. Q. How have you applied those models to measure the cost of equity for AP?

3 A. The models that I used to measure the cost of common equity for the Company were

4 applied with market and financial data developed from my proxy group of eight water

5 companies. The proxy group consists of water companies that: (i) are contained in

6 The Value Line Investment Survey, (ii) their stock is publicly-traded, and (iii) they are

7 not currently the target of an announced merger or acquisition. The companies in the

8 proxy group are identified on page 2 of Schedule 3. I will refer to these companies as

9 the "Water Group" throughout my testimony.

10 8. Q. How have you performed your cost of equity analysis with the market data for

11 the Water Group?

12 A. I have applied the models/methods for estimating the cost of equity using the average

13 data for the Water Group. I have not measured separately the cost of equity for the

14 individual companies within the Water Group, because the determination of the cost of

15 equity for an individual company has become increasingly problematic. By employing

16 group average data, I have helped to minimize the effect of extraneous influences on

17 the market data for an individual company.

18 9. Q. Please summarize your cost of equity analysis.

19 A. My cost of equity determination was derived from the results of the methods/models

20 identified above. In general, the use of more than one method provides a superior

21 foundation to arrive at the cost of equity. At any point in time, any single method can

22 provide an incomplete measure of the cost of equity depending upon extraneous

23 factors that may influence market sentiment. The specific application of these

24 methods/models will be described later in my testimony. The following table provides

25 a summary of the indicated costs of equity using each of these approaches.

4


Water Group

DCF 11.43%

Risk Premium 11.50%

CAPM 13.14%

Comparable Earnings 12.30%

Average 12.09% Median 11.90% Mid-point 12.29%

1 1 Focusing upon the market model approaches (i.e., DCF, RP and CAPM), the average

2 equity return is 12.02% (11.43% + 11.50% + 13.14% = 36.07% - 3). The DCF and

3 Risk Premium approaches provide an average return of 11.47% (11.43% + 11.50% =

4 22.63% 2). For this case, I recommend that the Company's rate of return on

5 common equity be set within the range of 11.25% to 11.75%. In order to provide

6 recognition of the exemplary performance of the Company's management, the rate of

7 return on common equity proposed in this case consists of the midpoint of my range

8 (i.e., 11.50%) plus twenty-five basis points (i.e., 0.25%). -

9 The exemplary performance of the Company's management is described in

10 the direct testimony of Mr. Smeltzer. Mr. Smeltzer explains the many initiatives that

11 the Company has undertaken, which have produced high quality service at reasonable

12 prices. In recognition of its outstanding performance and its goal of maintaining

13 reasonably priced water service, the Company should be granted an opportunity to

14 earn an 11.75% rate of return on common equity.


1 WATER UTILITY RISK FACTORS

2 10. Q. Please identify some of the risk factors which impact the water utility industry.

3 A. The business risk of the water utilities has been strongly influenced by water quality

4 concerns. The Safe Drinking Water Act Amendments of 1996 ("SDWA"), which re-

5 authorized the SDWA for the second time since its original passage in 1974, instituted

6 policies and procedures governing water quality. Significant aspects of the 1996 Act

7 provide that the federal Environmental Protection Agency ("EPA"), in conjunction with

8 other interested parties, will develop a list of contaminants for possible regulation and

9 must update that list every 5 years. From that list, EPA must select at least five

10 contaminants and determine whether to regulate them. This process must be

11 repeated every five years. The EPA may bypass this process and adopt interim

12 regulations for contaminants which pose an urgent health threat.

13 The current priorities of the EPA include regulations directed to: (i)

14 microbials, disinfectants and disinfection byproducts, (ii) radon, (iii) radionuclides, and

15 (iv) arsenic. The regulations which emanate from the EPA concerning certain

16 potentially hazardous substances noted above, together with the Federal Clean Water

17 Act and the Resource Conservation and Recovery Act, will bear upon the risk of all

18 water utilities. Most of these regulations affect the entire water industry in contrast with

19 certain regulations issued pursuant to the Clean Air Act, which may impact only

20 selected electric utilities. This business risk factor, together with the important role that

21 water service facilities play within the infrastructure, underscores the public policy

22 concerns which are focused on the water utilities. Moreover, since September 11,

23 2001, water utilities are operating on heightened alert to protect drinking water

24 supplies. Water utilities have taken additional security safeguards including (i) limiting

25 access to treatment and storage facilities, (ii) conducting additional testing and

6


1 monitoring, (iii) reassessing security procedures and systems, and (iv) providing

2 additional training to their personnel.

3 11. Q. How do these issues impact the water utility industry?

4 A. Managers of water utilities have in the past and will in the future focus increased

5 attention on environmental and related regulatory issues. Drinking water quality has

6 also received heightened attention out of concern over the integrity of the source of

7 supply which is often threatened by changing land use and the permissible level of

8 discharged contaminants established by state and federal agencies, and now potential

9 threats from terrorists. Moreover, water companies have experienced increased water

10 treatment and monitoring requirements and escalating costs in order to comply with

11 the increasingly stringent regulatory requirements noted above. Water utilities may

12 also be required to expend resources to undertake research and employ technological

13 innovations to comply with potential regulatory requirements. These factors are

14 symptomatic of the changing business risk faced by water utilities.

15 12. Q. Are there other factors that influence the business risk of water utilities?

16 A. Yes. Being the sole purveyor of potable water from an established infrastructure does

17 not insulate a water utility's operations from general business conditions, regulatory

18 policy, the influence of weather, and customers' usage habits. It is also important to

19 recognize that water companies face higher degrees of capital intensity than other

20 utilities, more costly waste disposal requirements, and threats to their sources of

21 supply. Issues surrounding Methyl Tertiary Butyl Ether ("MTBE") contamination and

22 the regulation of arsenic are cases-in-point.

23 13. Q. Are there other structural issues which affect the business risk of water

24 utilities?

25 A. Yes. As noted above, the high fixed costs of water utilities makes earnings vulnerable

7


1 to significant variations when usage fluctuates with weather, the economy, and

2 customer conservation efforts. Conservation efforts can take the form of low water

3 usage clothes washers, toilets and shower heads, and other reductions due to

4 changes in usage. While the wise use of water is always the objective, the business

5 risk of the water utility industry can be affected by increased customer awareness of

6 conservation. Moreover, current building standards have mandated the use of fixtures

7 which must comply with more stringent water use requirements. These issues, along

8 ' with other changes in customer usage patterns, have resulted in declining' use per

9 customer. This situation makes it more difficult for a water utility to actually achieve

10 the return established in rate cases.

11 14. Q. Please identify some of the specific water utility risk factors which impact the

12 Company.

13 A. The Company must conform its operations to the requirements of the SDWA and

14 Enhanced Surface Water Treatment Rule ("ESWTR"), which include monitoring and

15- testing, compliance with the lead and copper rule, regulation of

16 Disinfectants/Disinfection By-Products ("DDBP"), and other contaminants. Moreover,

17 high capital intensity is a characteristic typically found in the water utility business. In

18 this regard, the Company's investment in net plant is 4.79 times its revenue. This is to

19 say, AP must invest $4.79 in new or replacement plant to produce $1.00 of additional

20 revenue. This compares to the Water Group's investment in net plant which is 3.49

21 times its revenue.

22 15. Q. How is the Company's risk profile affected by its construction program?

23 A. The Company is engaged in a continuing capital expenditure program necessary to

24 meet the needs of its customers and to comply with various regulations. For the

25 future, the Company expects its capital expenditures, net of customer contributions


and advances, to be:

Capital Year Expenditures

2007 $ 151,900,000 2008 $ 165,000,000 2009 $ 170,000,000 2010 $ 170,000,000 2011 $ 170,000,000

Total $ 826,900,000

2 The Company's total capital expenditures over the next five years will represent

3 approximately 60% ($826,900,000 + $1,377,459,000) of the net utility plant in service

4 (net of contributions) based upon the amount at December 31, 2006. The Company

5 expects that a meaningful portion of its capital expenditures will require external

•

6 financing. As previously noted, a fair rate of return for the Company represents a key

7 to a financial profile that will provide the Company with the ability to raise the capital

8 necessary to meet its capital needs on reasonable terms.

9 16. Q. How should the Commission respond to the evolving business risk facing the

10 Company?

11 A. The Company is faced with the requirement to invest in new facilities and to maintain

12 and upgrade existing facilities in its service territory. Where a substantial ongoing

13 capital investment is required to meet the high quality of product and service that

14 customers demand, supportive regulation is absolutely essential.

15 FUNDAMENTAL RISK ANALYSIS

16 17. Q. Is it necessary to conduct a fundamental risk analysis to provide a framework

17 for determining a utility's cost of equity?

18 A. Yes. It is necessary to establish a company's relative risk position within its industry

19 through a fundamental analysis of various quantitative and qualitative factors that bear 9


1 upon investors' assessment of overall risk. The items that influence investors'

2 evaluation of risk and their required returns are described in Appendix C. For this

3 purpose, I have compared the Company to the Standard & Poor's ("S&P") Public

4 Utilities, an industry-wide proxy consisting of various public utility endeavors, and to

5 the Water Group.

6 18. Q. What are the components of the S&P Public Utilities?

7 A. The S&P Public Utilities is a widely recognized index that is comprised of electric

8 power companies and natural gas companies. These companies are identified on

9 page 3 of Schedule 4. I have used this group as a broad-based measure of public

10 utility endeavors.

11 19. Q. What criteria have you employed to assemble your Water Group?

12 A. The Water Group companies have the following common characteristics: (i) they are

13 listed in the "Water Utility Industry" section of The Value Line Investment Survey: (ii)

14 their stock is traded; and (iii) they are not currently the target of a publicly-announced

15 merger or acquisition. It would be inappropriate to include a company that is a target

16 of a takeover in a proxy group because the stock price of that company usually

17 disconnects from its underlying fundamentals. I will discuss this issue in further detail

18 later in my testimony.

19 20. Q. Is knowledge of a utility's bond rating an important factor in assessing its risk

20 and cost of capital?

21 A. Yes. Knowledge of a company's credit quality rating is important because the cost of

22 each type of capital is directly related to the associated risk of the firm. So while a

23 company's credit quality risk is shown directly by the rating and yield on its bonds,

24 these relative risk assessments also bear upon the cost of equity. This is because a

25 company's cost of equity is represented by its borrowing cost plus compensation to

10


1 recognize the higher risk of an equity investment compared to debt.

2 21. Q. How do the credit quality ratings compare for AP, the Water Group, and the S&P

3 Public Utilities?

4 A. The credit quality rating for AP is A+ from S&P. For the Water Group, the average

5 credit quality rating is A from S&P, and A2 from Moody's. For the S&P Public Utilities,

6 the average composite rating is BBB+/Baa1 by S&P and Moody's, respectively. Many

7 of the financial indicators that I will subsequently discuss are considered during the

8 rating process.

9 22. Q. How do the financial data compare for the Company, Water Group and the S&P

10 Public Utilities?

11 A. The broad categories of financial data that I will discuss are shown on Schedules 2, 3,

12 and 4. This analysis covers the years 2002 through 2006. The important categories of

13 relative risk may be summarized as follows:

14 Size. In terms of capitalization, the Company is larger than the average size

15 of the Water Group. The average size of the S&P Public Utilities is many times larger

16 than the Company and the Water Group. All other things being equal, a smaller

17 company is riskier than a larger company because a given change in revenue and

18 expense has a proportionately greater impact on a small firm. As I will demonstrate

19 later, the size of a firm can impact its cost of equity.

20 Market Ratios. Market-based financial ratios, such as dividend yields,

21 provide a partial measure of the investor-required cost of equity. If all other factors are

22 equal, investors will require a higher return on equity for companies that exhibit greater

23 risk as compensation for that risk. That is to say, a firm that investors perceive to have

11


1 higher risks will experience a lower price per share in relation to expected earnings

2 and hence; a lower price-earnings ratio.1

3 The average price-earnings multiple was higher for the Water Group as

4 compared to the S&P Public Utilities. The average dividend yield was lower the Water

5 Group than for the S&P Public Utilities. On average, the historical market-to-book

6 ratios were higher for the Water Group than for the S&P Public Utilities.

7 Common Equity Ratio. The level of financial risk is measured by the

8 proportion of long-term debt and other senior capital that is contained in a company's

9 capitalization. Financial risk is also analyzed by comparing common equity ratios (the

10 complement of the ratio of debt and other senior capital). That is to say, a firm with a

11 high common equity ratio has low financial risk, while a firm with a tow common equity

12 ratio has high financial risk. The five-year average common equity ratios, based on

13 permanent capital, were 49.4% for the Company, 50.5% for the Water Group, and

14 41.2% for the S&P Public Utilities. From a financial risk perspective, the Company

15 historically displayed somewhat higher financial risk compared to the Water Group.

16 Return on Book Equity. Greater variability (i.e., uncertainty) of a firm's

17 earned returns signifies relative levels of risk, as shown by the coefficient of variation

18 (standard deviation * mean) of the rate of return on book common equity. The higher

19 the coefficient of variation, the greater degree of variability. For the five-year period,

20 the coefficients of variation were 0.034 (0.4% - 11.7%) for the Company, 0.040 (0.4%

21 + 10.0%) for the Water Group and 0.159 (1.7% + 10.7%) for the S&P Public Utilities.'

22 I have focused on the common equity ratios calcuiated from permanent capital

23 because short-term debt is used first to finance construction work in progress.

For example, two otherwise similarly situated firms each reporting $1.00 earnings per share would have different market prices at varying levels of risk, i.e., the firm with a higher level of risk will have a lower share value, while the firm with a lower risk profile will have a higher share value.

12


1 Operating Ratios. I have also compared operating ratios (the percentage of

2 revenues consumed by operating expense, depreciation, and taxes other than

3 income)2. The five-year average operating ratios were 51.6% for the Company, 74.0%

4 for the Water Group, and 84.0% for the S&P Public Utilities. The Company's lower

5 operating ratio can be traced to its high capital intensity because a larger operating

6 margin (i.e., the complement of the operating ratio) derives from the income taxes and

7 return associated with a larger capital investment per dollar of revenue.

8 Coverage. The level of fixed charge coverage (i.e., the multiple by which

9 available earnings cover fixed charges, such as interest expense and preferred stock

10 dividends) provides an indication of the earnings protection for creditors. Higher levels

11 of coverage, and hence earnings protection for fixed charges, are usually associated

12 with superior grades of creditworthiness. The five-year average pre-tax interest

13 coverage (excluding AFUDC) was 3.-93 times for the Company, 3.32 times for the

14 Water Group, and 2.89 times for the S&P Public Utilities.

15 Quality of Earnings. Measures of earnings quality are usually revealed by the

16 percentage of Allowance for Funds Used During Construction ("AFUDC") related to

17 income available for common equity, the effective income tax rate, and other cost

18 deferrals, These measures of earnings quality usually influence a firm's internally

19 generated funds because poor quality of earnings would not generate high levels of

20 cash flow. Quality of earnings has not been a significant concern for the Company, the

21 Water Group, and the S&P Utilities in recent years.

22 Internally Generated Funds. Internally generated funds ("IGF") provide an

23 important source of new investment capital for a utility and represent a key measure of

The complement of the operating ratio is the operating margin which provides a measure of profitability. The higher the operating ratio, the lower the operating margin.

13


1 credit strength. Historically, the five-year average percentage of IGF to capital

2 expenditures was 66.2% for the Company, 54.6% for the Water Group, and 110.1% for

3 the S&P Public Utilities. Cash flow has been less than construction requirements for

4 the Company and the Water Group as compared to the S&P Public Utilities thus

5 indicating higher risk for the water companies.

6 Betas. The financial data I have been discussing relate primarily to company-

7 specific risks. Market risk for firms with traded stock is measured by beta coefficients.

8 Beta coefficients attempt to identify systematic risk, i.e., the risk associated with

9 changes in the overall market for common equities.3 Value Line publishes such a

10 statistical measure of a stock's relative historical volatility to the rest of the market. A

11 comparison of market risk is shown by the average betas of .83 for the Water Group

12 (see page 2 of Schedule 3), and .95 for the S&P Public Utilities (see page 3 of

13 Schedule 4).

14 23. Q. Please summarize your risk evaluation of the Company and the Water Group.

15 A. The risk of the Company parallels that of the Water Group in certain respects. For the

16 future, the risk of the water industry will be strongly influenced by the regulatory

17 requirements associated with the SDWA, the need to maintain adequate supply, the

18 need to rehabilitate infrastructure, high capital intensity, a low rate of capital recovery,

19 and relatively low percentages of IGF to construction. As such, the Water Group

20 provides a reasonable basis for measuring the Company's cost of equity.

21 CAPITAL STRUCTURE RATIOS

22 24. Q. Please explain the selection of capital structure ratios for AP.

The procedure used to calculate the beta coefficient published by Value Line is described in Appendix H. A common stock that has a beta less than 1.0 is considered to have less systematic risk than the market as a whole and would be expected to rise and fall more slowly than the rest of the market. A stock with a beta above 1-.0 would have more systematic risk.

14

«


1 A. it is appropriate that AP's capital structure ratios be employed for rate of return

2 purposes. In the situation where the operating public utility raises its own debt directly

3 in the capital markets, as is the case for the Company, it is proper to employ the

4 capital structure ratios and senior capital cost rates of the regulated public utility for

5 rate of return purposes. Furthermore, consistency requires that the embedded cost

6 rate of the Company's senior securities also be employed. This procedure is

7 consistent with the ratesetting procedures used by the Commission in numerous prior

8 rate cases for AP.

9 25. Q. Does Schedule 5 provide the capitalization and capital structure ratios you have

10 considered?

11 A. Yes. Schedule 5 presents the Company's capitalization and related capital structure

12 ratios based upon investor-provided capital. The June 30, 2007 capitalization

13 corresponds with the end of the historic test year in this case. The capital structure

14 includes the First Mortgage Bonds, Medium Term Notes ("MTN"), Notes, Industrial

15 Development Bonds ("IDB"), and PENNVEST loans, which are related to water

16 operations only, i.e., it excludes debt issued for the benefit of AP's wastewater

17 operations.

18 The June 30, 2008 capitalization is estimated at the end of the future test

19 year. The June 30, 2008 forecast capital structure reflects the planned issuance of

20 $60 million of conventional long-term debt; $50 million of tax-exempt IDB debt;

21 redemption of $27,904 million of existing debt, including maturities and sinking fund

22 payments; and a net change of $6,565 million in PENNVEST debt. For both the

23 historical and future test years, funds restricted for construction activity have been

24 netted against the principal amount of debt outstanding. This process is necessary

25 because unexpended funds have not yet been invested in property, plant, and

•


1 equipment, yet the full principal amount is shown on the Company's balance sheet. At

2 June 30, 2007, the funds restricted for construction activity was $52,154 million. By

3 June 30, 2008, that amount is projected to be $70,528 ($52,154 million - $23,626

4 million + $42,000 million). The Company also projects $45 million of new common

5 equity in increments in the fourth quarter of 2007 and the second quarter of 2008. A

6 forecast increase in retained earnings by June 30, 2008 is also shown on Schedule 5.

7 I have also adjusted the Company's capital structure to recognize the ratesetting

8 treatment of the call premiums on the early redemption of high cost long-term debt that

9 has been redeemed.

10 26. Q. Please describe this adjustment.

.11, A. I have adjusted the principal amount of long-term debt to exclude the amounts used to

12 finance premiums on the early redemption of long-term debt. To do otherwise would

13 deny AP the full return on the premiums paid to redeem this high cost capital since

14 additional amounts of capital were issued to pay the call premiums. The amounts

15 issued to finance the call premiums do not increase the Company's rate base. That is

16 to say, no additional rate base was created through additional debt necessary to

17 finance this transaction, and therefore an adjustment is required to provide the return

18 necessary to service this additional capital. Hence, AP's long-term debt amounts must

19 be adjusted for this disparity in order that the return necessary to service the

20 capitalization is produced from rate base investment times the overall rate of return.

21 This adjustment is equitable since customers receive the cost savings

22 resulting from these refinancings in the form of a lower overall rate of return, and AP

23 recovers all costs incurred in providing these benefits to the customers. To

24 accomplish these savings, the Company paid the bond holders a premium for

25 surrendering their securities prior to maturity. These premiums represented an

16


1 investment made by AP to reduce its overall cost of capital. Since the reduced interest

2 costs are reflected in the lower cost of capital to ratepayers, it is appropriate that the

3 Company recover the costs incurred to produce these savings. This includes both a

4 return of and return on the unamortized premiums. Adjusting the principal amounts in

5 the capital structure provides a return on the premium as a part of the embedded cost

6 rates of capital. The Commission has encouraged utilities to refinance high-cost capital

7 and has stated that a utility will not be penalized for undertaking a refinancing. Hence,

8 it is necessary to restore the Company's capital structure to the condition that existed

9 prior to the refinancing of the high cost debt. To accomplish this, it is necessary to

10 reduce the long-term debt outstanding by the amount of the call premium. These

11 adjustments maintain the aggregate amount of total capitalization for the Company.

12 All of my adjustments to the Company's capital structure for call premiums comply with

13 adjustments routinely approved by the Commission and were adopted by the

14 Commission's numerous rate case decisions.

15 27. Q. • What capital structure ratios do you recommend be adopted for rate of return

16 purposes in this proceeding?

17 A. Since ratesetting is prospective, the rate of return should, at a minimum, reflect known

18 or reasonably foreseeable changes which will occur during the course of the future test

19 year. As a result, I will adopt the Company's future test year-end capital structure

20 ratios of 49.20% long-term debt and 50.80% common equity. These capital structure

21 ratios are the best approximation of the mix of capital the Company will employ to

22 finance its rate base during the period new rates are in effect. I have excluded short-

23 term debt from these ratios because the amount estimated at June 30, 2008 roughly

24 approximates the balance of construction work in progress. Short-term provides

25 bridge financing for construction work in progress, until the magnitude of short-term

17


1 debt reaches a point where a permanent financing with long-term debt and equity is

2 economic. That is to say, short-term debt is temporary financing pending the issuance

3 of long-term debt and equity in the desired proportions that support the Company's

4 capital structure goals. The Commission uses a formula for computing the AFUDC

5 that assigns short-term debt first to the AFUDC rate and additional amounts; if any,

6 above the CWIP balance are assigned the overall rate of return. Given the Company's

7 procedure of calculating its AFUDC, it has been the Commission's policy to exclude

8 short-term debt from the capital structure.

9 COST OF SENIOR CAPITAL

10 28. Q. What cost rate have you assigned to the long-term debt portion of AP's capital

11 structure?

12 A. Consistency with the capital structure ratios for the Company requires that the

13 embedded cost rates of AP's senior securities must also be employed. This procedure

14 is consistent with the ratesetting procedures used by the Commission in numerous

15 prior AP rate cases. The determination of the cost of debt is essentially an arithmetic

16 exercise. This is due to the fact that the Company has contracted for the use of this

17 capital for a specific period of time at a specified cost rate. As shown on page 1 of

18 Schedule 6, the actual embedded cost rate of long-term debt was 5.97% on June 30,

19 2007. By June 30, 2008, the embedded debt cost rate is estimated to be 5.88%, as

20 shown on page 3 of Schedule 6. During the future test year, the Company plans to

21 issue $60 million of conventional long-term debt that has been assigned a cost rate of

22 6.00% and new IDB debt at an estimated cost of 5.00%. The details leading to the

23 development of the individual effective cost rates for each series of long-term debt,

24 using the cost rate to maturity technique, are shown on pages 2 and 4 of Schedule 6.

25 The cost rate, or yield to maturity ("ytm"). is the rate of discount that equates the

18


1 present value of all future interest and principal payments with the net proceeds of the

2 bond. In my calculation of the embedded cost of long-term debt, I have recognized the

3 costs associated with the Company's early redemption of high cost debt. As

4 previously explained, it is necessary to compensate AP for the costs incurred to lower

5 the embedded debt cost rate which reduces the cost of capital charged to ratepayers.

6 I will adopt the 5.88% prospective embedded cost of long-term debt for rate

. 7 of return purposes. The 5.88% long-term debt cost rate is related to the amount of

8 long-term debt shown on Schedule 5 which provides the basis for the 49.20% long-

9 term debt ratio.

10 COST OF EQUITY - GENERAL APPROACH

11 29. Q. Please describe the process you employed to determine the cost of equity for

12 the Company.

13 A. Although my fundamental financial analysis provides the required framework to

14 establish the risk relationships among AP, the Water Group and the S&P Public

15 Utilities, the cost of equity must be measured by standard financial models that I

16 describe in Appendix D. Differences in risk traits, such as size, business

17 diversification, geographical diversity, regulatory policy, financial leverage, and bond

18 ratings must be considered when analyzing the cost of equity indicated by the models.

19 It also is important to reiterate that no one method or model of the cost of

20 equity can be applied in an isolated manner. Rather, informed judgment must be used

21 to take into consideration the relative risk traits of the firm. It is for this reason that I

22 have used more than one method to measure the Company's cost of equity. As noted

23 in Appendix D and elsewhere in my direct testimony, each of the methods used to

24 measure the cost of equity contains certain incomplete and/or overly restrictive

25 assumptions and constraints that are not optimal. Therefore, I favor considering the

19

«


1 results from a variety of methods. In this regard, I have applied each of these methods

2 with data taken from the Water Group and determined that the cost of equity is in the

3 range of 11.25% to 11.75%.

4 DISCOUNTED CASH FLOW ANALYSIS

5 30. Q. Please describe your use of the Discounted Cash Flow approach to determine

6 the cost of equity.

7 A. The details of my use of the DCF approach and the calculations and evidence in

8 support of my conclusions are set forth in Appendix E. I will summarize them here,

9 The Discounted Cash Flow ("DCF") model seeks to explain the value of an asset as

10 the present value of future expected cash flows discounted at the appropriate risk-

11 adjusted rate of return. In its simplest form, the DCF return on common stocks

12 consists of a current cash (dividend) yield and future price appreciation (growth) of the

13 investment.

14 Among other limitations of the model, there is a certain element of circularity

15 in the DCF method when applied in rate cases. This is because investors'

16 expectations for the future depend upon regulatory decisions. In turn, when regulators

17 depend upon the DCF model to set the cost of equity, they rely upon investor

18 expectations that include an assessment of how regulators will decide rate cases. Due

19 to this circularity, the DCF model may not fully reflect the true risk of a utility.

20 As I describe in Appendix E, the DCF approach has other limitations that

21 diminish its usefulness in the ratesetting process when the market capitalization

22 diverges significantly from the book value capitalization. When this situation exists, the

23 DCF method will lead to a misspecified cost of equity when it is applied to a book value

24 capital structure.

25 31. Q. Are there any other factors that make the results of the DCF model problematic

20


1 in measuring the cost of equity for water utilities?

2 A. The results of the DCF model are especially troublesome at this time due to the

3 merger and acquisition ("M&A") activity sweeping the water utility industry. Water

. 4 companies have become acquisition targets during the process of "rolling-up" the

5 industry. It has been reported that there are approximately 50,000 separate investor-

6 owned and municipal water utility systems in the U.S. There are numerous examples

7 of water utility acquisitions within recent memory! In the last several years, Aquarion

8 purchased the New England properties from American Water Works; Philadelphia

9 Suburban Corporation (now Aqua America) completed the major acquisition of

10 Consumers Water Company and acquired the AquaSource assets from DQE;

11 American Water Works completed the $700 million acquisition of National Enterprises,

12 Inc. and acquired the water utility and wastewater assets of Citizens Utilities;

• 13 Yorkshire Water/Kelda purchased Aquarion and subsequently sold it to Macquarie;

14 Suez Lyonnaise des Eaux purchased all of the remaining shares of United Water

15 Resources that it did not already own; Thames Water purchased ETown Corporation;

16 and the German utility RWE AG, after acquiring Thames, acquired American Water

17 Works and now proposes to divest its interest in AWW.

18 These acquisitions were accomplished at premiums offered to induce

19 stockholders to sell their shares - the Aquarion acquisition was at a 19.3% premium,

20 the UWR acquisition was at a 54% premium, the ETown Corp. acquisition was at a

21 36% premium, and the American Water Works acquisition was at a 36.5% premium.

12 These premiums create a ripple effect on the stock prices of all water utilities, just like

23 a rising tide lifts all boats. Due to M&A activity, there has been a significant run-up of

24 the stock prices for the water companies. With these elevated stock prices, dividend

•

25 yields fall, and without some adjustment, the results become unduly depressed by

21


1 reference to alternative investment opportunities - such as public utility bonds.

2 32. Q. Please explain the dividend yield component of a DCF analysis.

3 A. The DCF methodology requires the use of an expected dividend yield to establish the

4 investor-required cost of equity. For the twelve months ended September 2007, the

5 monthly dividend yields of the Water Group are shown graphically on Schedule 7. The

6 monthly dividend yields shown on Schedule 7 reflect an adjustment to the month-end

7 prices to reflect the build up of the dividend in the price that has occurred since the last

8 ex-dividend date (i.e., the date by which a shareholder must own the shares to be

9 entitled to the dividend payment - usually about two to three weeks prior to the actual

10 payment). An explanation of this adjustment is provided in Appendix E.

11 For the twelve months ending September 2007, the average dividend yield

12 was 2.64% for the Water Group based upon a calculation using annualized dividend

• 13 payments and adjusted month-end stock prices. The dividend yields for the more

14 recent six- and three- month periods were 2.67% and 2.68%, respectively. I have

15 used, for the purpose of my direct testimony, a dividend yield of 2.67% for the Water

16 Group, which represents the six-month average yield. The use of this dividend yield

17 will reflect current capital costs, while avoiding spot yields.

18 For the purpose of a DCF calculation, the average dividend yields must be

19 adjusted to reflect the prospective nature of the dividend payments i.e., the higher

20 expected dividends for the future. Recall that the DCF is an expectational model that

21 must reflect investor anticipated cash flows for the Water Group. I have adjusted the

22 six-month average dividend yield in three different, but generally accepted manners,

, 23 and used the average of the three adjusted values as calculated in Appendix E. That

24 adjusted dividend yield is 2.78% for the Water Group.

— 25 33. Q. Please explain the underlying factors that influence investors' growth

9 ^ 22


1 expectations.

2 A. As noted previously, investors are interested principally in the future growth of their

3 investments {i.e., the price per share of the stock). As I explain in Appendix E, future

4 earnings per share growth represents their primary focus because under the constant

5 price-earnings multiple assumption of the DCF model, the price per share of stock will

6 grow at the same rate as earnings per share. In conducting a growth rate analysis, a

7 wide variety of variables can be considered when reaching a consensus of prospective

8 growth. The variables that can be considered include: earnings, dividends, book

9 value, and cash flow stated on a per share basis. Historical values for these variables

10 can be considered, as well as analysts' forecasts that are widely available to investors.

11 A fundamental growth rate analysis also can be formulated, which consists of internal

12 growth {"b x r"), where Y represents the expected rate of return on common equity

13 and "b" is the retention rate that consists of the fraction of earnings that are not paid

14. out as dividends. The internal growth rate can be modified to account for sales of new

15 common stock — this is called external growth ("s x v"), where "s" represents the new

16 common shares expected to be issued by a firm and "v" represents the value that

17 accrues to existing shareholders from selling stock at a price different from book value.

18 Fundamental growth, which combines internal and external growth, provides an

19 explanation of the factors that cause book value per share to grow over time. Hence,

20 a fundamental growth rate analysis is duplicative of expected book value per share

21 growth.

22 Growth also can be expressed in multiple stages. This expression of growth

23 consists of an initial "growth" stage where a firm enjoys rapidly expanding markets,

24 high profit margins, and abnormally high growth in earnings per share. Thereafter, a

25 firm enters a "transition" stage where fewer technological advances and increased

23


1 product saturation begin to reduce the growth rate and profit margins come under

2 pressure. During the "transition" phase, investment opportunities begin to mature,

3 capital requirements decline, and a firm begins to pay out a larger percentage of

4 earnings to shareholders. Finally, the mature or "steady-state" stage is reached when

5 a firm's earnings growth, payout ratio, and return on equity stabilizes at levels where

6 they remain for the life of a firm. The three stages of growth assume a'step-down of

7 high initial growth to lower sustainable growth. Even if these three stages of growth

8 can be envisioned for a firm, the third "steady-state" growth stage, which is assumed to

9 remain fixed in perpetuity, represents an unrealistic expectation because the three

10 stages of growth can be repeated. That is to say, the stages can be repeated where

11 growth for a firm ramps-up and ramps-down in cycles over time.

12 34. Q. What investor-expected growth rate is appropriate in a DCF calculation?

13 A. Investors consider both company-specific variables and overall market sentiment (i.e.,

14 level of inflation rates, interest rates, economic conditions, etc.) when balancing their

15 capital gains expectations with their dividend yield requirements. I follow an approach

16 that is not rigidly formatted because investors are not influenced by a single set of

17 company-specific variables weighted in a formulaic manner. Therefore, in my opinion,

18 all relevant growth rate indicators using a variety of techniques must be evaluated

19 when formulating a judgment of investor expected growth.

20 35. Q. Before presenting your analysis of the growth rates that apply specifically to the

21 Water Group, can you provide an overview of the macroeconomic factors that

22 influence investor growth expectations for common stocks?

23 A. Yes. As a preliminary matter, it is useful to view macroeconomic forecasts that

24 influence stock prices. Forecast growth of the Gross Domestic Product ("GDP") can

25 represent the starting point for this analysis. The GDP has both "product side" and

24


1 "income side" components. The product side of the GDP is comprised of: (i) personal

2 consumption expenditures; (ii) gross private domestic investment; (iii) net exports of

3 goods and services; and (iv) government consumption expenditures and gross

4 investment. On the income side of the GDP, the components are: (i) compensation of

5 employees; (ii) proprietors' income; (iii) rental income; (iv) corporate profits; (v) net

6 interest; (vi) business transfer payments; (vti) indirect business taxes; (viii)

7 consumption of fixed capital; (ix) net receipts/payment to the rest of the world; and (x)

8 statistical discrepancy. The "product side," (i.e., demand components) could be used'

9 as a long-term representation of revenue growth for public utilities. However, it is well

10 known that revenue growth does not necessarily equal earnings growth. There is no

11 basis to assume that the same growth rate would apply to revenues and all

12 components of the cost of service, especially after the troublesome issues of

13 employees' costs, insurance costs, high fuel costs, and environmental costs are

14 worked-out in the long-term for public utilities. The earnings growth rates for utilities

15 will be substantially affected by fluctuations in operating expenses and capital costs."

16 The long-term consensus forecast that is published semi-annually by the Blue

17 Chip Economic Indicators ("Blue Chip") should be used as the source of

18 macroeconomic growth. Blue Chip is a monthly publication that provides forecasts

19 incorporating a wide variety of economic variables assembled from a panel of more

20 than 50 noted economists from the banking, investment, industrial, and consulting

21 sectors whose advice affects the investment activities of market participants. It is

22 always preferable to use a consensus forecast taken from a large panel of

23 contributors, rather than to rely upon one source that may not be representative of the

24 types of information that have an impact on investor expectations. Indeed, Blue Chip

25 is frequently quoted in The Wall Street Journal. The New York Times. Fortune, Forbes,

25


1 and Business Week; Twice annually, Blue Chip provides long-range consensus

2 forecasts. Based upon the October 10, 2007 issue of Blue Chip, those forecasts are:

Blue Chip Economic Indicators Corporate

Averages Nominal GDP Profits, Pretax 2009-13 5.0% 4.6%

3 2014-18 4.9% 5.1%

4 These forecasts show that growth in corporate profits generally will exceed growth in

5 overall GDP for 2014 to 2018. It also is indicated historically that the percentage

6 change in corporate profits has been higher than the percentage change in GDP. 4

7 36. Q. What company-specific data have you reviewed in your growth rate analysis?

8 A. I have reviewed the growth in the financial variables shown on Schedules 8 and 9.

9 The bar graph provided on Schedule 8 shows the historical growth rates in earnings

10 per share, dividends per share, book value per share, and cash flow per share for the

11 Water Group. The historical growth rates were taken from the Value Line publication

12 that provides these data. As shown on Schedule 8, historical growth in earnings per

13 share was in the range of 2.56% to 5.50% for the Water Group." Negative growth rates

14 reflected in the historical data provide no reliable guide to gauge investor expected

15 growth for the future. Investor expectations encompass long-term positive growth

16 rates and, as such, could not be represented by sustainable negative rates of change.

17 Therefore, statistics that include negative growth rates should not be given any weight

18 when formulating a composite growth rate expectation. The prospect of rate increases

19 granted by regulators, the continued obligation to provide service as required by

20 customers, and the ongoing growth of customers mandate investor expectations of

21 positive future growth rates. Stated simply, there is no reason for investors to expect

Obviously, growth in corporate profits is negatively impacted during recessionary periods, but on average corporate profits has grown historically over two percentage points faster than GDP since 1934.

26


1 that a utility will wind up its business and distribute its common equity capital to

2 shareholders, which would be symptomatic of a long-term permanent earnings decline.

3 Although investors have knowledge that negative growth and losses can occur, their

4 expectations include positive growth. Negative historic values will not provide a

5 reasonable representation of future growth expectations because, in the long run,

6 investors will always expect positive growth. Indeed, rational investors expect positive

7 returns, othenwise they will hold cash rather than invest with the expectation of a loss.

8 Schedule 9 provides projected earnings per share growth rates taken from analysts'

9 forecasts compiled by IBES/First Call, Zacks, and Reuters/Market Guide and from the

10 Value Line publication. IBES/First Call, Zacks, and Reuters/Market Guide represent

11 reliable authorities of projected growth upon which investors rely. The IBES/First Call,

12 Zacks, and Reuters/Market Guide forecasts are limited to earnings per share growth,

13 while Value Line makes projections of other financial variables. The Value Line

14 forecasts of dividends per share, book value per share, and cash flow per share have

15 also been included on Schedule 9 for the Water Group.

16 Although five-year forecasts usually receive the most attention in the growth

17 analysis for DCF purposes, present market performance has been strongly influenced

18 by short-term earnings forecasts. Each of the major publications provides earnings

19 forecasts for the current and subsequent year. These short-term earnings forecasts

20 receive prominent coverage, and indeed they dominate these publications. While the

21 DCF model typically focuses upon long-run estimates of earnings, stock prices are

22 clearly influenced by current and near-term earnings forecasts.

23 37. Q. Is a five-year investment horizon associated with the analysts' forecasts

24 consistent with the DCF model?

25 A. Yes. In fact, it illustrates that the infinite form of the model contains an unrealistic

27


1 assumption. Rather than viewing the DCF in the context of an endless stream of

2 growing dividends (e.g., a century of cash flows), the growth in the share value (i.e.,

3 capital appreciation, or capital gains yield) is most relevant to investors' total return

4 expectations. Hence, the sale price of a stock can be viewed as a liquidating dividend

5 that can be discounted along with the annual dividend receipts during the investment-

6 holding period to arrive at the investor expected return. The growth in the price per

7 share will equal the growth in earnings per share absent any change in price-earnings

8 (P-E) multiple - a necessary assumption of the DCF. As such, my company-specific •

9 growth analysis, which focuses principally upon five-year forecasts of earnings per

10 share growth, conforms with the type of analysis that influences the total return

11 expectation of investors. Moreover, academic research focuses on five-year growth

12 rates as they influence stock prices. Indeed, if investors really required forecasts

13 which extended beyond five years in order to properly value common stocks, then I am

14 sure that some investment advisory service would begin publishing that information for

15 individual stocks in order to meet the demands, of investors. The absence of such a

16 publication signals that investors do not require infinite forecasts in order to purchase

17 and sell stocks in the marketplace.

18 38. Q. What specific evidence have you considered in the DCF growth analysis?

19 A. As to the five-year forecast growth rates, Schedule 9 indicates that the projected

20 earnings per share growth rates for the Water Group are 9.63% by IBES/First Call,

21 10.67% by Zacks, 11.10% by Reuters/Market Guide, and 9.25% by Value Line. The

22 Value Line projections indicate that earnings per share for the Water Group will grow

23 prospectively at a more rapid rate (i.e., 9.25%) than the dividends per share (i.e.,

24 5.88%), which indicates a declining dividend payout ratio for the future. As indicated

25 earlier, and in Appendix E, with the constant price-earnings multiple assumption of the

28


1 DCF model, growth for these companies will occur at the higher earnings per share

2 growth rate, thus producing the capita! gains yield expected by investors.

3 39. Q. What conclusion have you drawn from these data?

4 A. Historical and projected earnings per share and dividends per share growth indicators

5 should, of course, be considered. However, projections of future earnings growth

6 provide the principal focus of investor expectations. In this regard, it is worthwhile to

7 note that Professor Myron Gordon, the foremost proponent of the DCF model in rate

8 cases, concluded that the best measure of growth in the DCF model is forecasted

9 earnings per share growth. Hence, to follow Professor Gordon's findings, projections

10 of earnings per share growth, such as those published by IBES/First Call, Zacks,

11 Reuters/Market Guide, and Value Line, represent a reasonable assessment of investor

12 expectations.

13 It is appropriate to consider all forecasts of earnings growth rates that are

14 available to investors. In this regard, I have considered the forecasts from IBES/First

15 Call, Zacks, Reuters/Market Guide and Value Line. The IBES/First Call, Zacks, and

16 Reuters/Market Guide growth rates are consensus forecasts taken from a survey of

17 analysts that make projections of growth for these companies. The IBES/First Call,

18 Zacks, and Reuters/Market Guide estimates are obtained from the Internet and are

19 widely available to investors free-of-charge. First Call is probably quoted most

20 frequently in the financial press when reporting on earnings forecasts. The Value Line

21 forecasts also are widely available to investors and can be obtained by subscription or

22 free-of-charge at most public and collegiate libraries.

23 The forecasts of earnings per share growth, as shown on Schedule 9, provide

24 a range of growth rates of 9.25% to 11.10%. To those company-specific growth rates,

25 consideration must be given to long-term growth in corporate profits. Although the

29


1 DCF growth rates cannot be established solely with a mathematical formulation, an

2 investor-expected growth rate of at least 8.00% is within the array of earnings per

3 share growth rates shown by the analysts' forecasts and the forecast growth in overall

4 corporate profits. The Value Line forecast of dividend per share growth is inadequate

5 in this regard due to the forecast decline in the dividend payout that I previously

6 described. As such, an 8.00% growth rate will accommodate all these factors.

7 40. Q. Does the sum of the dividend yield and growth rate provide a complete

8 representation of the cost of equity?

9 A. No.

10 41. Q. Please explain why.

11 A. If regulators rely upon the results of the DCF (which are based on the market price of

12 the stock of the companies analyzed) and use those results in computing the weighted

13 average cost of capital with a book value capital structure, those results will not reflect

14 the degree of financial risk associated with the capital structure shown by the market

15 capitalization. When the price diverges from book value, the potential exists for a

16 financial risk difference, whereby the capitalization of a utility measured at its market

17 value contains relatively less debt and more equity than the capitalization measured at

18 its book value.

19 This shortcoming of the DCF has persuaded the Commission to adjust the DCF

20 determined cost of equity upward to make the return consistent with the book value

21 capital structure. Provisions for this risk difference were made by the Commission in

22 the following cases:

23 • January 10, 2002 for Pennsylvania-American Water Company in Docket No. R-24 00016339 - 60 basis points adjustment. 25 • August 1, 2002 for Philadelphia Suburban Water Company in Docket No. R-26 00016750 - 80 basis points adjustment. 27 • January 29, 2004 for Pennsylvania-American Water Company in Docket No. R-28 00038304 (affirmed by the Commonwealth Court on November 8, 2004) -- 60

30


1 basis points adjustment. 2 • August 5, 2004 for Aqua Pennsylvania, Inc. in Docket No. R-00038805 - 60 basis 3 points adjustment. 4 - December 22, 2004 for PPL Electric Utilities Corporation in Docket No. R-5 00049255 - 45 basis points adjustment. 6 - February 8, 2007 for PPL Gas Utilities Corporation in Docket No. R-00061398 - 70 7 basis points adjustment. 8

9 It must be recognized that in order to make the DCF results relevant to the

10 capitalization measured at book value (as is done for rate setting purposes), the

11 market-derived cost rate cannot be used without modification. As I will explain, the

12 results of the DCF model can be modified to account for differences in risk when the

13 book value capital structure contains more financial leverage than the market value

14 capital structure.

15 42. Q. Is your leverage adjustment dependent upon the market valuation or book

16 valuation from an investor's perspective?

17 A. The only perspective that is important to investors is the return that.they-can-realize-on_

18 the market value of their investment,. As I have measured the DCF, the simple yield

19 (D/P) plus growth (g) provides a return applicable strictly to the price (P) that an

20 investor is willing to pay for a share of stock. The DCF formula is derived from the

21 standard valuation model: P = D/ (k-g), where P = price, D = dividend, k = the cost of

22 equity, and g = growth in cash flows. By rearranging the terms, we obtain the familiar

23 DCF equation: k= D/P+g. All of the terms in the DCF equation represent investors'

24 assessment of expected future cash flows that they will receive in relation to the value

25 that they set for a share of stock (P). The need for the leverage adjustment arises

26 when the results of the DCF model (k) are to be applied to a capital structure that is

27 different than indicated by the market priceJP). From the market perspective, the

28 financial risk of the Water Group is accurately measured by the capital structure ratios

29 calculated from the market capitalization of a firm. If the ratesetting process utilizes

31


1 the market capitalization ratios, then no additional analysis or adjustment would be

2 required, and the simple yield (D/P) plus growth (g) components of the DCF would

3 satisfy the financial risk associated.with the market value of the equity capitalization.

4 Since the ratesetting process uses a different set of ratios calculated from the book

5 value capitalization, then further analysis is required to synchronize the financial risk of

6 the book capitalization with the required return on the book value of the equity. This

7 adjustment is developed through precise mathematical calculations, using well

8 recognized analytical procedures that are widely accepted in the financial literature.

9 To arrive at that return, the rate of return on common equity is the unleveraged cost of

10 capital (or equity return at 100% equity) plus a term(s) reflecting the_increaseJn

11 financial risk resulting from the use of leverage in the capital structure. Multiple terms

•12 are used in the case of both debt and preferred stock. The resulting return is the one

13 that is necessary for the utility to earn on its own book value capital structure to reflect

14 the financial risk that varies from the return that applies to the market value capital

15 structure.

16 43. Q. What are the implications of applying a DCF return derived from market data to

17 the book value of a utility's capitalization?

18 A. The capital structure ratios measured at the utility's book value show more financial^

19 leverage, and higher risk, than the capitalization measured at its market values.

20 Please refer to Appendix E for the comparison. This means that a marketrderived-cost^

21 of equity, using models such as DCF and CAPM, reflects a level of financial risk that is

22 different - in this instance, much lower_^from-that-~shown^by_the_book_value_

23 capitalization. Hence, it is necessary to adjust the market-determined cost of equity

24 upward to reflect the higher financial risk related to the book value capitalization used

25 for ratesetting purposes. Failure to make this modification would result in a mismatch

32


1 of the lower financial risk related to market value used to measure the cost of equity

2 and the higher financial risk of the book value capital structure used in the ratesetting

3 process. That is to say, the cost of equity for the Water Group that is related to the

4 53.12% common equity ratio using book value has higher financial risk than the

5 72.41% common equity ratio using market values. Because the ratesetting process

6 utilizes the book value capitalization, it is necessary to adjust the market-determined

7 cost of equity for the higher financial risk related to the book value of the capitalization.

8 44. Q. How is the DCF-determined cost of equity adjusted for the financial risk

9 associated with the book value of the capitalization?

10 A. In pioneering work, Nobel laureates Modigliani and Miller developed several theories

11 about the role of leverage in a firm's capital structure. As detailed in Appendix E, the

12 Modigliani and Miller theory shows that the cost of equity increases by 1.23% (12.01%

13 - 10.78%) when the book value of equity, rather than the market value of equity, is

14 used for ratesetting purposes. As noted previously, the Commission has recognized

15 the need for this adjustment by adding 0.45% to 0.80% to the results of the simple

16 dividend yield plus growth components of the DCF. The average adjustment for the

17 four water company cases was 0.65%, and the adjustment in the most recent

18 Commission order was 0.70%. For the purpose of this case, an adjustment of at least

19 0.65% is warranted given the actual calculation that shows a higher adjustment with

20 year-end 2006 data.

21 45. Q. Please provide the DCF return based upon your preceding discussion of

22 dividend yield, growth, and leverage.

23 A. As explained previously, I have utilized a six-month average dividend yield {"Di /PQ")

24 adjusted in a forward-looking manner for my DCF calculation. This dividend yield is

25 used in conjunction with the growth rate ("g ") previously developed. The DCF also

33


1 includes the leverage modification ("lev.") required when the book value equity ratio is

2 used in determining the weighted average cost of capital in the ratesetting process

3 rather than the market value equity ratio related to the price of stock. The resulting

4 DCF cost rate is:

D T/P 0 + g + lev. k

Water Group 2.78% + 8.00% + 0.65% = 11.43%

5 The DCF result shown above represents the simplified (i.e., Gordon) form of the model

6 that contains a constant growth assumption. I should reiterate, however, that the DCF

7 indicated cost rate provides an explanation of the rate of return on common stock

8 market prices without regard to the prospect of a change in the price-earnings multiple.

9 An assumption that there will be no change in the price-earnings multiple is not

10 supported by the realities of the equity market, because price-earnings multiples do

11 not remain constant.

12 RISK PREMIUM ANALYSIS

13 46. Q. Please describe your use of the Risk Premium approach to determine the cost of

14 equity.

15 A. The details of my use of the Risk Premium approach and the evidence in support of

16 my conclusions are set forth in Appendix G. I will summarize them here. With this

17 method, the cost of equity capital is determined by corporate bond yields plus a

18 premium to account for the fact that common equity is exposed to greater investment

19 risk than debt capital. As with other models of the cost of equity, the Risk Premium

20 approach has its limitations, including the difficulty in formulating an accurate

21 assessment of the future cost of corporate debt and the measurement of the risk-

22 adjusted common equity premium.

34


1 47. Q. What long-term public utility debt cost rate did you use in your risk premium

2 analysis?

3 A. In my opinion, 6.25% represents a reasonable estimate of the prospective yield on

4 long-term A-rated public utility bonds. As I will subsequently show, the Moody's index

5 and the Blue Chip forecasts support this figure.

6 The historical yields for long-term public utility debt are shown graphically on

7 page 1 of Schedule 10. For the twelve months ended August 2007, the average

8 monthly yield on Moody's A-rated index of public utility bonds was 6.00%. For the six

9 and three-month periods ended August 2007, the yields were 6.10% and 6.26%,

10 respectively. During the twelve-months ended August 2007, the range of the yields on

11 A-rated public utility bonds was 5.80% to 6.30%.

12 48. Q. How have interest rates changed over the past several years?

13 A. In the two year period between June 2004 and June 2006, the Federal Open Market

14 Committed ("FOMC") increased the Fed Funds rate in seventeen 25 basis point

15 increments. These policy actions, which brought the Fed Funds rate to 5.25%, were

16 widely interpreted as part of the process of moving toward a more neutral range for

17 monetary policy. After the series of increases in the Fed Funds rate that concluded in

18 June 2006, interest rates were characterized by a relatively flat to slightly inverted yield

19 curve, which endured longer than would have been expected.

20 Beginning in 2007, turmoil erupted in the credit markets, which prompted

21 central banks throughout the world to inject over $325 billion of reserves into the

22 banking system over a three-day period in reaction to a credit crunch. Problems had

23 been developing in the market for asset-backed securities linked to subprime

24 mortgages. Valuation uncertainties for these securities caused liquidity concerns for

25 hedge funds, investment banks, and financial institutions. The bankruptcy of some

35


1 hedge funds added to the liquidity problems in the credit markets. The market for

2 commercial paper, the most liquid part of the credit markets for non-Treasury

3 securities, was also affected. In response to the market turmoil, the FOMC made

4 several statements intended to calm the credit markets, the first of their type since

5 after the September 11, 2001 terrorists' attack. During a two week period in mid-

6. August 2007, the Federal Reserve added liquidity in an attempt to stabilize the

7 functioning of financial markets. As noted above these actions were part of the efforts

8 of central banks globally to restore order to the financial markets. Then, one week

9 after its initial announcement, the FOMC made a surprise reduction in the discount

10 rate. The FMOC reduced the discount rate by 50 basis points to narrow the spread

11 between this rate and the target federal funds rate. At the same time, the FOMC made

12 the following statement:

13 Financial market conditions have deteriorated, and tighter 14 credit conditions and increased uncertainty have the 15 potential to restrain economic growth going forward. In 16 these circumstances, although recent data suggest that 17 the economy has continued to expand at a moderate pace, 18 the Federal Open Market Committee judges that the 19 downside risks to growth have increased appreciably. The 20 Committee is monitoring the situation and is prepared to 21 act as needed to mitigate the adverse effects on the 22 economy arising from the disruptions in financial markets. 23

24 Thereafter, at its regularly scheduled meeting on September 18, 2007, the FOMC

25 reduced the target Fed Funds rate to 4.75% and the discount rate was reduced to

26 5.25% in an effort to forestall the adverse effects of the financial market turmoil on the

27 economy generally. A further reduction of 25 basis points occurred at the FOMC's

28 next scheduled meeting on October 31, 2008. There, the FOMC indicated that:

29 Economic growth was solid in the third quarter, and strains 30 in financial markets have eased somewhat on balance. 31 However, the pace of economic expansion will likely slow 32 in the near term, partly reflecting the intensification of the 33 housing correction. Today's action, combined with the

36


1 policy action taken in September, should help forestall 2 some of the adverse effects on the broader economy that 3 might otherwise arise from the disruptions in financial 4 markets and promote moderate growth over time. 5 6 Readings on core inflation have improved modestly this 7 year, but recent increases in energy and commodity prices, 8 among other factors, may put renewed upward pressure 9 on inflation. In this context, the Committee judges that

10 some inflation risks remain, and it will continue to monitor 11 inflation developments carefully. 12 13 The Committee judges that, after this action, the upside 14 risks to inflation roughly balance the downside risks to 15 growth. The Committee will continue to assess the effects 16 of financial and other developments on economic 17 prospects and will act as needed to foster price stability 18 and sustainable economic growth. 19

20 49. Q. What forecasts of interest rates have you considered in your analysis?

21 A. I have determined the prospective yield on A-rated public utility debt by using the Blue

22 Chip Financial Forecasts ("Blue Chip") along with the spread in the yields that I

23 describe above and in Appendix F. The Blue Chip is a reliable authority and contains

24 consensus forecasts of a variety of interest rates compiled from a panel of banking,

25 brokerage, and investment advisory services. In early 1999, Blue Chip stopped

26 publishing forecasts of yields on A-rated public utility bonds because the Federal

27 Reserve deleted these yields from its Statistical Release H.15. To independently

28 project a forecast of the yields on A-rated public utility bonds, I have combined the

29 forecast yields on long-term Treasury bonds published on October 1, 2007, and the

30 yield spread of 1.25%. For comparative purposes, I also have shown the Blue Chip

31 forecasts for Aaa-rated and Baa-rated corporate bonds:

37


Blue Chip Financial Forecasts Corporate 30-Year A-rated Public Utility

Year Quarter Aaa-rated Baa-rated Treasury Spread Yield

2007 Fourth 5.7% 6.6% 4.8% 1.25% 6.05%

2008 First 5.7% 6.7% 4.9% 1.25% 6.15%

2008 Second 5.8% 6.7% 4.9% 1.25% 6.15%

2008 Third 5.9% 6.8% 5.0% • 1.25% 6.25% 2008 Fourth 6.0% 6.9% 5.1% 1.25% 6.35%

2008 First 6.0% 7.0% 5.2% 1.25% 6.45%

1 50. Q. Are there additional forecasts of interest rates that extend beyond those shown

2 above?

3 A. Yes. Twice yearly, Blue Chip provides long-term forecasts of interest rates. In its

4 June 1, 2007 publication, the Blue Chip published forecasts of interest rates as follows:

Blue Chip Financial Forecasts Corporate 30-Year A-rated Public Utility

Averages Aaa-rated Baa-rated Treasury Spread Yield 2008-12 6.0% 6.9% 5.3% 1.25% 6.55%

5 2013-17 6.0% 7.0% 5.3% 1.25% 6.55%

6 Given these forecast interest rates, a 6.25% yield on A-rated public utility bonds

7 represents a reasonable expectation.

8 51. Q. What equity risk premium have you determined for public utilities?

9 A. Appendix G provides a discussion of the financial returns that I relied upon to develop

10 the appropriate equity risk premium for the S&P Public Utilities. I have calculated the

11 equity risk premium by comparing the market returns on utility stocks and the market

12 returns on utility bonds. I chose the S&P Public Utility index for the purpose of

13 measuring the market returns for utility stocks. The S&P Public Utility index is

14 reflective of the risk associated with regulated utilities, rather than some broader

15 market indexes, such as the S&P 500 Composite index. The S&P Public Utility index

16 is a subset of the overall S&P 500 Composite index. Use of the S&P Public Utility

17 index reduces the role of judgment in establishing the risk premium for public utilities.

38


1 With the equity risk premiums developed .for the S&P Public Utilities as a base, I

2 derived the equity risk premium for the Water Group.

3 52. Q. What equity risk premium for the S&P Public Utilities have you determined for

4 this case?

5 A. To develop an appropriate risk premium, I analyzed the results for the S&P Public

6 Utilities by averaging (i) the midpoint of the range shown by the geometric mean and

7 median and (ii) the arithmetic mean. This procedure has been employed to provide a

8 comprehensive way of measuring the central tendency of the historical returns. As

9 shown by the values set forth on page 2 of Schedule 11, the indicated risk premiums

10 for the various time periods analyzed are 5.37% (1928-2006), 6.40% (1952-2006),

11 5.61% (1974-2006), and 5.83% (1979-2006). The selection of the shorter periods

12 taken from the entire historical series is designed to provide a risk premium that

13 conforms more nearly to present investment fundamentals, and removes some of the

14 more distant data from the analysis.

15 53. Q. Do you have further support for the selection of the time periods used in your

16 equity risk premium determination?

17 A. Yes. First, the terminal year of my analysis presented in Schedule 11 represents the

18 returns realized through 2006. Second, the selection of the initial year of each period

19 was based upon the events that I described in Appendix G. These events were fixed

20 in history and cannot be manipulated as later financial data becomes available. That

21 is to say, using the Treasury-Federal Reserve Accord as a defining event, the year

22 1952 is fixed as the beginning point for the measurement period regardless of the

23 financial results that subsequently occurred. Likewise, 1974 represented a benchmark

24 year because it followed the 1973 Arab Oil embargo. Also, the year 1979 was chosen

25 because it began the deregulation of the financial markets. As such, additional data

39


1 are merely added to the earlier results when they become available, clearly showing

2 that the periods chosen were not driven by the desired results of the study.

3 54. Q. What conclusions have you drawn from these data?

4 A. Using the summary values provided on page 2 of Schedule 11, the 1928-2006 period

5 provides the lowest indicated risk premium, while the 1952-2006 period provides the

6 highest risk premium for the S&P Public Utilities. Within these bounds, a common

7 equity risk premium of 5.72% (5.61% + 5.83% = 11.44% + 2) can be calculated from

8 data covering the periods 1974-2006 and 1979-2006. Therefore, 5.72% represents a

9 reasonable risk premium for the S&P Public Utilities in this case.

10 As noted earlier in my fundamental risk analysis, differences in risk

11 characteristics must be taken into account when applying the results for the S&P

12 Public Utilities to the Water Group including size, market ratios, common equity ratio,

13 return on book equity, operating ratios, coverage, quality of earnings, internally

14 generated funds, and betas. In my opinion, these differences indicate that 5.25%

15 represents a reasonable common equity risk premium in this case. This represents

16 approximately 92% (5.25% + 5.72% = 0.92) of the risk premium of the S&P Public

17 Utilities and is reflective of the risk of the Water Group compared to the S&P Public

18 Utilities.

19 55. Q. What common equity cost rate would be appropriate using this equity risk

20 premium and the yield on long-term public utility debt?

21 A. The cost of equity (i.e., "k") is represented by the sum of the prospective yield for long-

22 term public utility debt (i.e., "i") and the equity risk premium (i.e., "RP"). The Risk

23 Premium approach provides a cost of equity of:

40


/ + RP - K '

Water Group 6.25% + 5.25% = 11.50%

1 CAPITAL ASSET PRICING MODEL

2 56. Q. Have you used the Capital Asset Pricing Model to measure the cost of equity in

3 this case?

4 A. Yes, I have used the Capital Asset Pricing Model ("CAPM") in addition to my other

5 methods. As with other models of the cost of equity, the CAPM contains a variety of

6 assumptions that I discuss in Appendix H. Therefore, this method should be used with

7 other methods to measure the cost of equity, as each will complement the other and

8 will provide a result that will alleviate the unavoidable shortcomings found in each

9 method.

10 57. Q. What are the features of the CAPM as you have used it?

11 A. The CAPM uses the yield on a risk-free interest bearing obligation plus a rate of return

12 premium that is proportional to the systematic risk of an investment. The details of my

13 use of the CAPM and evidence in support of my conclusions are set forth in Appendix

14 H. To compute the cost of equity with the CAPM, three components are necessary: a

15 risk-free rate of return ("Rf), the beta measure of systematic risk ("p"), and the market

16 risk premium ("Rm-Rf) derived from the total return on the market of equities reduced

17 by the risk-free rate of return. The CAPM specifically accounts for differences in

18 systematic risk (i.e., market risk as measured by the beta) between an individual firm

19 or group of firms and the entire market of equities. As such, to calculate the CAPM it

20 is necessary to employ firms with traded stocks. In this regard, I performed a CAPM

21 calculation for the Water Group. In contrast, my Risk Premium approach considers

22 both industry- and company-specific factors because it is not limited to measuring just

41


1 systematic risk. As a consequence, the Risk Premium approach is more

2 comprehensive than the CAPM. In addition, the Risk Premium approach provides a

3 better measure of the cost of equity because it is founded upon the yields on corporate

4 bonds rather than Treasury bonds.

5 58. Q. What betas have you considered in the CAPM?

6 A. For my CAPM analysis, I initially considered the Value Line betas. As shown on page

7 1 of Schedule 12, the average beta is .83 for the Water Group.

8 59. Q. What betas have you used in the CAPM determined cost of equity?

9 A. The betas must be reflective of the financial risk associated with the ratesetting capital

10 structure that is measured at book value. Therefore, Value Line betas cannot be used

11 . directly in the CAPM, unless those betas are applied to a capital structure measured

12 with market values. To develop a CAPM cost rate applicable to a book value capital

13 structure, the Value Line betas have been unleveraged and releveraged for the

14 common equity ratios using book values using the Hamada formula. This adjustment

15 has been made with the formula:

16 pi = fiu [1 + (1 -1) D/E + P/E]

17 where HI = the leveraged beta, Uu = the unleveraged beta, t = income tax rate, D =

18 debt ratio, P = preferred stock ratio, and E = common equity ratio. The betas

19 published by Value Line have been calculated with the market price of stock and

20 therefore are related to the market value capitalization. By using the formula shown

21 above and the capital structure ratios measured at its market values, the beta would

22 become .66 for the Water Group if it employed no leverage and was 100% equity

23 financed. With the unleveraged beta as a base, I calculated the leveraged beta of 1.04

24 for the Water Group associated with book value capital structure. The betas and their

25 corresponding common equity ratios are:

42


Market Values Book Values Beta Common Equity Ratio Beta Common Equity Ratio

0.83 72.41% 1.04 53.12%

1

2 The leveraged beta that I will employ in the CAPM cost of equity calculation is 1.04 for

3 the Water Group.

4 60. Q. What risk-free rate have you used in the CAPM?

5 A. For reasons explained in Appendix F, I have employed the yields on 20-year Treasury

6 bonds using both historical and forecast data to match the longer-term horizon

7 associated with the ratesetting process. On pages 2 and 3 of Schedule 12, I provide

8 the historical yields on Treasury notes and bonds. For the twelve months ended

9 September 2007, the average yield was 4.95%, as shown on page 3 of that schedule.

10 For the six- and three-months ended September 2007, the yields on 20-year Treasury

11 bonds were 5.04% and 5.01%, respectively. During the twelve-months ended

12 September 2007, the range of the yields on 20-year Treasury bonds was 4.78% to

13 5.29%. As shown on page 4 of Schedule 12, forecasts published by Blue Chip on

14 October 1, 2007 indicate that the yields on long-term Treasury bonds are expected to

15 be in the range of 4.8% to 5.2% during the next six quarters. The longer term

16 forecasts described previously show that the yields on Treasury bonds will average

17 5.3% from 2008 through 2012 and from 2013 to 2017. Hence, I have used a 5.00%

18 risk-free rate of return for CAPM purposes.

19 61. Q. What market premium have you used in the CAPM?

20 A. As developed in Appendix H, the market premium is developed by averaging historical

21 market performance (i.e., 6.5%) and the forecasts (i.e., 7.28%). For the historically

22 based market premium, I have used the arithmetic mean. The resulting market

43


1 premium is 6.89% (6.5% + 7.28% = 13.78% 2), which represents the average market

2 premium using historical and forecast data.

3 62. Q. Are there adjustments to the CAPM results that are necessary to fu/ly reflect the

4 rate of return on common equity?

5 A. Yes. The technical literature supports an adjustment relating to the size of the

6 company or portfolio for which the calculation is performed. There would be an

7 understatement of a firm's cost of equity with the CAPM unless the size of a firm is

8 considered. That is to say, as the size of a firm decreases, its risk and, hence, its

9 required return increases. Moreover, in his discussion of the cost of capital, Professor

10 Brigham has indicated that smaller firms have higher capital costs than otherwise

11 similar larger firms (see Fundamentals of Financial Management, fifth edition, page

12 ' 623). Also, the Fama/French study (see 'The Cross-Section of Expected Stock

13 Returns"; The Journal of Finance, June 1992) established that size of a firm helps

14 explain stock returns. In an October 15, 1995 article in Public Utility Fortnightly,

15 entitled "Equity and the Small-Stock Effect," it was demonstrated that the CAPM could

16 understate the cost of equity significantly according to a company's size. Indeed, it

17 was demonstrated in the SBBI Yearbook that the returns for stocks in lower deciles

18 (i.e., smaller stocks) had returns in excess of those shown by the simple CAPM. In

.19 this regard, Water Group has an average market equity capitalization of $772 million,

20 which would make it a low cap portfolio. The low cap market capitalization would

21 indicate a size premium of 1.76%. Absent such an adjustment, the CAPM would

22 understate the required return. However, for my CAPM analysis, I have adopted a

23 more conservative size adjustment of 0.97%, which represents the mid-cap

24 adjustment.

25 63. Q. What result have you determined using the CAPM?

44


1 A. Using the 5.00% risk-free rate of return, the leverage adjusted beta of 1.04 for the

2 Water Group, the 6.89% market premium, and the size adjustment, the following result

3 is indicated.

Rf + a x ( Rm-Rf ) + size = K

Gas Group 5.00% + 1.04 x ( 6.89% ) + 0.97% = 13.14%

4 COMPARABLE EARNINGS APPROACH

5 64. Q. How have you applied the Comparable Earnings approach in this case?

6 A. The technical aspects of my Comparable Earnings approach are set forth in Appendix

7 I. In order to identify the appropriate return on equity for a public utility, it is necessary

8 to analyze returns experienced by other firms within the context of the Comparable

9 Earnings standard. The firms selected for the Comparable Earnings approach should

10 be companies whose prices are not subject to cost-based price ceilings (i.e., non-

11 regulated firms) so that circularity is avoided. Because regulated firms must compete

12 with non-regulated firms in the capital markets, it is appropriate to view the returns

13 experienced by firms which operate in competitive markets. Moreover, regulation is a

14 substitute for competitively-determined prices. One must keep in mind that the rates of

15 return for non-regulated firms represent results on book value actually achieved, or

16 expected to be achieved, because the starling point of the calculation is the actual

17 experience of companies that are not subject to rate regulation. The United States

18 Supreme Court has held that:

19 A public utility is entitled to such rates as will permit it to 20 earn a return on the value of the property which it employs 21 for the convenience of the public equal to that generally 22 being made at the same time and in the same general part 23 of the country on investments in other business 24 undertakings which are attended by corresponding risks 25 and uncertainties.... The return should be reasonably 26 sufficient to assure confidence in the financial soundness 27 of the utility and should be adequate, under efficient and

45


1 economical management, to maintain and support its credit 2 and enable it to raise the money necessary for the proper 3 discharge of its public duties. Bluefield Water Works vs. 4 Public Service Commission, 262 U.S. 668 (1923). 5 6 Therefore, it is important to identify the returns earned by firms that compete for capital

7 with a public utility. This can be accomplished by analyzing the returns of non-

8 regulated firms that are subject to the competitive forces of the marketplace.

9 There are two avenues available to implement the Comparable Earnings

10 approach. One method would involve the selection of another industry (or industries)

11 with comparable risks to the public utility in question, and the results for all companies

12 within that industry would serve as a benchmark. The second approach requires the

13 selection of parameters that represent similar risk traits for the public utility and the

14 comparable risk companies. Using this approach, the business lines of the

15 comparable companies become unimportant. The latter approach is preferable.

16 To identify the comparable risk companies, the Value Line Investment Survey

17 for Windows was used to screen for firms of comparable risks. The Value Line

18 Investment Survey for Windows includes data on approximately 1700 firms. Excluded

19 from the selection process were companies incorporated in foreign countries and

20 master limited partnerships (MLPs).

21 65. Q. How have you implemented the Comparable Earnings approach?

22 A. In order to implement the Comparable Earnings approach, non-regulated companies

23 were selected from the Value Line Investment Survey for Windows that have six

24 categories (see Appendix I for definitions) of comparability designed to reflect the risk

25 of the Water Group. These screening criteria were based upon the range as defined

26 by the rankings of the companies in the Water Group. The items considered were:

27 Timeliness Rank, Safety Rank, Financial Strength, Price Stability, Value Line betas,

28 and Technical Rank. The identities of the companies comprising the Comparable 46


1 Earnings group and their associated rankings within the ranges are identified on page

2 1 of Schedule 13.

3 Value Line data was relied upon because it provides a comprehensive basis

4 for evaluating the risks of the comparable firms. As to the returns calculated by Value

5 Line for these companies, there is some downward bias in the figures shown on page

6 2 of Schedule 13, because Value Line computes the returns on year-end rather than

7 average book value. If average book values had been employed, the rates of return

8 would have been slightly higher. Nevertheless, these are the returns considered by

9 investors when taking positions in these stocks. Because many of the comparability

10 factors, as well as the published returns, are used by investors for selecting stocks,

11 Value Line is, therefore, an appropriate database for measuring comparable return

12 opportunities.

13 66. Q. What data have you used in your Comparable Earnings analysis?

14 A, I have used both historical realized returns and forecast returns for non-utility

15 companies. As noted previously, I have not used returns for utility companies in order

16 to avoid the circularity that arises from using regulatory-influenced returns to determine

17 a regulated return. It is appropriate to consider a relatively long measurement period

18 in the Comparable Earnings approach in order to cover conditions over an entire

19 business cycle. A ten-year period (5 historical years and 5 projected years) is

20 sufficient to cover an average business cycle. Unlike the DCF and CAPM, the results

21 of the Comparable Earnings method can- be applied directly to the book value

22 capitalization because the nature of the analysis relates to book value. Hence, the

23 Comparable Earnings approach does not contain the potential misspecification

24 contained in market models when the market capitalization and book value

25 capitalization diverge significantly. The historical rate of return on book common

47


1 equity was 10.8% using the median value as shown on page 2 of Schedule 13. The

2 forecast rates of return, as published by Value Line, are shown by the 13.8% median

3 value also provided on page 2 of Schedule 13.

4 67. Q. What rate of return on common equity have you determined in this case using

5 the Comparable Earnings approach?

6 A. The average of the historical and forecast median rates of return is:

Historical Forecast Average

Comparable Earnings Group 10.80% 13.80% 12.30%

7 CREDIT QUALITY AND CONCLUSION

8 68. Q. What are some of the important factors that influence credit quality?

9 A. The Company must have the financial strength that will, at a minimum, permit it to

10 maintain a financial profile that is commensurate with the requirements to obtain a

11 solid investment grade bond rating. Strong credit quality is necessary to provide a

12 utility with the highest degree of financial flexibility in order to attract capital on

13 reasonable terms during all economic conditions. Customers also benefit from strong

14 credit quality because the utility will be able to obtain lower financing costs that are

15 passed on to customers in the form of a lower embedded cost of debt. For this

16 reason, rates should be established that would promote the maintenance of a financial

17 profile that would support a strong A bond rating.

18 69. Q. What is your conclusion concerning the Company's cost of common equity?

19 A. Based upon the application of a variety of methods and models described previously, it

20 is my opinion that the rate of return on common equity is within the range of 11.25% to

21 11.75%. The rate of return on common equity should recognize the exemplary

22 performance of the Company's management when selecting the return within this

48


1 range. For reasons explained previously, that return should be represented by the

2 midpoint of my range (i.e., 11.50%) plus the twenty-five basis points (i.e., 0.25%)

3 justified in the testimony of Mr. Smeltzer. It is essential that the Commission employ a

4 variety of techniques to measure the Company's cost of equity because of the

5 limitations/infirmities that are inherent in each method. In conclusion, the Company is

6 entitled to an 11.75% rate of return on common equity so that it can compete in the

7 capital markets, attain reasonable credit quality, and receive recognition of the

8 significant accomplishments that management has achieved.

9 70. Q. Does this conclude your direct testimony?

10 A. Yes.

49


Appendices A Through I to Accompany

the Direct Testimony

of

Paul R. Moul Managing Consultant P. Moul & Associates

Concerning

Cost of Equity and

Rate of Return

APPENDIX A TO DIRECT TESTIMONY OF PAUL R. MOUL

1 EDUCATIONAL BACKGROUND, BUSINESS EXPERIENCE

2 AND QUALIFICATIONS

3 I was awarded a degree of Bachelor of Science in Business Administration by Drexel

4 University in 1971. While at Drexel, I participated in the Cooperative Education Program

5 which included employment, for one year, with American Water Works Service Company, Inc.,

6 as an internal auditor, where I was involved in the audits of several operating water companies

7 of the American Water Works System and participated in the preparation of annual reports to

8 regulatory agencies and assisted in other general accounting matters.

9 Upon graduation from Drexel University, I was employed by American Water Works

10 Service Company, Inc., in the Eastern Regional Treasury Department where my duties

11 included preparation of rate case exhibits for submission to regulatory agencies as well as

12 responsibility for various treasury functions of the American Water Works System's thirteen

13 New England operating subsidiaries.

14 In 1973, I joined the Municipal Financial Services Department of Betz Environmental

15 Engineers, a consulting engineering firm, where I specialized in financial studies for municipal

16 water and wastewater systems.

17 In 1974, I joined Associated Utility Services, Inc., now known as AUS Consultants. I

18 held various positions with the Utility Services Group of AUS Consultants, concluding my

19 employment there as a Senior Vice President.

20 In 1994, I formed P. Moul & Associates, an independent financial and regulatory

21 consulting firm. In my capacity as Managing Consultant and for the past twenty-nine years, I

22 have continuously studied the rate of return requirements for cost of service regulated firms.

23 In this regard, I have supervised the preparation of rate of return studies which were employed

24 in connection with my testimony and in the past for other individuals. I have presented direct

25 testimony on the subject of fair rate of return, evaluated rate of return testimony of other

26 witnesses, and presented rebuttal testimony. Ar1


1 My studies and prepared direct testimony have been presented before thirty (30)

2 federal, state and municipal regulatory commissions, including: the Federal Energy

3 Regulatory Commission; state public utility commissions in Alabama, Connecticut, Delaware,

4 Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts,

5 Michigan, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio,

6 Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia, and

7 West Virginia; and the Philadelphia Gas Commission. My testimony has been offered in over

8 200 rate cases involving electric power, natural gas distribution and transmission, resource

9 recovery, solid waste collection and disposal, telephone, wastewater, and water service utility

10 companies. While my testimony has involved principally fair rate of return and financial

11 matters, I have also testified on capital allocations, capital recovery, cash working capital,

12 income taxes, factoring of accounts receivable, and take-or-pay expense recovery. My

13 testimony has been offered on behalf of municipal and investor-owned public utilities and for

14 the staff of a regulatory commission. I also testified at an Executive Session of the State of

15 New Jersey Commission of Investigation concerning the BPU regulation of solid waste

16 collection and disposal.

17 I was a co-author of a verified statement submitted to the Interstate Commerce

18 Commission concerning the 1983 Railroad Cost of Capital (Ex Parte No. 452). I was also co-

19 author of comments submitted to the Federal Energy Regulatory Commission regarding the

20 Generic Determination of Rate of Return on Common Equity for Public Utilities in 1985, 1986

21 and 1987 (Docket Nos. RM85-19-000, RM86-12-000, RM87-35-000 and RM88-25-000).

22 Further, I have been the consultant to the New York Chapter of the National Association of

23 Water Companies which represented the water utility group in the Proceeding on Motion of the

24 Commission to Consider Financial Regulatory Policies for New York Utilities (Case 91 -M-

25 0509). I have also submitted comments to the Federal Energy Regulatory Commission in its

A-2


1 Notice of Proposed Rulemaking (Docket No. RM99-2-000) concerning Regional Transmission

2 Organizations and on behalf of the Edison Electric Institute in its intervention in the case of

3 Southern California Edison Company (Docket No. ER97-2355-000).

4 In late 1978, I arranged for the private placement of bonds on behalf of an investor-

5 owned public utility. I have assisted in the preparation of a report to the Delaware Public

6 Service Commission relative to the operations of the Lincoln and Ellendale Electric Company.

7 I was also engaged by the Delaware P.S.C. to review and report on the proposed financing

8 and disposition of certain assets of Sussex Shores Water Company (P.S.C. Docket Nos. 24-

9 79 and 47-79). I was a co-author of a Report on Proposed Mandatory Solid Waste Collection

10 Ordinance prepared for the Board of County Commissioners of Collier County, Florida.

11 I have been a consultant to the Bucks County Water and Sewer Authority concerning

12 rates and charges for wholesale contract service with the City of Philadelphia. My municipal

13 consulting experience also included an assignment for Baltimore County, Maryland, regarding

14 the City/County Water Agreement for Metropolitan District customers (Circuit Court for

15 Baltimore County in Case 34/153/87-CSP-2636).

16 I am a member of the Society of Utility and Regulatory Financial Analysis (formerly the

17 National Society of Rate of Return Analysts) and have attended several Financial Forums

18 sponsored by the Society. I attended the first National Regulatory Conference at the Marshall-

19 Wythe School of Law, College of William and Mary. I also attended an Executive Seminar

20 sponsored by the Colgate Darden Graduate Business School of the University of Virginia

21 concerning Regulated Utility Cost of Equity and the Capital Asset Pricing Model. In October

22 1984, I attended a Standard & Poor's Seminar on the Approach to Municipal Utility Ratings,

23 and in May 1985, I attended an S&P Seminar on Telecommunications Ratings.

24 My lecture and speaking engagements include:

A-3


1 9

Date Occasion Soonsor <L

3 April 2006 Thirty-eighth Financial Forum Society of Utility & Regulatory 4 Financial Analysts 5 April 2001 Thirty-third Financial Forum Society of Utility & Regulatory 6 Financial Analysts 7 8

December 2000 Pennsylvania Public Utility Law Conference:

Pennsylvania Bar Institute

9 Non-traditional Players 10 in the Water Industry 11 July 2000 EEI Member Workshop Edison Electric Institute 12 Developing incentives Rates: 13 Application and Problems 14 February 2000 The Sixth Annual Exnet and Bruder, Gentile & 15

February 2000 FERC Briefing Marcoux, LLP

16 March 1994 Seventh Annual Electric Utility 17 Proceeding Business Environment Conf. 18 May 1993 Financial School New England Gas Assoc. 19 April 1993 Twenty-Fifth National Society of Rate 20 Financial Forum of Return Analysts 21 June 1992 Rate and Charges American Water Works 22 Subcommittee Association 23 Annual Conference 24 May 1992 Rates School New England Gas Assoc. 25 October 1989 Seventeenth Annual Water Committee of the 26 Eastern Utility National Association 27 Rate Seminar of Regulatory Utility 28 Commissioners Florida 29 Public Service Commission 30 and University of Utah 31 October 1988 Sixteenth Annual Water Committee of the 32 Eastern Utility National Association 33 Rate Seminar of Regulatory Utility 34 Commissioners, Florida 35 Public Service 36 Commission and University 37 of Utah 38 May 1988 Twentieth Financial National Society of 39 Forum Rate of Return Analysts 40 October 1987 Fifteenth Annual Water Committee of the 41 Eastern Utility National Association 42 Rate Seminar of Regulatory Utility 43 Commissioners, Florida 44 Public Service Commis45 sion and University of 46 Utah 47 September 1987 Rate Committee American Gas Association 48 Meeting 49 May 1987 Pennsylvania National Association of 50 Chapter

A-4

Water Companies


1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17 18

October 1986

October 1984

March 1984

February 1983

May 1982

October 1979

annual meeting Eighteenth Financial Forum

Fifth National on Utility Ratemaking Fundamentals

Management Seminar

The Cost of Capita! Seminar

A Seminar on Regulation and The Cost of Capital

Economics of Regulation

National Society of Rate of Return

American Bar Association

New York State Telephone Association

Temple University, School of Business Admin.

New Mexico State University, Center for Business Research and Services

Brown University

A-5

APPENDIX B TO DIRECT TESTIMONY OF PAUL R. MOUL

1 RATESETTING PRINCIPLES

2 Traditional cost of service regulation, as implemented by a regulatory agency engaged

3 in ratesetting, such as the Commission, serves as a substitute for competition. In setting

4 rates, a regulatory agency must carefully consider the public's interest in reasonably priced, as

5 well as safe and reliable, service. The level of rates must also provide the public utility and its

6 investors with an opportunity to earn a rate of return for the public utility and its investors that

7 is commensurate with the risk to which the invested capital is exposed so that the public utility

8 has access to the capital required to meet its service responsibilities to its customers. Without

9 an opportunity to earn a fair rate of return, a public utility will be unable to attract sufficient

1G . capital required to meet its responsibilities over time.

11 It is important to remember that regulated firms must compete for capital in a global

12 market with non-regulated firms, as well as municipal, state and federal governments.

13 Traditionally, a public utility has been responsible for providing a particular type of service to its

14 customers within a specific market area. Although this relationship with customers has been

15 changing, a regulated utility remains quite different from a non-regulated firm which is free to

16 enter and exit competitive markets in accordance with available business opportunities.

17 As established by the landmark Bluefield and Hope cases,1 several tests have been

18 articulated through which the regulator can determine the fairness or reasonableness of the

19 rate of return. These tests include a determination of whether the rate of return is (i) similar to

20 that of other financially sound businesses having similar or comparable risks, (ii) sufficient to

21 ensure confidence in the financial integrity of the public utility, and (iii) adequate to maintain

22 and support the credit of the utility, thereby enabling it to attract, on a reasonable cost basis,

23 the funds necessary to satisfy its capital requirements so that it can meet the obligation to

24 provide adequate and reliable service to the public.

1 Bluefield Water Works & Improvement Co. v. P.S.C. of West Virginia. 262 U.S. 679 (1923) and F.P.C. v. Hope Natural Gas Co.. 320 U.S. 591 (1944).

B-1

APPENDIX B TO DIRECT TESTIMONY OF PAUL R. MOUL

1 A fair rate of return must not only provide the utility with the ability to attract new capital

2 it must also be fair to existing investors. An appropriate rate of return which may have been

3 reasonable at one point in time may become too high or too low at a subsequent point in time,

4 based upon changing business risks, economic conditions and alternative investment

5 opportunities. When applying the standards of a fair rate of return, it must be recognized that

6 the end result must provide for the payment of interest on the company's debt, the payment of

7 dividends on the company's stock, the recovery of costs associated with securing capital, the

8 maintenance of reasonable credit quality for the company, and support of the company's

9 financial condition, which today would include those measures of financial performance in the

10 areas of interest coverage and adequate cash flow derived from a reasonable level of

11 earnings.

12

B-2

APPENDIX C TO DIRECT TESTIMONY OF PAUL R. MOUL

1 EVALUATION OF RISK

2 The rate of return required by investors is directly linked to the perceived level of risk.

3 The greater the risk of an investment, the higher is the required rate of return necessary to

4 compensate for that risk all else being equal. Because investors will seek the highest rate of

5 return available considering the risk involved, the rate of return must at least equal the

6 investor-required, market-determined cost of capital if public utilities are to attract the

7 necessary investment capital on reasonable terms.

8 In the measurement of the cost of capital, it is necessary to assess the risk of a firm.

9 The level of risk for a firm is often defined as the uncertainty of achieving expected

10 performance, and is sometimes viewed as a probability distribution of possible outcomes.

11 Hence, if the uncertainty of achieving an expected outcome is high, the risk is also high. As a

12 consequence, high risk firms must offer investors higher returns than low risk firms, which pay

13 ' less to attract capital from investors. This is because the level of uncertainty, or risk of not

14 realizing expected returns, establishes the compensation required by investors in the capital

15 markets. Of course, the risk of a firm must also be considered in the context of its ability to

16 actually experience adequate earnings which conform with a fair rate of return. Thus, if there

17 is a high probability that a firm will not perform well due to fundamentally poor market

18 conditions, investors will demand a higher return.

19 The investment risk of a firm is comprised of its business risk and financial risk.

20 Business risk is all risk other than financial risk, and is sometimes defined as the staying

21 power of the market demand for a firm's product or service and the resulting inherent

22 ' uncertainty of realizing expected pre-tax returns on the firm's assets. Business risk

23 encompasses all operating factors, e.g., productivity, competition, management ability, etc.

24 that bear upon the expected pre-tax operating income attributed to the fundamental nature of a

25 firm's business. Financial risk results from a firm's use of borrowed funds (or similar sources

C-1


1 of capital with fixed payments) in its capital structure, i.e., financial leverage. Thus, if a firm did

2 . not. employ financial leverage by borrowing any capital, its investment risk would be

3 represented by its business risk.

4 It is important to note that in evaluating the risk of regulated companies, financial

5 leverage cannot be considered in the same context as it is for non-regulated companies.

6 Financial leverage has a different meaning for regulated firms than for non-regulated

7 companies. When rates are set for regulated public utilities, the cost of service formula gives

8 the benefits of financial leverage to consumers in the form of lower revenue requirements,

9 since the cost of borrowed funds is generally lower than the cost of equity invested in the

10 company. For non-regulated companies, all benefits of financial leverage are retained by the

11 common stockholder. Although retaining none of the benefits, regulated firms bear the risk of

12 financial leverage. Therefore, a regulated firm's rate of return on common equity must

13 recognize the greater financial risk shown by the higher leverage typically employed by public

14 utilities.

15 Although no single index or group of indices can precisely quantify the relative

16 investment risk of a firm, financial analysts use a variety of indicators to assess that risk. For

17 example, the creditworthiness of a firm is revealed by its bond ratings. If the stock is traded,

18 the price-earnings multiple, dividend yield, and beta coefficients (a statistical measure of a

19 stock's relative volatility to the rest of the market) provide some gauge of overall risk. Other

20 indicators, which are reflective of business risk, include the variability of the rate of return on

21 equity, which is indicative of the uncertainty of actually achieving the expected earnings;

22 operating ratios (the percentage of revenues consumed by operating expenses, depreciation,

23 and taxes other than income tax), which are indicative of profitability; the quality of earnings,

24 which considers the degree to which earnings are the. product of accounting principles or cost

25 deferrals; and the level of internally generated funds. Similarly, the proportion of senior capital

C-2


1 in a company's capitalization is the measure of financial risk which is often analyzed in the

2 context of the equity ratio {i.e., the complement of the debt ratio).

C-3

APPENDIX D TO DIRECT TESTIMONY OF PAUL R. MOUL

1 COST OF EQUITY-GENERAL APPROACH

2 Through a fundamental financial analysis, the relative risk of a firm must be established

3 prior to the determination of its cost of equity. Any rate of return recommendation which lacks

4 such a basis will inevitably fail to provide a utility with a fair rate of return except by

5 coincidence. With a fundamental risk analysis as a foundation, standard financial models can

6 be employed by using informed judgment. The methods which have been employed to

7 measure the cost of equity include: the Discounted Cash Flow ("DCF") model, the Risk

8 Premium ("RP") approach, the Capital Asset Pricing Model ("CAPM") and the Comparable

9 Earnings ("CE") approach.

10 The traditional DCF model, while useful in providing some insight into the cost of

11 equity, is not an approach that should be used exclusively. The divergence of stock prices

12 from company-specific fundamentals can provide a misleading cost of equity calculation. As

13 reported in The Wall Street Journal on June 6, 1991, a statistical study published by Goldman

14 Sachs indicated that only 35% of stock price growth in the 1980's could be attributed to

15 earnings and interest rates. Further, 38% of the rise in stock prices during the 1980's was

16 attributed to unknown factors. The Goldman Sachs study highlights the serious limitations of a

17 model, such as DCF, which is founded upon identification of specific variables to explain stock

18 price growth. That is to say, when stock price growth exceeds growth in a company's earnings

19 per share, models such as DCF will misspecify investor expected returns which are comprised

20 of capital gains, as well as dividend receipts. As such, a combination of methods should be

21 used to measure the cost of equity.

22 The Risk Premium analysis is founded upon the prospective cost of long-term debt,

23 i.e., the yield that the public utility must offer to raise long-term debt capital directly from

24 investors. To that yield must be added a risk premium in recognition of the greater risk of

25 common equity over debt. This additional risk is, of course, attributable to the fact that the

D-1

APPENDIX D TO DIRECT TESTIMONY OF PAUL R. MOUL

1 payment of interest and principal to creditors has priority over the payment of dividends and

2 return of capital to equity investors. Hence, equity investors require a higher rate of return

3 than the yield on long-term corporate bonds.

4 The CAPM is a model not unlike the traditional Risk Premium. The CAPM employs the

5 yield on a risk-free interest-bearing obligation plus a premium as compensation for risk. Aside

6 from the reliance on the risk-free rate of return, the CAPM gives specific quantification to

7 systematic (or market) risk as measured by beta.

8 The Comparable Earnings approach measures the returns expected/experienced by

9 other non-regulated firms and has been used extensively in rate of return analysis for over a

10 half century. However, its popularity diminished in the 1970s and 1980s with the

11 popularization of market-based models. Recently, there has been renewed interest in this

12 approach. Indeed, the financial community has expressed the view that the regulatory

13 process must consider the returns which are being achieved in the non-regulated sector so

14 that public utilities can compete effectively in the capital markets. Indeed, with additional

15 competition being introduced throughout the traditionally regulated public utility industry,

16 returns expected to be realized by non-regulated firms have become increasing relevant in the

17 ratesetting process. The Comparable Earnings approach considers directly those

18 requirements and it fits the established standards for a fair rate of return set forth in the

19 landmark decisions on the issue of rate of return. These decisions require that a fair return for

20 a utility must be equal to that earned by firms of comparable risk.

D-2

APPENDIX E TO DIRECT TESTIMONY OF PAUL R. MOUL

1 DISCOUNTED CASH FLOW ANALYSIS

2 Discounted Cash Flow ("DCF") theory seeks to explain the value of an economic or

3 financial asset as the present value of future expected cash flows discounted at the

4 appropriate risk-adjusted rate of return. Thus, if $100 is to be received in a single payment 10

5 years subsequent to the acquisition of an asset, and the appropriate risk-related interest rate is

6 8%, the present value of the asset would be $46.32 (Value = $100 - (1.08)10) arising from the

7 discounted future cash flow. Conversely, knowing the present $46.32 price of an asset (where

8 price = value), the $100 future expected cash flow to be received 10 years hence shows an

9 8% annual rate of return implicit in the. price and future cash flows expected to be received.

10 In its simplest form, the DCF theory considers the number of years from which the cash

11 flow will be derived and the annual compound interest rate which reflects the risk or

12 uncertainty associated with the cash flows. It is appropriate to reiterate that the dollar values

13 to be discounted are future cash flows.

14 DCF theory is flexible and can be used to estimate value {or price) or the annual

15 required rate of return under a wide variety of conditions. The theory underlying the DCF

16 methodology can be easily illustrated by utilizing the investment horizon associated with a

17 preferred stock not having an annual sinking fund provision. In this case, the investment

18 horizon is infinite, which reflects the perpetuity of a preferred stock. If P represents price, Kp is

19 the required rate of return on a preferred stock, and D is the annual dividend (P and D with

20 time subscripts), the value of a preferred share is equal to the present value of the dividends to

21, be received in the future discounted at the appropriate risk-adjusted interest rate, Kp. In this

22 circumstance:

23 p 0 = D / + D 2 + D 3 ,+ . , . + • ^ (J + Kp) (l + Kpf (l + Kpf O+Kpf

E-1


1 If Di = D 2 = D 3 ^ ... D n as is the case for preferred stock, and n approaches infinity, as is the

2 case for non-callable preferred stock without a sinking fund, then this equation reduces to:

3 p9=* Kp

4 This equation can be used to solve for the annual rate of return on a preferred stock when the

5 . current price and subsequent annual dividends are known. For example, with Di = $1.00, and

6 Po = $10, then Kp = $1.00 + $10, or 10%.

7 The dividend discount equation, first shown, is the generic DCF valuation model for all

8 equities, both preferred and common. While preferred stock generally pays a constant

9 dividend, permitting the simplification subsequently noted, common stock dividends are not

10 constant. Therefore, absent some other simplifying condition, it is necessary to rely upon the

11 generic form of the DCF. If, however, it is assumed that Di, D 2, D 3, . . .D n are systematically

12 related to one another by a constant growth rate (g), so that Do (1 + g) ~ Di, Di (1 + g) = D2, Dz

13 (1 + g) = D3 and so on approaching infinity, and if Ks (the required rate of return on a common

14 stock) is greater than g, then the DCF equation can be reduced to:

Ks-g Ks-g

15 which is the periodic form of the "Gordon" model.1 Proof of the DCF equation is found in all

16 modern basic finance textbooks. This DCF equation can be easily solved as:

Po

1 Although the popular application of the DCF model is often attributed to the work of Myron J. Gordon in the mid-1950's, J. B. Williams exposited the DCF model in its present form nearly two

E-2


1 which is the periodic form of the Gordon Model commonly applied in estimating equity rates of

2 return in rate cases. When used for this purpose, Ks is the annual rate of return on common

3 equity demanded by investors to induce them to hold a firm's common stock. Therefore, the

4 variables D 0, Po and g must be estimated in the context of the market for equities, so that the

5 rate of return, which a public utility is permitted the opportunity to earn, has meaning and

6 reflects the investor-required cost rate.

7 Application of the Gordon model with market derived variables is straightforward. For

8 example, using the most recent prior annualized dividend (Do) of $0.80, the current price (PQ)

9 of $10.00, and the investor expected dividend growth rate (g) of 5%, the solution of the DCF

10 formula provides a 13.4% rate of return. The dividend yield component in this instance is

11 8.4%, and the capital gain component is 5%, which together represent the total 13.4% annual

12 rate of return required by investors. The capital gain component of the total return may be

13 calculated with two adjacent future year prices. For example, in the eleventh year of the

14 holding period, the price per share would be $17.10 as compared with the price per share of

15 $16.29 in the tenth year which demonstrates the 5% annual capital gain yield.

16 Some DCF devotees believe that it is more appropriate to estimate the required return

17 on equity with a model which permits the use of multiple growth rates. This may be a plausible

18 approach to DCF, where investors expect different dividend growth rates in the near term and

19 long run. If two growth rates, one near term and one long-run, are to be used in the context of

20 a price (P 0 ) of $10.00, a dividend (Do) of $0.80, a near-term growth rate of 5.5%, and a long-

21 run expected growth rate of 5.0% beginning at year 6, the required rate of return is 13.57%

22 solved with a computer by iteration.

23 Dividend Yield

24 The historical annual dividend yield for the Water Group is shown on Schedule 3. The

decades earlier.

E-3


1 2002-2006 five-year average dividend yield was 2.9% for the Water Group. The monthly

2 dividend yields for the twelve months ending in September 2007 are shown graphically on

3 Schedule 7. These dividend yields reflect an adjustment to the month-end closing prices to

4 remove the pro rata accumulation of the quarterly dividend amount since the last ex-dividend

5 date.

6 The ex-dividend date usually occurs two business days before the record date of the

7 dividend (i.e., the date by which a shareholder must own the shares to be entitled to the

8 dividend payment-usually about two to three weeks prior to the actual payment). During a

9 quarter (here defined as 91 days), the price of a stock moves up ratably by the dividend

10 amount as the ex-dividend date approaches. The stock's price then falls by the amount of the

11 dividend on the ex-dividend date. Therefore, it is necessary to calculate the fraction of the

12 quarterly dividend since the time of the last ex-dividend date and to remove that amount from

13 the price. This adjustment reflects normal recurring pricing of stocks in the market, and

14 establishes a price which will reflect the true yield on a stock.

15 A six-month average dividend yield has been used to recognize the prospective.

16 orientation of the ratesetting process as explained in the direct testimony. For the purpose of

17 a DCF calculation, the average dividend yields must be adjusted to reflect the prospective

18 nature of the dividend payments, i.e., the higher expected dividends for the future rather than

19 the recent dividend payment annualized. An adjustment to the dividend yield component,

20 when computed with annualized dividends, is required based upon investor expectation of

21 quarterly dividend increases.

22 The procedure to adjust the average dividend yield for the expectation of a dividend

23 increase during the initial investment period will be at a rate of one-half the growth component,

24 developed below. The DCF equation, showing the quarterly dividend payments as Do, may be

25 stated in this fashion:

E-4


Po

1 The adjustment factor, based upon one-half the expected growth rate developed in my direct

2 testimony, will be 4.000% (8.00% x .5) for the Water Group, which assumes that two dividend

3 payments will be at the expected higher rate during the initial investment period. Using the

4 six-month average dividend yield as a base, the prospective (forward) dividend yield would be

5 2.78% (2.67% x 1.04000) for the Water Group.

6 Another DCF model that reflects the discrete growth in the quarterly dividend (D0) is as

7 . follows:

K-DoO + g f + Do(l + g f + DoO + g r + D<>(l + g) + Pa

8 This procedure confirms the reasonableness of the forward dividend yield previously

9 calculated. The quarterly discrete adjustment provides a dividend yield of 2.80% (2.67% x

10 1.04952) for the Water Group. The use of an adjustment is required for the periodic form of

11 the DCF in order to properly recognize that dividends grow on a discrete basis.

12 In either of the preceding DCF dividend yield adjustments, there is no recognition for

13 the compound returns attributed to the quarterly dividend payments. Investors have the

14 opportunity to reinvest quarterly dividend receipts. Recognizing the compounding of the

15 periodic quarterly dividend payments (Do), results in a third DCF formulation:

E-5


k = 1 + Do

Po. -1 + S

1 This DCF equation provides no further recognition of growth in the quarterly dividend.

2 Combining discrete quarterly dividend growth with quarterly compounding would provide the

3 following DCF formulation, stating the quarterly dividend payments (Do):

Po -1

10

4 A compounding of the quarterly dividend yield provides another procedure to recognize the

5 necessity for an adjusted dividend yield. The unadjusted average quarterly dividend yield was

6 0.6675% (2.67% + 4) for the Water Group. The compound dividend yield would be 2.75%

7 (1.0068054-1) for the Water Group, recognizing quarterly dividend payments in a forward-

8 looking manner. These dividend yields conform with investors' expectations in the context of

9 reinvestment of their cash dividend.

For the Water Group, a 2.78% forward-looking dividend yield is the average (2.78% +

11 2.80% + 2.75% = 8.33% - 3) of the adjusted dividend yield using the form Dg/Po (1+-5g), the

12 dividend yield recognizing discrete quarterly growth, and the quarterly compound dividend

13 yield with discrete quarterly growth.

14 Growth Rate

15 If viewed in its infinite form, the DCF model is represented by the discounted value of

16 an endless stream of growing dividends. It would, however, require 100 years of future

E-6


1 dividend payments so that the discounted value of those payments would equate to the

2 present price so that the discount rate and the rate of return shown by the simplified Gordon

3 form of the DCF model would be about the same. A century of dividend receipts represents

4 an unrealistic investment horizon from almost any perspective. Because stocks are not held

5 by investors forever, the growth in the share value (i.e., capital appreciation, or capital gains

6 yield) is most relevant to investors' total return expectations. Hence, investor expected returns

7 in the equity market are provided by capital appreciation of the investment as well as receipt of

8 dividends. As such, the sale price of a stock can be viewed as a liquidating dividend which can

9 be discounted along with the annual dividend receipts during the investment holding period to

10 arrive at the investor expected return.

11 In its constant growth form, the DCF assumes that with a constant return on book

12 common equity and constant dividend payout ratio, a firm's earnings per share, dividends per

13 share and book value per share will grow at the same constant rate, absent any external

14 financing by a firm. Because these constant growth assumptions do not actually prevail in the

15 capital markets, the capital appreciation potential of an equity investment is best measured by

16 the expected growth in earnings per share. Since the traditional form of the DCF assumes no

17 change in the price-earnings multiple, the value of a firm's equity will grow at the same rate as

18 earnings per share. Hence, the capital gains yield is best measured by earnings per share

19 growth using company-specific variables.

20 Investors consider both historical and projected data in the context of the expected

21 growth rate for a firm. An investor can compute historical growth rates using compound

22 growth rates or growth rate trend lines. Otherwise, an investor can rely upon published growth

23 rates as provided in widely-circulated, influential publications. However, a traditional constant

24 growth DCF analysis that is limited to such inputs suffers from the assumption of no change in

25 the price-earnings multiple, i.e., that the value of a firm's equity will grow at the same rate as

E-7


1 earnings. Some of the factors which actually contribute to investors' expectations of earnings

2 growth and which should be considered in assessing those expectations, are: (i) the earnings

3 rate on existing equity, (ii) the portion of earnings not paid out in dividends, (iii) sales of

4 additional common equity, (iv) reacquisttion of common stock previously issued, (v) changes in

5 financial leverage, (vi) acquisitions of new business opportunities, (vii) profitable liquidation of

6 assets, and (viii) repositioning of existing assets. The realities of the equity market regarding

7 total return expectations, however, also reflect factors other than these inputs. Therefore, the

8 DCF model contains overly restrictive limitations when the growth component is stated in

9 terms of earnings per share (the basis for the capital gains yield) or dividends per share (the

10 basis for the infinite dividend discount model). In these situations, there is inadequate

11 recognition of the capital gains yields arising from stock price growth which could exceed

12 earnings or dividends growth.

13 To assess the growth component of the DCF, analysts' projections of future growth

14 influence investor expectations as explained above. One influential publication is The Value

15 Line Investment Survey which contains estimated future projections of growth. The Value Line

16 Investment Survey provides growth estimates which are stated within a common economic

17 environment for the purpose of measuring relative growth potential. The basis for these

18 projections is the Value Line 3 to 5 year hypothetical economy. The Value Line hypothetical

19 economic environment is represented by components and subcomponents of the National

20 Income Accounts which reflect in the aggregate assumptions concerning the unemployment

21 rate, manpower productivity, price inflation, corporate income tax rate, high-grade corporate

22 bond interest rates, and Fed policies. Individual estimates begin with the correlation of sales,

23 earnings and dividends of a company to appropriate components or subcomponents of the

24 future National Income Accounts. These calculations provide a consistent basis for the

25 published forecasts. Value Line's evaluation of a specific company's future prospects are

E-8


1 considered in the context of specific operating characteristics that influence the published

2 projections. Of particular importance for regulated firms, Value Line considers the regulatory

3 quality, rates of return recently authorized, the historic ability of the firm to actually experience

4 the authorized rates of return, the firm's budgeted capital spending, the firm's financing

5 forecast, and the dividend payout ratio. The wide circulation of this source and frequent

6 reference to Value Line in financial circles indicate that this publication has an influence on

7 investor judgment with regard to expectations for the future.

8 There are other sources of earnings growth forecasts. One of these sources is the

9 Institutional Brokers Estimate System ("IBES"). The IBES service provides data on consensus

10 earnings per share forecasts and five-year earnings growth rate estimates. The publisher of

11 IBES has been purchased by Thomson/First Call. The IBES forecasts have been integrated

12 into the First Call consensus growth forecasts. The earnings estimates are obtained from

13 financial analysts at brokerage research departments and from institutions whose securities

14 analysts are projecting earnings for companies in the First Call universe of companies. Other

15 services that tabulate earnings forecasts and publish them are Zacks Investment Research

16 and Market Guide (which is provided over the Internet by Reuters). As with the IBES/First Call

17 forecasts, Zacks and Reuters/Market Guide provide consensus forecasts collected from

18 analysts for most publically traded companies.

19 In each of these publications, forecasts of earnings per share for the current and

20 subsequent year receive prominent coverage. That is to say, IBES/First Call, Zacks,

21 Reuters/Market Guide, and Value Line show estimates of current-year earnings and

22 projections for the next year. While the DCF model typically focusses upon long-run estimates

23 of growth, stock prices are clearly influenced by current and near-term earnings prospects.

24 Therefore, the near-term earnings per share growth rates should also be factored into a

25 growth rate determination.

E-9


1 Although forecasts of future performance are investor influencing2, equity investors

2 may also rely upon the observations of past performance. Investors' expectations of future

3 growth rates may be determined, in part, by an analysis of historical growth rates. It is

4 apparent that any serious investor would advise himself/herself of historical performance prior

5 to taking an investment position in a firm. Earnings per share and dividends per share

6 represent the principal financial variables which influence investor growth expectations.

7 Other financial variables are sometimes considered in rate case proceedings. For

8 example, a company's internal growth rate, derived from the return rate on book common

9 equity and the related retention ratio, is sometimes considered. This growth rate measure is

10 represented by the Value Line forecast "SxR" shown on Schedule 9. Internal.growth rates are

11 often used as a proxy for book value growth. Unfortunately, this measure of growth is often

12 not reflective of investor-expected growth. This is especially important when there is an

13 indication of a prospective change in dividend payout ratio, earned return on book common

14 equity, change in markeMo-book ratios or other fundamental changes in the character of the

15 business. Nevertheless, I have also shown the historical and projected growth rates in book

16 value per share and internal growth rates.

17 Leverage Adjustment

18 As noted previously, the divergence of stock prices from book values creates a conflict

19 within the DCF model when the results of a market-derived cost of equity are applied to the

20 common equity account measured at book value in the ratesetting context. This is the

21 situation today where the market price of stock exceeds its book value for most companies.

22 This divergence of price and book value also creates a financial risk difference, whereby the

23 capitalization of a utility measured at its market value contains relatively less debt and more

As shown in a National Bureau of Economic Research monograph by John G. Cragg and Burton G. Malkiel, Expectations and the Structure of Share Prices. University of Chicago Press 1982.

E-10


1 equity than the capitalization measured at its book value. It is a well-accepted fact of financial

2 theory that a relatively higher proportion of equity in the capitalization has less financial risk

3 than another capital structure more heavily weighted with debt. This is the situation for the

4 Water Group where the market value of its capitalization contains more equity than is shown

5 by the book capitalization. The following comparison demonstrates this situation where the

6 market capitalization is developed by taking the "Fair Value of Financial Instruments"

7 (Disclosures about Fair Value of Financial Instruments - Statement of Financial Accounting

8 Standards ("FAS") No. 107) as shown in the annual report for these companies and the

9 market value of the common equity using the price of stock. The comparison of capital

10 structure ratios is:

11 Water Capitalization at Market Value Capitalization at Book Value 12 Group (Fair Value) (Carrying Amounts) 13 14 Long-term Debt 27.38% 46.56% 15 Preferred Stock 0.22 0.32 16 Common Equity 72.41 53.12 17 18 Total 100.00% 100.00% 19 20 With regard to the capital structure ratios represented by the carrying amounts shown above,

21 there are some variances from the ratios shown on Schedule 3. These variances arise from

22 the use of balance sheet values in computing the capital structure ratios shown on Schedule 3

23 and the use of the Carrying Amounts of the Financial Instruments according to FAS 107 (the

24 Carrying Amounts were used in the table shown above to be comparable to the Fair Value

25 amounts used in the comparison calculations).

26 With the capital ratios calculated above, is necessary to first calculate the cost of equity

27 for a firm without any leverage. The cost of equity for an unleveraged firm using the capital

28 structure ratios calculated with market values is:

E-11


1 ku = ke - (((ku - i ) 1-t) D / E ) - (ku - d ) P / E

2 9.85% =10.78% - (((9.85%-6.10%) .65) 27.38%/72.41%) - (9.85% - 5.99%) 0.22%/72.41%

3 where ku = cost of equity for an all-equity firm, ke = market determined cost equity, / = cost of

4 debt3, d = dividend rate on preferred stock4, D = debt ratio, P = preferred stock ratio, and E =

5 common equity ratio. The formula shown above indicates that the cost of equity for a firm with

6 100% equity is 9.85% using the market value of the Water Group's capitalization. Having

7 . determined that the cost of equity is 9.85% for a firm with 100% equity, the rate of return on

8 common equity associated with the book value capital structure is:

9 ke = ku + (((ku - i ) 1-t) D / E -) + (ku - d ) P IE

10 12.01% = 9.85%+ (((9.85%-6.10%).65) 46.56%/53.12%) + (9.85%-5.99%) 0.32%/53.12%

The cost of debt is the six-month average yield on Moody's A rated public utility bonds.

The cost of preferred is the six-month average yield on Moody's "a" rated preferred stock.

E-12

APPENDIX F TO DIRECT TESTIMONY OF PAUL R. MOUL

1 INTEREST RATES

2 Interest rates can be viewed in their traditional nominal terms (i.e., the stated rate of

3 interest) and in real terms (i.e., the stated rate of interest less the expected rate of inflation).

4 Absent consideration of inflation, the real rate of interest is determined generally by supply

5 factors which are influenced by investors' willingness to forego current consumption (i.e., to

6 save) and demand factors that are influenced by the opportunities to derive income from

7 productive investments. Added to the real rate of interest is compensation required by investors

8 for the inflationary impact of the declining purchasing power of their income received in the

9 future. While interest rates are clearly influenced by the changing annual rate of inflation, it is

10 important to note that the expected rate of inflation that is reflected in current interest rates, may

11 be quite different than the prevailing rate of inflation.

12 Rates of interest also vary by the type of interest bearing instrument. Investors require

13 compensation for the risk associated with the term of the investment and the risk of default. The

14 risk associated with the term of the investment is usually shown by the yield curve, i.e., the

15 difference in rates across maturities. The typical structure is represented by a positive yield

16 curve which provides progressively higher interest rates as the maturities are lengthened. Flat

17 (i.e., relatively level rates across maturities) or inverted (i.e., higher short-term rates than long-

18 term rates) yield curves occur less frequently.

19 The risk of default is typically associated with the creditworthiness of the borrower.

20 Differences in interest rates can be traced to the credit quality ratings assigned by the bond

21 rating agencies, such as Moody's Investors Service, Inc. and Standard & Poor's Corporation.

22 Obligations of the United States Treasury are usually considered to be free of default risk, and

23 hence reflect only the real rate of interest, compensation for expected inflation, and maturity

24 risk. The Treasury has been issuing inflation-indexed notes which automatically provide

F-1


1 compensation to investors for future inflation, thereby providing a lower current yield on these

2 issues.

3 Interest Rate Environment

4 Federal Reserve Board ("Fed") policy actions which impact directly short-term interest

5 rates also substantially affect investor sentiment in long-term fixed-income securities markets. In

6 this regard, the Fed has often pursued policies designed to build investor confidence in the

7 fixed-income securities market. Formative Fed policy has had a long history, as exemplified by

8 the historic 1951 Treasury-Federal Resen/e Accord, and more recently, deregulation within the

9 financial system which increased the level and volatility of interest rates. The Fed has indicated

10 that it will follow a monetary policy designed to promote non-inflationary economic growth.

11 As background to the recent levels of interest rates, history shows that the Open Market

12 Committee of the Federal Reserve board ("FOMC") began a series of moves toward lower

13 short-term interest rates in mid-1990 - at the outset of the previous recession. Monetary policy

14 was influenced at that time by (i) steps taken to reduce the federal budget deficit, (ii) slowing

15 economic growth, (iii) rising unemployment, and (iv) measures intended to avoid a credit crunch.

16 Thereafter, the Federal government initiated several bold proposals to deal with future

17 borrowings by the Treasury. With lower expected federal budget deficits and reduced Treasury

18 borrowings, together with limitations on the supply of new 30-year Treasury bonds, long-term

19 interest rates declined to a twenty-year low, reaching a trough of 5.78% in October 1993.

20 On February 4, 1994, the FOMC began a series of increases in the Fed Funds rate (i.e.,

21 the interest rate on excess overnight bank reserves). The initial increase represented the first

22 rise in short-term interest rates in five years. The series of seven increases doubled the Fed

23 Funds rate to 6%. The increases in short-term interest rates also caused long-term rates to

24 move up, continuing a trend which began in the fourth quarter of 1993. The cyclical peak in

F-2


1 long-term interest rates'was reached on November 7 and 14, 1994 when 30-year Treasury

2 bonds attained an 8.16% yield. Thereafter, long-term Treasury bond yields generally declined.

3 Beginning in mid-February 1996, long-term interest rates moved upward from their

4 previous lows. After initially reaching a level of 6.75% on March 15, 1996, long-term interest

5 rates continued to climb and reached a peak of 7.19% on July 5 and 8, 1996. For the period

6 leading up to the 1996 Presidential election, long-term Treasury bonds generally traded within.

7 this range. After the election, interest rates moderated, returning to a level somewhat below the

8 previous trading range. Thereafter, in December 1996, interest rates returned to a range of

9 6.5% to 7.0% which existed for much of 1996.

10 On March 25, 1997, the FOMC decided to tighten monetary conditions through a one-

11 quarter percentage point increase in the Fed Funds rate. This tightening increased the Fed

12 Funds rate to 5.5%. in making this move, the FOMC stated that it was concerned by persistent

13 strength of demand in the economy, which it feared would increase the risk of inflationary

14 imbalances that could eventually interfere with the long economic expansion.

15 In the fourth quarter of 1997, the yields on Treasury bonds began to decline rapidly in

16 response to an increase in demand for Treasury securities caused by a flight to safety triggered

17 by the currency and stock market crisis in Asia. Liquidity provided by the Treasury market

18 makes these bonds an attractive investment in times of crisis. This is because Treasury

19 securities encompass a very large market which provides ease of trading and carry a premium

20 for safety. During the fourth quarter of 1997, Treasury bond yields pierced the psychologically

21 important 6% level for the first time since 1993.

22 Through the first half of 1998, the yields on long-term Treasury bonds fluctuated within a

23 range of about 5.6% to 6.1% reflecting their attractiveness and safety. In the third quarter of

24 1998, there was further deterioration of investor confidence in global financial markets, This

25 loss of confidence followed the moratorium (i.e., default) by Russia on its sovereign debt and

F-3


1 fears associated with problems in Latin America. While not significant to the global economy in

2 the aggregate, the August 17 default by Russia had a significant negative impact on investor

3 confidence, following earlier discontent surrounding the crisis in Asia. These events

4 subsequently led to a general pull back of risk-taking as displayed by banks growing reluctance

5 to lend, worries of an expanding credit crunch, lower stock prices, and higher yields on bonds of

6 riskier companies. These events contributed to the failure of the hedge fund, Long-Term Capital

7 Management.

8 In response to these events, the FOMC cut the Fed Funds rate just prior to the mid-term

9 Congressional elections. The FOMC's action was based upon concerns over how increasing

10 weakness in foreign economies would affect the U.S. economy. As recently as July 1998, the

11 FOMC had been more concerned about fighting inflation than the state of the economy. The

12 initial rate cut was the first of three reductions by the FOMC. Thereafter, the yield on long-term

13 Treasury bonds reached a 30-year low of 4.70% on October 5, 1998. Long-term Treasury

14 yields below 5% had not been seen since 1967. Unlike the first rate cut that was widely

15 anticipated, the second rate reduction by the FOMC was a surprise to the markets. A third

16 reduction in short-term interest rates occurred in November 1998 when the FOMC reduced the

17 Fed Funds rate to 4.75%.

18 All of these events prompted an increase in the prices for Treasury bonds which lead to

19 the low yields described above. Another factor that contributed to the decline in yields on long-

20 term Treasury bonds was a reduction in the supply of new Treasury issues coming to market

21 due to the Federal budget surplus - the first in nearly 30 years. The dollar amount of Treasury

22 bonds being issued declined by 30% in two years, thus resulting in higher prices and lower

23 yields. In addition, rumors of some struggling hedge funds unwinding their positions further

24 added to the gains in Treasury bond prices.

F-4


1 The financial crisis that spread from Asia to Russia and to Latin America pushed

2 nervous investors from stocks into Treasury, bonds, thus increasing demand for bonds, just

3 when supply was shrinking. There was also a move from corporate bonds to Treasury bonds to

4 take advantage of appreciation in the Treasury market. This resulted in a certain amount of

5 exuberance for Treasury bond investments that formerly was reserved for the stock market.

6 Moreover, yields in the fourth quarter of 1998 became extremely volatile as shown by Treasury

7 yields that fell from 5.10% on September 29 to 4.70 percent on October 5, and thereafter

8 returned to 5.10% on October 13. A decline and rebound of 40 basis points in Treasury yields

9 in a two-week time frame is remarkable.

10 Beginning in mid-1999, the FOMC raised interest rates on six occasions reversing its

11 actions in the fall of 1998. On June 30, 1999, August 24, 1999, November 16, 1999, February

12 2, 2000, March 21, 2000, and May 16, 2000, the FOMC raised the Fed Funds.rate to 6.50%.

13 This brought the Fed Funds rate to its highest level since 1991, and was 175 basis points higher

14 than the level that occurred at the height of the Asian currency and stock market crisis. At the

15 time, these actions were taken in response to more normally functioning financial markets, tight

16 labor markets, and a reversal of the monetary ease that was required earlier in response to the

17 global financial market turmoil.

18 As the year 2000 drew to a close, economic activity slowed and consumer confidence

19 began to weaken. In two steps at the beginning and at the end of January 2001, the FOMC

20 reduced the Fed Funds rate by one percentage point. These actions brought the Fed Funds

21 rate to 5.50%. The FOMC described its actions as "a rapid and forceful response of monetary

22 policy" to eroding consumer and business confidence exemplified by weaker retail sales and

23 business spending on capital equipment and cut backs in manufacturing production.

24 Subsequently, on March 20, 2001, April 18, 2001, May 15, 2001, June 27, 2001, and August 21,

25 2001, the FOMC lowered the Fed Funds in steps consisting of three 50 basis points decrements

F-5


1 followed by two 25 basis points decrements. These actions took the Fed Funds rate to 3.50%.

2 The FOMC observed on August 21, 2001:

3 "Household demand has been sustained, but business profits 4 and capital spending continue to weaken and growth abroad is 5 slowing, weighing on the U.S. economy. The associated easing 6 of pressures on labor and product markets is expected to keep 7 inflation contained. 8 9 Although long-term prospects for productivity growth and the

10 economy remain favorable, the Committee continues to believe 11 that against the background of its long-run goals of price stability 12 and sustainable economic growth and of the information 13 currently available, the risks are weighted mainly toward 14 conditions that may generate economic weakness in the 15 foreseeable future." 16 17 After the terrorist attack on September 11, 2001, the FOMC made two additional 50 basis points

18 reductions in the Fed Funds rate. The first reduction occurred on September 17, 2001 and

19 followed the four-day closure of the financial markets following the terrorist attacks. The second

20 reduction occurred at the October 2 meeting of the FOMC where it observed:

21 "The terrorist attacks have significantly heightened uncertainty in 22 an economy that was already weak. Business and household 23 spending as a consequence are being further damped. 24 Nonetheless, the long-term prospects for productivity growth and 25 the economy remain favorable and should become evident once 26 the unusual forces restraining demand abate." 27 28 Afterward, the FOMC reduced the Fed Funds rate by 50 basis points on November 6, 2001 and

29 by 25 basis points on December 11, 2001. In total, short-term interest rates were reduced by

30 the FOMC eleven (11) times during the year 2001. These actions cut the Fed Funds rate by

31 4.75% and resulted in 1.75% for the Fed Funds rate.

32 In an attempt to deal with weakening fundamentals in the economy recovering from the

33 recession that began in March 2001, the FOMC provided a psychologically important one-half

34 percentage point reduction in the federal funds rate. The rate cut was twice as large as the

35 market expected, and brought the fed funds rate to 1.25% on November 6, 2002. The FOMC

36 stated that:

F-6


1 "The Committee continues to believe that an accommodative 2 stance of monetary policy, coupled with still-robust underlying 3 growth in productivity, is providing important ongoing support to 4 economic activity. However, incoming economic data have 5 tended to confirm that greater uncertainty, in part attributable to 6 heightened geopolitical risks, is currently inhibiting spending, 7 production, and employment. Inflation and inflation expectations 8 remain well contained. 9

10 In these circumstances, the Committee believes that today's 11 additional monetary easing should prove helpful as the economy 12 works its way through this current soft spot. With this action, the 13 Committee believes that, against the background of its long-run 14 goals of price stability and sustainable economic growth and 15 of the information currently available, the risks are balanced 16 with respect to the prospects for both goals in the foreseeable 17 future." 18 19 As 2003 unfolded, there was a continuing expectation of lower yields on Treasury

20 securities. In fact, the yield on ten-year Treasury notes reached a 45-year low near the end of

21 the second quarter of 2003. For long-term Treasury bonds, those yields culminated with a

22 4.24% yield on June 13, 2003. Soon thereafter, the FOMC reduced the Fed Funds rate by 25

23 basis points on June 25, 2003. In announcing its action, the FOMC stated:

24 "The Committee continues to believe that an accommodative 25 stance of monetary policy, coupled with still robust underlying 26 growth in productivity, is providing important ongoing support to 27 economic activity. Recent signs point to a firming in spending, 28 markedly improved financial conditions, and labor and product 29 markets that are stabilizing. The economy, nonetheless, has yet 30 to exhibit sustainable growth. With inflationary expectations 31 subdued, the Committee judged that a slightly more expansive 32 monetary policy would add further support for an economy which 33 it expects to improve over time." 34

35 Thereafter, intermediate and long-term Treasury yields moved marketedly higher. Higher yields

36 on long-term Treasury bonds, which exceeded 5.00% can be traced to: (i) the market's

37 disappointment that the Fed Funds rate was not reduced below 1.00%, (ii) an indication that the

38 Fed will not use unconventional methods for implementing monetary policy, (iii) growing

39 confidence in a strengthening economy, and (iv) a Federal budget deficit that is projected to be

40 $455 billion in 2003 (reported, subsequently, the actually deficit was $374 billion) and $475 F-7


1 billion in 2004 (revised subsequently, the estimated deficit is $500 billion in 2004). All these

2 factors significantly changed the seniment in the bond market.

3 For the remainder of 2003, the FOMC continued with its balanced monetary policy,

4 thereby retaining the 1% Fed Funds rate. However, in 2004, the FOMC initiated a policy of

5 moving toward a more neutral Fed Funds rate (i.e., removing the bias of abnormal low rates).

6 On June 30, 2004, August 10, 2004, September 21, 2004, November 10, 2004, December 14,

7 2004, February 2, 2005, March 22, 2005, May 3, 2005, June 30, 2005, August 9, 2005,

8 September 20, 2005, November 1, 2005, December 13, 2005, January 31, 2006, March 28,

9 2006, May 10, 2006, and June 29, 2006, the FOMC increased the Fed Funds rate in seventeen

10 25 basis point increments. These policy actions are widely interpreted as part of the process of

11 moving toward a more neutral range for the Fed Funds rate.

12 Just after the FOMC meeting on August 7, 2007, where the FOMC decided to retain a

13 5.25% Fed Funds rate, turmoil in the credit markets prompted central banks throughout the

14 world to inject over $325 billion of reserves into the banking system over a three-day period in

15 reaction to a credit crunch. Problems had been developing earlier in 2007, beginning in the

16 market for asset-backed securities linked to subprime mortgages. Valuation uncertainties for

17 these securities caused liquidity concerns for hedge funds, investment banks, and financial

18 institutions. The market for commercial paper, the most liquid part of the credit markets for non-

19 Treasury securities, was also affected. In response to the market turmoil, the FOMC issued the

20 following statement, the first of its type since after the September 11, 2001 terrorists' attack.

21 "The Federal Reserve is providing liquidity to facilitate the orderly 22 functioning of financial markets. 23 24 The Federal Reserve will provide reserves as necessary through 25 open market operations to promote trading in the federal funds 26 market at rates close to the Federal Open Market Committee's 27 target rate of 5-1/4 percent. In current circumstances, depository 28 institutions may experience unusual funding needs because of 29 dislocations in money and credit markets. As always, the discount 30 window is available as a source of funding."

F-8


1

2 Then, one week after its initial announcement, the FOMC made a surprise reduction of 50 basis

3 points in the discount rate to narrow the spread between this rate and the target Fed Funds rate.

4 At the same time, the FOMC made the following statement: 5 "Financial market conditions have deteriorated, and tighter credit 6 conditions and increased uncertainty have the potential to restrain 7 economic growth going forward. In these circumstances, although 8 recent data suggest that the economy has continued to expand at 9 a moderate pace, the Federal Open Market Committee judges that

10 the downside risks to growth have increased appreciably. The 11 Committee is monitoring the situation and is prepared to act as 12 needed to mitigate the adverse effects on the economy arising 13 from the disruptions in financial markets." 14 15 At its next regularly scheduled meeting, the FOMC reduced the Fed Funds rate and the

16 discount rate by 0.50%. In its September 18, 2007 press release, the FOMC stated:

17 "Economic growth was moderate during the first half of the year, 18 but the tightening of credit conditions has the potential to intensify 19 the housing correction and to restrain economic growth more 20 generally. Today's action is intended to help forestall some of the 21 adverse effects on the broader economy that might otherwise 22 arise from the disruptions in financial markets and to promote 23 moderate growth over time.

24 Readings on core inflation have improved modestly this year. 25 However, the Committee judges that some inflation risks remain, 26 and it will continue to monitor inflation developments carefully.

27 Developments in financial markets since the Committee's last 28 regular meeting have increased the uncertainty surrounding the 29 economic outlook. The Committee will continue to assess the 30 effects of these and other developments on economic prospects 31 and will act as needed to foster price stability and sustainable 32 economic growth."

33 With these actions, the Fed Funds rate was targeted at 4.75% and the discount rate was set at

34 5.25%.

35 Public Utility Bond Yields

36 The Risk Premium analysis of the cost of equity is represented by the combination of a

37 firm's borrowing rate for long-term debt capital plus a premium that is required to reflect "the

F-9


1 additional risk associated with the equity of a firm as explained in Appendix G. Due to the

2 senior nature of the long-term debt of a firm, its cost is lower than the cost of equity due to the

3 prior claim which lenders have on the earnings and assets of a corporation.

4 As a generalization, all interest rates track to varying degrees of the benchmark yields

5 established by the market for Treasury securities. Public utility bond yields usually reflect the

6 underlying Treasury yield associated with a given maturity plus a spread to reflect the specific

7 credit quality of the issuing public utility. Market sentiment can also have an influence on the

8 spreads as described below. The spread in the yields on public utility bonds and Treasury

9 bonds varies with market conditions, as does the relative level of interest rates at varying

10 maturities shown by the yield curve.

11 Pages 1 and 2 of Schedule 10 provide the recent history of long-term public utility bond

12 yields for the rating categories of Aa, A and Baa (no yields are shown for Aaa rated public utility

13 bonds because this index has been discontinued). The top four rating categories of Aaa, Aa, A,

14 and Baa are known as "investment grades" and are generally regarded as eligible for bank

15 investments under commercial banking regulations. These investment grades are distinguished

16 from "junk" bonds which have ratings of Ba and below.

17 A relatively long history of the spread between the yields on long-term A-rated public

18 utility bonds and 20-year Treasury bonds is shown on page 3 of Schedule 10. There, it is

19 shown that those spreads were about the one percentage during for the years 1994 through

20 1997. With the aversion to risk and flight to quality described earlier, a significant widening of

21 the spread in the yields between corporate {e.g., public utility) and Treasury bonds developed in

22 1998, after an initial widening of the spread that began in the fourth quarter of 1997. The

23 significant widening of spreads in 1998 was unexpected by some technically savvy investors, as

24 shown by the debacle at the Long-Term Capital Management hedge fund. When Russia

25 defaulted its debt on August 17, some investors had to cover short positions when Treasury

F-10


1 price's spiked upward. Short covering by investors that guessed wrong on the relationship

2 between corporate and Treasury bonds also contributed to run-up in Treasury bond prices by

3 increasing the demand for them. This helped to contribute to a widening of the spreads

4 between corporate and Treasury bonds.

5 As shown on page 3 of Schedule 10, the spread in yields between A-rated public utility

6 bonds and 20-year Treasury bonds were about one percentage point prior to 1998, 1.32% in

7 1998, 1.42% in 1999, 2.01% in 2000, 2.13% in 2001, 1.94% in 2002, 1.62% in 2003, 1.12% in

8 2004, 1.01% in 2005, and 1.08% in 2006. As shown by the monthly data presented on pages 4

9 and 5 of Schedule 10, the interest rate spread between the yields on 20-year Treasury bonds

10 and A-rated public utility bonds was 1.04 percentage points for the twelve-months ended August

11 2007. For the six- and three-month periods ending August 2007, the yield spread was 1.06%

12 and 1.10%, respectively. Spreads widened with the development of the credit crunch in the

13 third quarter of 2007.

14 Risk-Free Rate of Return in the CAPM

15 Regarding the risk-free rate of return (see Appendix H), pages 2 and 3 of Schedule 12

16 provide the yields on the broad spectrum of Treasury Notes and Bonds. Some practitioners of

17 the CAPM would advocate the use of short-term treasury yields (and some would argue for the

18 yields on 91-day Treasury Bills). Other advocates of the CAPM would advocate the use of

19 longer-term treasury yields as the best measure of a risk-free rate of return. As Ibbotson has

20 indicated:

21 The Cost of Capital in a Regulatory Environment. When discounting 22 cash flows projected over a long period, it is necessary to discount 23 them by a long-term cost of capital. Additionally, regulatory processes 24 for setting rates often specify or suggest that the desired rate of return 25 for a regulated firm is that which would allow the firm to attract and 26 retain debt and equity capital over the long term. Thus, the long-term 27 cost of capital is typically the appropriate cost of capital to use in 28 regulated ratesetting. (Stocks, Bonds, Bills and Inflation - 1992 29 Yearbook, pages 118-119) 30

F-11


1 As indicated above, long-term Treasury bond yields represent the correct measure of the risk-

2 free rate of return in the traditional CAPM. Very short term yields on Treasury bills should be

3 avoided for several reasons. First, rates should be set on the basis of financial conditions that

4 will exist during the effective period of the proposed rates. Second, 91-day Treasury bill yields

5 are more volatile than longer-term yields and are greatly influenced by FOMC monetary policy,

6 political, and economic situations. Moreover, Treasury bill yields have been shown to be

7 empirically inadequate for the CAPM. Some advocates of the theory would argue that the risk-

8 free rate of return in the CAPM should be derived from quality long-term corporate bonds.

F-12

APPENDIX G TO DIRECT TESTIMONY OF PAUL R. MOUL

1 RISK PREMIUM ANALYSIS

2 The cost of equity requires recognition of the risk premium required by common

3 equities over long-term corporate bond yields. In the case of senior capital, a company

4 contracts for the use of long-term debt capital at a stated coupon rate for a specific period of

5 time and in the case of preferred stock capital at a stated dividend rate, usually with provision

6 for redemption through sinking fund requirements. In the case of senior capital, the cost rate

7 is known with a high degree of certainty because the payment for use of this capital is a

8 contractual obligation, and the future schedule of payments is known. In essence, the

9 investor-expected cost of senior capital is equal to the realized return over the entire term of

10 the issue, absent default.

11 The cost of equity, on the other hand, is not fixed, but rather varies with investor

12 perception of the risk associated with the common stock. Because no precise measurement

13 exists as to the cost of equity, informed judgment must be exercised through a study of various

14 market factors which motivate investors to purchase common stock. In the case of common

15 equity, the realized return rate may vary significantly from the expected cost rate due to the

16 uncertainty associated with earnings on common equity. This uncertainty highlights the added

17 risk of a common equity investment.

18 As one would expect from traditional risk and return relationships, the cost of equity is

19 affected by expected interest rates. As noted in Appendix F, yields on long-term corporate

20 bonds traditionally consist of a real rate of return without regard to inflation, an increment to

21 reflect investor perception of expected future inflation, the investment horizon shown by the

22 term of the issue until maturity, and the credit risk associated with each rating category.

G-1


1 The Risk Premium approach recognizes the required compensation for the more risky

2 common equity over the less risky secured debt position of a lender. The cost of equity stated

3 in terms of the familiar risk premium approach is:

4 k=i+RP

5 where, the cost of equity ("k") is equal to the interest rate on long-term corporate debt ("i"),

6 plus an equity risk premium ("RP") which represents the additional compensation for the riskier

7 common equity.

8 Equity Risk Premium

9 The equity risk premium is determined as the difference in the rate of return on debt

10 capital and the rate of return on common equity. Because the common equity holder has only

11 a residual claim on earnings and assets, there is no assurance that achieved returns on

12 common equities will equal expected returns. This is quite different from returns on bonds,

13 where the investor realizes the expected return during the entire holding period, absent

14 default. It is for this reason that common equities are always more risky than senior debt

15 securities. There are investment strategies available to bond portfolio managers that

16 immunize bond returns against fluctuations in interest rates because bonds are redeemed

17 through sinking funds or at maturity, whereas no such redemption is mandated for public utility

18 common equities.

19 It is well recognized that the expected return on more risky investments will exceed the

20 required yield on less risky investments. Neither the possibility of default on a bond nor the

21 maturity risk detracts from the risk analysis, because the common equity risk rate differential

22 (i.e., the investor-required risk premium) is always greater than the return components on a

23 bond. It should also be noted that the investment horizon is typically long-run for both

24 corporate debt and equity, and that the risk of default (i.e., corporate bankruptcy) is a concern

G-2


1; to both debt and equity investors. Thus, the required yield on a bond provides a benchmark or

2 starting point with which to track and measure the cost rate of common equity capital. There is

3 no need to segment the bond yield according to its components, because it is the total return

4 demanded by investors that is important for determining the risk rate differential for common

5 equity. This is because the complete bond yield provides the basis to determine the

6 differential, and as such, consistency requires that the computed differential must be applied to

7 the complete bond yield when applying the risk premium approach. To apply the risk rate

8 differential to a partial bond yield would result in a misspecification of the cost of equity

9 because the computed differential was initially determined by reference to the entire bond

10 return.

11 The risk rate differential between the cost of equity and the yield on long-term

12 corporate bonds can be determined by reference to a comparison of holding period returns

13 (here defined as one year) computed over long time spans. This analysis assumes that over

14 long periods of time investors' expectations are on average consistent with rates of return

15 actually achieved. Accordingly, historical holding period returns must not be analyzed over an

16 unduly short period because near-term realized results may not have fulfilled investors'

17 expectations. Moreover, specific past period results may not be representative of investment

18 fundamentals expected for the future. This is especially apparent when the holding period

19 returns include negative returns which are not representative of either investor requirements of

20 the past or investor expectations for the future. The short-run phenomenon of unexpected

21 returns (either positive or negative) demonstrates that an unduly short historical period would

22 not adequately support a risk premium analysis. It is important to distinguish between

23 investors' motivation to invest, which encompass positive return expectations, and the

24 knowledge that losses can occur. No rational investor would forego payment for the use of

G-3


1 capital, or expect loss of principal, as a basis for investing. Investors will hold cash rather than

2 invest with the expectation of a loss.

3 Within these constraints, page 1 of Schedule 11 provides the historical holding period

4 returns for the S&P Public Utility Index which has been independently computed and the

5 historical holding period returns for the S&P Composite Index which have been reported in

6 Stocks, Bonds. Bills and Inflation published by Ibbotson & Associates. The tabulation begins

7 with 1928 because January 1928 is the earliest monthly dividend yield for the S&P Public

8 Utility Index. I have considered all reliable data for this study to avoid the introduction of a

9 particular bias to the results. The measurement of the common equity return rate differential is

10 based upon actual capital market performance using realized results. As a consequence, the

11 underlying data for this risk premium approach can be analyzed with a high degree of

12 precision. Informed professional judgment is required only to interpret the results of this study,

13 but not to quantify the component variables.

14 • The risk rate differentials for all equities, as measured by the S&P Composite, are

15 established by reference to long-term corporate bonds. For public utilities, the risk rate

16 differentials are computed with the S&P Public Utilities as compared with public utility bonds.

17 The measurement procedure used to identify the risk rate differentials consisted of

18 arithmetic means, geometric means, and medians for each series. Measures of the central

19 tendency of the results from the historical periods provide the best indication of representative

20 rates of return. In regulated ratesetting, the correct measure of the equity risk premium is the

21 arithmetic mean because a utility must expect to earn its cost of capital in each year in order to

22 provide investors with their long-term expectations. In other contexts, such as pension

23 determinations, compound rates of return, as shown by the geometric means, may be

24 appropriate. The median returns are also appropriate in ratesetting because they are a

G-4


1 measure of the central tendency of a single period rate of return. Median values have also

2 been considered in this analysis because they provide a return which divides the entire series

3 of annual returns in half and are representative of a return that symbolizes, in a meaningful

4 way, the central tendency of all annual returns contained within the analysis period. Medians

5 are regularly included in many investor-influencing publications.

6 As previously noted, the arithmetic mean provides the appropriate point estimate of the

7 risk premium. As further explained in Appendix H, the long-term cost of capital in rate cases

8 requires the use of the arithmetic means. To supplement my analysis, I have also used the

9 rates of return taken from the geometric mean and median for each series to provide the

10 bounds of the range to measure the risk rate differentials. This further analysis shows that

11 when selecting the midpoint from a range established with the geometric means and medians,

12 the arithmetic mean is indeed a reasonable measure for the long-term cost of capital. For the

13 years 1928 through 2006, the risk premiums for each class of equity are:

14 S&P S&P 15 Composite Public Utilities 16 17 Arithmetic Mean 5.86% 5.41% 18 19 Geometric Mean 4.25% 3.35% 20 Median 10.17% 7.29% 21 22 Midpoint of Range 7.21% 5.32% 23 24 Average 6.54% 5.37% 25 26 The empirical evidence suggests that the common equity risk premium is higher for the S&P

27 Composite Index compared to the S&P Public Utilities.

28 If, however, specific historical periods were also analyzed in order to match more

29 closely historical fundamentals with current expectations, the results provided on page 2 of

30 Schedule 11 should also be considered. One of these sub-periods included the 54-year

G-5


1 period, 1952-2006. These years follow the historic 1951 Treasury-Fed era I Reserve Accord

2 which affected monetary policy and the market for government securities.

3 A further investigation was undertaken to determine whether realignment has taken place

4 subsequent to the historic 1973 Arab Oil embargo and during the deregulation of the financial

5 markets. In each case, the public utility risk premiums were computed by using the arithmetic

6 mean, and the geometric means and medians to establish the range shown by those values.

7 The time periods covering the more recent periods 1974 through 2006 and 1979 through 2006

8 contain events subsequent to the initial oil shock and the advent of monetarism as Fed policy,

9 respectively. For the 55-year, 33-year and 28-year periods, the public utility risk premiums

10 were 6.40%, 5.61%, and 5.83% respectively, as shown by the average of the specific point-

11 estimates and the midpoint of the ranges provided on page 2 of Schedule 11.

G-6

APPENDIX H TO DIRECT TESTIMONY OF PAUL R. MOUL

1 CAPITAL ASSET PRICING MODEL

2 Modern portfolio theory provides a theoretical explanation of expected returns on

3 portfolios of securities. The Capital Asset Pricing Model ("CAPM") attempts to describe the

4 way prices of individual securities are determined in efficient markets where information is

5 freely available and is reflected instantaneously in security prices. The CAPM states that the

6 expected rate of return on a security is determined by a risk-free rate of return plus a risk

7 premium which is proportional to the non-diversifiable (or systematic) risk of a security.

8 The CAPM theory has several unique assumptions that are not common to most other

9 methods used to measure the cost of equity. As with other market-based approaches, the

10 CAPM is an expectational concept. There has been significant academic research conducted

11 that found that the empirical market line, based upon historical data, has a less steep slope

12 and higher intercept than the theoretical market line of the CAPM. For equities with a beta

13 less than 1.0, such as utility common stocks, the CAPM theoretical market line will

14 underestimate the realistic expectation of investors in comparison with the empirical market

15 line which shows that the CAPM may potentially misspecify investors' required return.

16 The CAPM considers changing market fundamentals in a portfolio context. The

17 balance of the investment risk, or that characterized as unsystematic, must be diversified.

18 Some argue that diversifiable (unsystematic) risk is unimportant to investors. But this

19 contention is not completely justified because the business and financial risk of an individual

20 . company, including regulatory risk, are widely discussed within the investment community and

21 therefore influence investors in regulated firms. In addition, I note that the CAPM assumes

22 that through portfolio diversification, investors will minimize the effect of the unsystematic

23 (diversifiable) component of investment risk. Because it is not known whether the average

24 investor holds a well-diversified portfolio, the CAPM must also be used with other models of

25 the cost of equity.

H-1


1 To apply the traditional CAPM theory, three inputs are required: the beta coefficient

2 CP"), a risk-free rate of return ("Rf). and a market premium ("Rm - Rf"). The cost of equity

3 stated in terms of the CAPM is:

4 k = Rf +p (Rm - Rf)

5 As previously indicated, it is important to recognize that the academic research has

6 shown that the security market line was flatter than that predicted by the CAPM theory and it

7 . had a higher intercept than the risk-free rate. These tests indicated that for portfolios with

8 betas less than 1.0, the traditional CAPM would understate the return for such stocks.

9 Likewise, for portfolios with betas above 1.0, these companies had lower returns than

10 indicated by the traditional CAPM theory. Once again, CAPM assumes that through portfolio

11 diversification investors will minimize the effect of the unsystematic (diversifiable) component

12 of investment risk. Therefore, the CAPM must also be used with other models of the cost of

13 equity, especially when it is not known whether the average public utility investor holds a well-

14 diversified portfolio.

15 Beta

16 The beta coefficient is a statistical measure which attempts to identify the non-

17 diversifiable (systematic) risk of an individual security and measures the sensitivity of rates of

18 return on a particular security with general market movements. Under the CAPM theory, a

19 security that has a beta of 1.0 should theoretically provide a rate of return equal to the return

20 rate provided by the market. When employing stock price changes in the derivation of beta, a

21 stock with a beta of 1.0 should exhibit a movement in price which would track the movements

22 in the overall market prices of stocks. Hence, if a particular investment has a beta of 1.0, a

23 one percent increase in the return on the market will result, on average, in a one percent

24 increase in the return on the particular investment. An investment which has a beta less than

25 1.0 is considered to be less risky than the market.

H-2


1 The beta coefficient CP"), the one input in the CAPM application which specifically

2 applies to an individual firm, is derived from a statistical application which regresses the

3 returns on an individual security (dependent variable) with the returns on the market as a

4 whole (independent variable). The beta coefficients for utility companies typically describe a

5 small proportion of the total investment risk because the coefficients of determination (R2) are

6 low.

7 Page 1 of Schedule 12 provides the betas published by Value Line. By way of

8 explanation, the Value Line beta coefficient is derived from a "straight regression" based ,upon

9 the percentage change in the weekly price of common stock and the percentage change

10 weekly of the New York Stock Exchange Composite average using a five-year period. The •

11 raw historical beta is adjusted by Value Line for the measurement effect resulting in

12 overestimates in high beta stocks and underestimates in low beta stocks. Value Line then

13 rounds its betas to the nearest .05 increment. Value Line does not consider dividends in the

14 computation of its betas.

15 Market Premium

16 The final element necessary to apply the CAPM is the market premium. The market

17 premium by definition is the rate of return on the total market less the risk-free rate of return

18 ("Rm - Rf ) . In this regard, the market premium in the CAPM has been calculated from the total

19 return on the market of equities using forecast and historical data. The future market return is

20 established with forecasts by Value Line using estimated dividend yields and capital

21 appreciation potential.

22 With regard to the forecast data, I have relied upon the Value Line forecasts of capital

23 appreciation and the dividend yield on the 1,700 stocks in the Value Line Survey. According to

24 the September 28, 2007 edition of The Value Line Investment Survey Summary and Index.

25 (see page 5 of Schedule 12) the total return on the universe of Value Line equities is:

H-3


1 Median Median 2 Dividend Appreciation Total 3 Yield + Potential = Return 4 5 As of September 28,2007 1.7% + 9.73%1 = 11.43%

6 The tabulation shown above provides the dividend yield and capital gains yield of the

7 companies followed by Value Line. Another measure of the total market return is provided by

8 the DCF return on the S&P 500 Composite index. As shown below, that return is 13.12%.

DCF Result for the S&P 500 Composite D/P ( 1+.5g ) + g k

1.75% ( 1.05635 ) + 11.27% = 13.12%

where: Price (P) at 30-Sep-2007 = 1526.75 Dividend (D) for 2nd Qtr. '07 = 6.69

Dividend (D) annualized = 26.76 Growth (g) First Call EpS = 11.27%

9 Using these indicators, the total market return is 12.28% (11.43% + 13.12% = 24.55% + 2)

10 using both the Value Line and S&P derived returns. With the 12.28% forecast market return

11 and the 5.00% risk-free rate of return, a 7.28% (12.28% - 5.00%) market premium would be

12 indicated using forecast market data.

13 With regard to the historical data, I provided the rates of return from long-term historical

14 time periods that have been widely circulated among the investment and academic community

15 over the past several years, as shown on page 6 of Schedule 12. These data are published

16 by Ibbotson Associates in its Stocks, Bonds, Bills and Inflation ("SBBI"). From the data

17 provided on page 6 of Schedule 12, I calculate a market premium using the common stock

18 arithmetic mean returns of 12.3% less government bond arithmetic mean returns of 5.8%. For

19 the period 1926-2006, the market premium was 6.5% (12.3% - 5.8%). I should note that the

20 arithmetic mean must be used in the CAPM because it is a single period model. It is further

1 The estimated median appreciation potential is forecast to be 45% for 3 to 5 years hence. The annual capital gains yield at the midpoint of the forecast period is 9.73% (i.e., 1.45-25 - 1).

H-4


1 confirmed by Ibbotson who has indicated:

2 Arithmetic Versus Geometric Differences 3 For use as the expected equity risk premium in the CAPM, the 4 arithmetic or simple difference of the arithmetic means of stock 5 market returns and riskless rates is the relevant number. This 6 is because the CAPM is an additive model where the cost of 7 capital is the sum of its parts. Therefore, the CAPM expected 8 equity risk premium must be derived by arithmetic, not 9 geometric, subtraction.

10 11 Arithmetic Versus Geometric Means 12 The expected equity risk premium should always be calculated 13 using the arithmetic mean. The arithmetic mean is the rate of 14 return which, when compounded over multiple periods, gives 15 the mean of the probability distribution of ending wealth 16 values. This makes the arithmetic mean return appropriate for 17 computing the cost of capital. The discount rate that equates 18 expected (mean) future values with the present value of an 19 investment is that investment's cost of capital. The logic of 20 using the discount rate as the cost of capital is reinforced by 21 noting that investors will discount their (mean) ending wealth 22 values from an investment back to the present using the 23 arithmetic mean, for the reason given above. They will 24 therefore require such an expected (mean) return 25 prospectively (that is, in the present looking toward the future) 26 to commit their capital to the investment. (Stocks. Bonds. Bills 27 and Inflation - 1996 Yearbook, pages 153-154) 28

29 For the CAPM, a market premium of 6.89% (6.5% + 7.28% = 13.78% + 2) would be

30 reasonable which is the average of the 6.5% using historical data and a market premium of

31 7.28% using forecasts.

H-5

APPENDIX I TO DIRECT TESTIMONY OF PAUL R. MOUL

1 COMPARABLE EARNINGS APPROACH

2 Value Line's analysis of the companies that it follows includes a wide range of financial

3 and market variables, including nine items that provide ratings for each company. From these

4. nine items, one category has been removed dealing with industry performance because, under

5 approach employed, the particular business type is not significant. In addition, two categories

6 have been ignored that deal with estimates of current earnings and dividends because they

7 are not useful for comparative purposes. The remaining six categories provide relevant

8 measures to establish comparability. The definitions for each of the six criteria (from the Value

9 Line Investment Survey - Subscriber Guide) follow:

10 Timeliness Rank 11 12 The rank for a stock's probable relative market performance in 13 the year ahead. Stocks ranked 1 (Highest) or 2 (Above 14 Average) are likely to outpace the year-ahead market. Those 15 ranked 4 (Below Average) or 5 (Lowest) are not expected to 16 outperform most stocks over the next 12 months. Stocks 17 ranked 3 (Average) will probably advance or decline with the 18 market in the year ahead. Investors should try to limit 19 purchases to stocks ranked 1 (Highest) or 2 (Above Average) 20 for Timeliness. 21 22 Safety Rank 23 24 . A measure of potential risk associated with individual common 25 stocks rather than large diversified portfolios (for which Beta is 26 good risk measure).- Safety is based on the stability of price, 27 which includes sensitivity to the market (see Beta) as well as 28 the stock's inherent volatility, adjusted for trend and other 29 factors including company size, the penetration of its markets, 30 product market volatility, the degree of financial leverage, the 31 earnings quality, and the overall condition of the balance 32 sheet. Safety Ranks range from 1 (Highest) to 5 (Lowest). 33 Conservative investors should try to limit purchases to equities 34 ranked 1 (Highest) or 2 (Above Average) for Safety.

1-1


1 Financial Strength 2 3 The financial strength of each of the more than 1,600 4 companies in the VS II data base is rated relative to all the 5 others. The ratings range from A++ to C in nine steps. (For 6 screening purposes, think of an A rating as "greater than" a B). 7 Companies that have the best relative financial strength are 8 given an A++ rating, indicating an ability to weather hard times 9 better than the vast majority of other companies. Those who

10 don't quite merit the top rating are given an A+ grade, and so 11 on. A rating as low as C++ is considered satisfactory. A rating 12 of C+ is well below average, and C is reserved for companies 13 with very serious financial problems. The ratings are based 14 upon a computer analysis of a number of key variables that 15 determine (a) financial leverage, (b) business risk, and (c) 16 company size, plus the judgment of Value Line's analysts and 17 senior editors regarding factors that cannot be quantified. 18 across-the-board for companies. The primary variables that 19 are indexed and studied include equity coverage of debt, 20 equity coverage. of intangibles, "quick ratio", accounting 21 methods, variability of return, fixed charge coverage, stock 22 price stability, and company size. 23 24 Price Stability Index 25 26 An index based upon a ranking of the weekly percent changes 27 in the price of the stock over the last five years. The lower the 28 standard deviation of the changes, the more stable the stock. 29 Stocks ranking in the top 5% (lowest standard deviations) 30 carry a Price Stability Index of 100; the next 5%, 95; and so on 31 down to 5. One standard deviation is the range around the 32 average weekly percent change in the price that encompasses 33 about two thirds of all the weekly percent change figures over 34 the last five years. When the range is wide, the standard 35 deviation is high and the stock's Price Stability Index is low. 36 37 Beta 38 39 A measure of the sensitivity of the stock's price to overall 40 fluctuations in the New York Stock Exchange Composite 41 Average. A Beta of 1.50 indicates that a stock tends to rise (or 42 fall) 50% more than the New York Stock Exchange Composite 43 Average. Use Beta to measure the stock market risk inherent 44 in any diversified portfolio of, say, 15 or more companies. 45 Otherwise, use the Safety Rank, which measures total risk 46 inherent in an equity, including that portion attributable to 47 market fluctuations. Beta' is derived from a least squares 48 regression analysis between weekly percent changes in the

I-2


1 price of a stock and weekly percent changes in the NYSE 2 Average over a period of five years. In the case of shorter 3 price histories, a smaller time period is used, but two years is 4 the minimum. The Betas are periodically adjusted for their 5 long-term tendency to regress toward 1.00. 6 7 Technical Rank 8 9 A prediction of relative price movement, primarily over the next

10 three to six months. It is a function of price action relative to 11 all stocks followed by Value Line. Stocks ranked 1 (Highest) 12 or 2 (Above Average) are likely to outpace the market. Those 13 ranked 4 (Below Average) or 5 (Lowest) are not expected to 14 outperform most stocks over the next six months. Stocks 15 ranked 3 (Average) will probably advance or decline with the 16 market. Investors should use the Technical and Timeliness 17 Ranks as complements to one another. 18

1-3


EXHIBIT TO ACCOMPANY

THE DIRECT TESTIMONY OF PAUL R. MOUL

WITH REGARD TO COST OF CAPITAL

AP EXHIBIT 4-A

BEFORE THE

PENNSYLVANIA PUBLIC UTILITY COMMISSION

DOCKET R-00072711

November 21. 2007

Exhibit 4-A

Aqua Pennsylvania, Inc. Index of Schedules

Schedule

Summary Cost of Capital 1

Aqua Pennsylvania, Inc. Historical Capitalization and Financial Statistics 2

Water Group Historical Capitalization and Financial Statistics 3

Standard & Poor's Public Utilities Historical Capitalization and Financial Statistics 4

Aqua Pennsylvania, Inc. Capitalization and Capital Structure Ratios 5

Aqua Pennsylvania, Inc. Embedded Cost of Long-Term Debt 6

• Dividend Yields 7

Historical Growth Rates 8

Projected Growth Rates 9

Interest Rates for Investment Grade Public Utility Bonds 10

Long-Term, Year-by-Year Total Returns for the S&P Composite Index, S&P Public Utility Index, and

Long-Term Corporate Bonds and Public Utility Bonds 11

Component Inputs for the Capital Market Pricing Model 12

Comparable Earnings Approach 13

Aqua Pennsylvania, Inc. Summary Cost of Capital

Estimated at June 30. 2008

Exhibit 4-A Page 1 of 31

Schedule 1 [1 of 1]

Weighted Cost Cost

Type of Capital Ratios Rate Rate

Long-Term Debt 49.20% 5.88% 2.89%

Common Equity 50.80% 11.75% 5.97%

Total 100.00% 8.86%

Indicated levels of fixed charge coverage assuming that the Company could actually achieve its overall cost of capital:

Pre-tax coverage of interest expense based upon a 41.4935% composite federal and state income tax rate

( 13.09% - 2.89% )

Post-tax coverage of interest expense ( 8.86% + 2.89% )

4.53 x

3.07 x

Aaua Pennsylvania. Inc. Capitalization and Financial Statistics

2002-2006. Inclusive


Schedule 2 [1 of 2]

2006 2005 2004 2003 2002

Amount of Capital Employed Permanent Capital Short-Term Debt Total Capital

Capital Structure Ratios Based on Permanent Capital:

Long-Term Debt Common Equity'1'

Based on Total Capital: Total Debt tncl. Short Term Common Equity11'

$ 1,187.7 $ 13.0 $ 1,200.7

Rate of Return on Book Common Equity'1'

Operating Ratio w'

Coverage ind. AFUDC Pre-tax: All Interest Charges Post-tax: All Interest Charges

Coverage excl. AFUDC ^ Pre-tax: All Interest Charges Post-tax: All Interest Charges

Quality of Earnings & Cash Flow AFC/Income Avail, for Common Equity Effective Income Tax Rate Internal Cash Generation/Construction Gross Cash Flow/ Avg. Total Debt l*' Gross Cash Flow Interest Coverage1H,

Common Dividend Coverage"'

See.Page2forNotes.

50.2% 49.8%

100.0%

50.7% 49.3%

100.0%

11.1%

53.0%

3.99 x 2.79 x

3.94 X 2.75 x

2.5% 40.0% 67.9% 20.2% 4.41 x 6.91 X

S 1,078.4 $ 75.0 S 1,153.4

51.0% 49.0%

100.0%

54.2% 45.8%

100.0%

12.0%

51.9%

4.26 x 2.96 X

4.26 X 2.96 X

0.0% 40.0% 74.5% 21.5% 4.93 X 4.05 x

(Milltons of Collars)

1,009.9 29.0

$ 1,038.9

50.9% 49.1%

100.0%

52.3% 47,7%

100.0%

11.6%

50.9%

4.04 x 2.81 x

3.99 X 2.77 x

2.6% 40.3% 61.8% 23.1% 4.76 x 2.30 X

943.0 52.1

$ 995.0

48.2% 51.8%

100.0%

50.9% 49.1%

100.0%

11.9%

50.8%

3.90 X 2.73 x

3.85 x 2.68 X

2.7% 40.4% 64.9% 20.3% 4.25 X 3.02 X

916.0 36.2

S 952.2

52.6% 47.4%

100.0%

54.4% 45.6%

100.0%

11.7%

51.2%

3.63 x 2.56 x

3.60 X 2.53 X

2.0% 40.5% 61.9% 17.7% 3.79 3.16

Average 50.6% 49.4%

100.0%

52.5% 47.5%

100.0%

11.7%

51.6%

3.96 2.77

3.93 X 2.74 X

2.0% 40.2% 66.2% 20.6% 4.43 x 3.89 X


Schedule 2 [2 of 2]

Aqua Pennsylvania, Inc. Capitalization and Financial Statistics


Notes:

(1) Excluding Accumulated Other Comprehensive Income fOCI") from the equity account..

(2) Total operating expenses, maintenance, depreciation and taxes other than income as a percentage of operating revenues.

(3) Coverage calculations represent the number of times available earnings, both including and excluding AFUDC (allowance for funds used during construction) as reported in its entirety, cover fixed charges.

(4) Internal cash generation/gross construction is the percentage of gross construction expenditures provided by internally-generated funds from operations after payment of all cash dividends divided by gross construction expenditures.

(5) Gross Cash Flow (sum of net income, depreciation, amortization, net deferred income taxes and investment tax credits, less AFUDC) as a percentage of average total debt.

(6) Gross Cash Flow (sum of net income, depreciation, amortization, net deferred income taxes and investment tax credits, less total AFUDC) plus interest charges, divided by interest charges.

(7) Common dividend coverage is the relationship of internally generated funds from operations after payment of preferred stock dividends to common dividends paid.

Source of Information: Certified Annual Reports by Price Waterhouse Coopers

Water Grpup Capitalization and Financial Statistics n



Schedule 3 [1 of 2]

2006 2005 2004 2003 2002

Amount of Capital Employed Permanent Capital Short-Term Debt Total Capital

Market-Based Financial Ratios Earnings/Price Ratio

. Market/Book Ratio Dividend Yield Dividend Payout Ratio

Capital Structure Ratios Based on Permanent Capital:

Long-Term Debt Preferred Stock Common Equity m

Based on Total Capital: Total Debt ind. Short Term Preferred Stock Common Equity ^

Rate of Return on Book Common Equity{2>

Operating Ratio ( 3 )

•Coverage ind. AFUDC ( '"

Pre-tax: Ail Interest Charges Post-tax: AH Interest Charges Overall Coverage: All Int. & Pfd. Div.

Coverage exd. AFUDC w

Pre-tax: All Interest Charges Post-tax: All Interest Charges Overall Coverage: All Int. & Pfd. Div.

Quality of Earnings S Cash Flow AFC/Income Avail, for Common Equity Effective Income Tax Rate Internal Cash Generation/Construction<s>

Gross Cash Flow/Avg. Total Debt'6 1

Gross Cash Flow Interest Coverage'71

Common Dividend Coverage1 8 1

(Millions of Dollars)

546.9 21.5

$ 568.4

28 x 261.3%

2.5% 70.6%

46.8% 0.4%

52.9% 100.0%

48:0% 0.4%

51.7% 100.0%

9.8%

74.8%

3.47 x 2.59 x 2.57 X

3.39 x 2.52 x 2.50 x

5.4% 33.1% 49.4% 20.9% 4.13 x 3.50 x

493.1 22.7

515.8

26 x 247.6%

2.7% 69.6%

49.2% 0.4%

50.5% 100.0%

50.6% 0.4%

49.1% 100.1%

9.6%

73.3%

3.63 X 2.62 x 2.60 X

3.57 X 2.55 X 2.54 X

4.5% 37.6% 50.3% 19.7%

4.33 X

3.34 x

458.7 18.3

$ 477.0

26 x 231.1%

3.0% 71.2%

49.0% 0.4%

50.6% 100.0%

50.3% 0.4%

49.2% 100.0%

9.7%

74,9%

3.38 X 2.54 x 2.52 X

3.28 X 2.45 X 2.43 x

6.4% 35,6% 60.6% 21.3% 4.38 X 3.54 X

402.4 23.5

$ 425.9

24 X 230.5%

3.1% 75.1%

49.4% 0.6%

50.0% 100.0%

52.0% 0.5%

47.5% 100.0%

10.0%

74.4%

3.21 X 2.45 X 2.43 X

3.14 X 2.38 % 2.37 X

4.9% 34.1% 59.3% 19.7% 4.04 X 3.45 x

351.6 28.2

$ 379.7

22 x 230.9%

3.2% 68.9%

50.9% 0.6%

48.5% 100.0%

53.7% 0.6%

45.8% 100.1%

10.7%

72.7%

3.29 x 2,45 x 2.43 x

3.24 x 2.40 x 2.38 x

3.8% 36.7% 53.4% 18.3% 3.81 x 3.19 x

Average 25 x

240.3% 2:9%

71.1%

49,1% 0.5%

50.5%' 100:0%

50:9% 0:5% '

48.7% 100:0%

10.0%

74.0%

3.40 x 2.53 x 2.51 x

3.32 x 2.46 x 2:44 x

5.0% 35.4% 54.6% 20.0%

4.14 X 3.40 x

See Page 2 for Notes.

Notes:

(1)

(2) (3)

(4)

(5)

(6)

(7) (8)


Schedule 3 [2 of 2]

Water Group Capitalization and Financial Statistics

2002-2006, Inclusive

All capitalization and financial statistics for the group are the arithmetic average of the achieved results for each individual company in the group. Excluding Accumulated Other Comprehensive Income ("OCI") from the equity account. Total operating expenses, maintenance, depreciation and taxes other than income taxes as a percent of operating revenues. Coverage calculations represent the number of times available earnings, both including and excluding AFUDC (allowance for funds used during construction) as reported in its entirety, cover fixed charges. Internal cash generation/gross construction is the percentage of gross construction expenditures provided by internally-generated funds from operations.after payment of all cash dividends divided by gross construction expenditures. Gross Cash Flow (sum of net income, depreciation, amortization, net deferred income taxes and investment tax credits, less total AFUDC) plus interest charges, divided by interest charges. Gross Cash Flow plus interest charges divided by interest charges. Common dividend coverage is the relationship of internally-generated funds from operations after payment of preferred stock dividends to common dividends paid.

Basis of Selection: The Water Group companies have the following common characteristics: (i) they are listed in the "Water Utility Industry" section (basic and expanded editions) of The Value Line Investment Survey, (ii) their stock is publicly traded, and (iii) they are not currently the target of a publicly-announced merger or acquisition.

Corporate Credit Ratings Stock S&P Stock Value Line

Ticker Company Moody's S&P Traded Ranking Beta

AWR American States Water A2 A- NYSE B+ 0.80

WTR Aqua America, Inc. - A+ NYSE A- 0.90

cwr California Water Sen/. Grp. A2 A+ NYSE B+ 0.90

CTWS Connecticut Water Services - A NASDAQ A- 0.90

MSEX Middlesex Water Company - A- NASDAQ B+ 0.85

SJW SJW Corporation - - AMER B+ . 0.75

swwc Southwest Water Company - - NASDAQ B+ 1.00

YORW York Water Company - A- - - 0.50

Average A2 A B+ 0.83

Note: Ratings are those of utility subsidiaries

Source of Information: • Utility COMPUSTAT Moody's Investors Service Standard & Poor's Corporation S&P Stock Guide

Standard & Poor's Public Utilities Capitalization and Financial Statistics'1'

2QO2-2006. Inclusive


Schedule 4 [1 of 3]

2006 2005 2004 2003 2002

Amount of Capital Employed Permanent Capital Short-Term Debt •Total Capital

Market-Based Financial Ratios Price-Earnings Multiple Market/Book Ratio Dividend Yield Dividend Payout Ratio

Capital Structure Ratios Based on Permanent Captial:

Long-Term Debt Preferred Stock Common Equity151

Based on Total Capital: Total Debt incl. Short Term Preferred Stock Common Equity121

Rate of Return on Book Common Equity'2'

Operating Ratio , 3 1

Coverage tncl. AFUDC M 1


Coverage excl. AFUDC w


Quality of Earnings & Cash Flow AFC/Income Avail, for Common Equity Effective Income Tax Rate Internal Cash Generation/Construction|S)

Gross Cash Flow/Avg. Total Debt'6' Gross Cash Flow Interest Coverage'7' Common Dividend Coverage | B '

$ 15,146.0 $ 516.4 $ 15,662.4

16x 206.6%

3.5% 56.3%

54.1% 1.1%

44.7% 100.0%

56.1% 1.1%

42.8% 100.0%

12.3%

81.2%

3.42 X 2.64 x 2.61 X

3.38 X 2.60 x 2.56 x

' 2.4% 32.4% 95.6% 23.8%

4.57 X 4.41 X

(Millionx of Dollars)

S 14,261.2 $14,164.3 $ 480.8 $ 279.5 $ 14,742.0

16 x 201.8%

3.5% 57.2%

55.6% 1.3%

43.2% 100.0%

57.7% 1.2%

41.1% 100.0%

11.4%

85.2%

3.20 X 2.54 X 2.50 X

3.17 x 2.51 x 2.47 x

0.9% 31.3%

108.3% 21.3%

4.42 X 4.41 x

$14,443.8

15 X 182.4%

3.8% 70.3%

57.4% 1.5%

41.0% 100.0%

59.0% 1.5%

39.5% 100.0%

11.5%

84.4%

3.02 x 2.42 X 2.38 X

2.99 X 2.39 X 2.35 x

3.0% 26.2%

127.0% 21.1%

4.42 X 5.00 x

$ 14,259.5 $ 266.9 $ 14,526.4

13 x 150.6%

4.2% 58.8%

59.3% 1.6%

39.1% 100.0%

60.7% 1.6%

37.7% 100.0%

10.0%

84.8%

2.57 x 2.12 x 2.07 X

2.53 x 2.08 x 2.03 X

1.7% 40.3%

127.8% 20.8%

4.42 X 5.27 x

$13,850.0 $ 913.6 $14,763.6

14 X 152.2%

5.0% 72.8%

60.4% 1.8%

37.8% 100.0%

63.1% 1.7%

35.2% 100.0%

8.1%

84.5%

2.41 x 1.99 X 1.95 X

2.37 x 1.95 x 1.90 x

2.6% 29.0% 91.8% 19.0%

4.07 X 4.23 X

Average 15 x

178.7% 4.0%

63.1%

57.4%, 1.5%

41.2% 100.0%

59.3% 1.4%

39.3% 100,0%

10.7%

84.0%

2.92 x 2.34 X 2.30 X

2.89 x 2:31 x 2.26 X

2.1% 31.8%

110.1% 21.2%

4.38 x 4.66 x

See Page 2 for Notes.

Notes:

Exhibit 4-A Page 7of 31

Schedule 4 [2 of 3]

Standard & Poor's Public Utilities Capitalization and Financial Statistics

2002-2006, Inclusive

(1) All capitalization and financial statistics for the group are the arithmetic average of the achieved results for each individual company in the group.

(2) Excluding Accumulated Other Comprehensive Income ("OCI") from the equity account

(3) Total operating expenses, maintenance, depreciation and taxes other than income taxes as a percent of operating revenues.

(4) Coverage calculations represent the number of times available earnings, both including and excluding AFUDC (allowance for funds used during construction) as reported in its entirety, cover fixed charges.

(5) Internal cash generation/gross construction is the percentage of gross construction expenditures provided by internally-generated funds from operations after payment of all cash dividends divided by gross construction expenditures.

(6) Gross Cash Flow (sum of net income, depreciation, amortization, net deferred income taxes and investment tax credits, less total AFUDC) as a percentage of average total debt.

(7) Gross Cash Flow (sum of net income, depreciation, amortization, net deferred income taxes and investment tax credits, less total AFUDC) plus interest charges, divided by interest charges.

(8) Common dividend coverage is the relationship of internally-generated funds from operations after payment of preferred stock dividends to common dividends paid.

Source of Information: Annual Reports to Shareholders Utility COMPUSTAT

Standard & Poor's Public Utilities

Company Identities f1)


Schedule 4 [3 of 3]

Common S&P Value Credit Rating ( 2 ) Stock Stock Line

Ticker Moody's S&P Traded Ranking Beta

Allegheny Energy AYE Baa3 BB+ NYSE B- 1.85 Ameren Corporation AEE A2 BBB+ NYSE A- 0.75 American Electric Power AEP Baal BBB NYSE B 1.20 CMS Energy CMS Bal BB NYSE C 1.45 CenterPoint Energy CNP Baa3 BBB NYSE B 0.65 Consolidated Edison ED A1 A NYSE B+ 0.65 Constellation Energy Group CEG A3 BBB+ NYSE B 0.95 DTE Energy Co. DTE Baal BBB, NYSE B+ 0.70 Dominion Resources D Baal BBB NYSE B+ 0.95 Duke Energy DUK Baa2 BBB NYSE B+ 1.20 Edison Int'l EIX Baal - BBB+ NYSE B 1.05 Entergy Corp. ETR Baa2 BBB NYSE B+ 0.85 Exelon Corp. EXC A3 BBB+ NYSE B+ 0.80 FPL Group FPL A1 A NYSE A- 0.80 FirstEnergy Corp. FE Baa2 BBB NYSE B+ 0.75 Integrys Energy Group TEG A1 A- NYSE B 0.85 Keyspan Energy KSE A3 A NYSE B 0.85 NICOR Inc. GAS A1 AA NYSE B 1.15 NiSource Inc. Ml Baa2 BBB NYSE B 0.80 PG&E Corp. PCG Baal BBB NYSE B 1.10 PPL Corp. PPL Baal A-. NYSE B 1.00 Pinnacle West Capital PNW Baa2 BBB- NYSE A. 0.90 Progress Energy, Inc. PGN Baal BBB NYSE B+ 0.80 Public Serv. Enterprise Inc. PEG Baal BBB NYSE B+ 0.90 Questar Corp. STR A2 A- NYSE A- 0.90 Sempra Energy SRE A2 A NYSE B 1.00 Southern Co. SO A2 A NYSE A- 0.65 TECO Energy TE Baa2 BBB- NYSE B- 1.00 TXU CORP TXU Baa3 BBB- NYSE B 1.05 Xcel Energy Inc XEL A3 BBB+ NYSE B 0.80

Average for S&P Utilities Baal BBB+ B 0.95

Note:

Source of Information:

( 1 t Includes companies contained in S&P Utility Compustat. AES Corp. and Dynegy, Inc. are not included. ( 2 ) Ratings are those of utility subsidiaries

Moody's Investors Service Standard & Poor's Corporation Standard & Poor's Stock Guide Value Line Investment Survey for Windows


Schedule 5 [1 of 1]

Aqua Pennsylvania. Inc. Capitalization and Related Capital Structure Ratios

Actual at June 30.2007 and Estimated at June 30. 2008

Actual at June 30, 2007 Estimated at June 30, 2008 Amount Ratios Amount Ratios

Outstanding Exd. S-T DeW Incl. S-rOeW Outstanding Excl. S-T Dob! Incl. S-T Debt

Long-Term Debt 1 " $ 575.660.273 49.15% 46.47% $ 645,980,539 (2) 49.20% 48.45%

Common Equity Common stock Capital in excesss of par value Retained earnings

100,000 239.112,000 356,441.000

100,000 284,112,000 382,808,000

(3!

H)

Tola! Common Equity 595,653.000 50.85% 48.08% 667,020,000 50.80% 50.02%

Total Pennanent Capital 1,171,313,273 100.00% 94.55% 1,313,000,539 100.00% 98.47%

Revolving Credit Facility 67,551,000 5.45% 20.414,844 IS) 1.53%

Total Capital Employed : $ 1,238,864,273 100.00% S 1,333,415,383 100.00%

Notes: I D Includes current portion of long-term debt. Reflects the issuance and retirement of long-term debt as follows:

Series 6.75% 5 9.17%

UTMA Note 9.00% 7.15% 6.14% 3.75% .9.89% 5.00% 5.00% 5.00% 5.00% 6.00%

Pennvest Pennvest

Amortization of Loss Total _S_

13) Reflects common equity cortributions from Parent Company of: 3rd Qtr. 2007 ! 4th Qtr. 2007 1st Qtr. 2008

2nd Qtr. 2008 Total

("i Projection of retained earnings, consisting of: Net Income

3rd Qtr. 2007 4th Qtr. 2007 1st Qtr. 2008

2nd Qtr. 2008 Total

is) Projection of Short-term debt activity: Borrowings

3rd Qlr. 2007 4th Qtr. 2007 1st Qtr. 2008

2nd Qtr. 2008 Total

$ 19,935,000 16,509,000 12,743,000 17,146,000

$ 10,781,000 15,057.844 18,113,000 13,912,000

Dividends $ 10,782,000

9.756,000 8,263,000

11,145,000

Repayments $

81,000,000

24,000,000

(10,000,000) (400,000) (103,844)

(2.000,000) (10,000,000)

(400,000) (5.000,000)

23,626,000 25,000,000 25,000,000

(42.000,000) 60,000.000

9,514,175 (2.949,000)

32,935 70.320.266

21.000,000

24.000.000

s 45,000,000

Net change

$ 9,153,000 6,753,000 4,460,000 6,001,000

S 26,367,000

Net change S 10,781,000

(65,942;i56) 18.113,000

(10.088,000)

$ (47.136,156)

Source of Information: Company provided data


Schedule 6 [1 of 4]

ftgui PtnntvmnH. mi. CakulMMK nf Tit EfnlstdMa Cos g[ Lang-Tum Dsbt

fetal itJunt X VX?

FIRST MORTGAGE BOM PS 9 .880* SfcRJES DUE 7006 8.830% SERIES DUE 2013 9 BTO% SERIES DUE 2016 B.I2014 SERIES DUE 2010 6190% SERIES DUE 2026 8 i70% SERIES DUE 2021 8.170* SERIES DUE 2011 (R C) S S3% SERIES DUE 2016 ( S U H ) 6 SOT* SERIES QUE 2022 (Stun) S.aXM SERIES DUE 2022 ( S h t n j s . M O * SERIES DUE 2025 7.1 SOS SERIES DUE 2We

Pa r u m Effoctva WalgMod Afnounl to Con

Ou&tondna Tgb l R.ta I " HaU

1 5.000,000 O.TO* 8.86% 0.06% 5.000,000 0 .80* 1 0 . 0 1 * 0 06% 5,000,000 0*0% 10 0 7 * 0.08S

lo .ooo.ow 3 .18* 0 2 1 * 0.28% 12.000,000 1 .81* 8.36% 016% e.KO.ooo D M * 8 3 2 * o . o t s 5.000,000 0 6 0 * 8 2 1 % 0.07% 4.000 TOO O.S i * B.74% 006% 1.500.000 0.24% 6.66% 0.02% 3,500.030 0 .56* 6.43% 0.05% 4,000.030 0.64% 6 28% 0.05% zaaosao 0 .32 * 7 .25* 0 .02*

73.000 H »

7,720% 6.880% 6-75014 6.140% 5.930% 5 210% 5.060% 5.170* 5 751% 5 . 7 5 1 * S-OGO* 6.060% 5.660%

MEDIUM TERM UOTES SERIES DUE 2025 SERIES DUE M l 5 EEHIES DUE 7007 SERIES DUE 2006 SERIES DUE 7012 SERIES DUE 2011 SERIES DUE 2015 SERIES DUE 2017 SERIES DUE 2018 SERIES DUE 1018 SERIES DUE 1027 SERIES DUE 2027 SERIES DUE 2028

15,000.000 2 .39* 7 6 1 % 0.19% 12.0DQ.0CO 1.91% 8.99* 0 .13* 10.000.000 V5S% 6 9 1 % 0 11% io.coo.oao 1.5S* 6 2 1 * 010% 25,roo1ooo 3.88% 6.02% 0.24% 15.000.000 2.38% 625% 0.15% 20.0co.00o 3.18% 5.15* 0.16%

7,000.000 1.11% 524% 0.06% is.ooa.ooo 2.36% 5.83* 0 1 4 % 5.000.000 O.SOH 5 03% 0 05%

iS.ooa.oco 2 .35 * 8 .16* O.I 5%

5.000,000 0.60% 6.16% 0 0 5 * 3.000,000 046% 6.06% 0 .03*

157,000.«10

NOTES

8.000% NOTE DUE 2013 6.95% SERIES DUE 2023 5 .95* SERIES DUE 2024 5.85% SERIES DUE 2033 S.95% SERIES DUE 2034 5.64% SERIES DUE 2014 5.64% SERIES DUE 2016 5 .64 * SERIES DUE 2020 5.64% SERIES DUE 2021 5 .64 * SERIES DUE 2017

IAX EXEMPT * PENH VEST

3.7S*TAX EXEMPT DC IDA DUE 2010 5.15% TAX EXEMPT DC IDA DUE 2032 5 35% TAX EXEMPT DCIDA DUE 2031 5.55% TAX EXEMPT BCIDAOUE 2032 6.00% TAX EXEMPT DCIDA DUE 2028 6.00% TAX EXEMPT MCIOAOUE 2030 (SHwi) S.OS* TAX EXEMPT NCI DA DUE 7038 (RC) 5.00% TAX EXEMPT DCIDA DUE 2036 5 0 0 * TAX EXEMPT DCIDA DUE 7037 5 0 0 * TAX EXEMPT DCIDA DUE 2038 ' 6 .00 * TAX EXEMPT DCIDA DUE 2038 5 .00* TAX EXEMPT CCIDA DUE 2040 5 .00* TAX EXEMPT CCIDA DUE 2041 1.372%.7.711 % COAL TVW PENN VEST «126S; 1.000% WHITE HAVEN PENNVEST (20015 1.000% HAWLEY PENNVEST #76012 3.237%4047% PICKERING DAM PENNVEST 4: 1.000% SHICKSHINNY PENNVEST 130004 (Shin} 1.000% PENNVEST 135035 (Sutq) 2.400*-3.S31* PENNVEST 135143 3.237*4.047% GLENSJDE TANK PENNVEST «; 1000% WESTERN PENNVEST 150038 Z642*^1.55% BRISTOL PENNVEST UOOai l.000%-1.3"9% HAVW-EY PENNVEST 180091 (RC) I.D0%-1.35% FERN DALE PENN VEST 1801 (Su«J> 3 400%-3 631 % VEDA PENN VEST 1600! 3 .237*4 047% NORTH WAYNE 12 PENNVEST (Shtn) 1 551*^ .032% PENN VEST 160107 2.757%-3 46% CRUM PENN VEST 480117 2.774%-3 4 6 a * YrtllTE ROCK PENN VEST »801 1 387%-;.)74% MIDWAY MANOR PENN VEST 1 3 237V4 0 4 7 * FEHNHILL TANK PENNVE5T I t 3.0D3%O 7 0 * TANK PAINTINGS PENNVEST <f 3.015%^ 6 1 % NORTH WAYNE « PENNVEST I 7.774%^ 43% MEYERS TRACT PENN VEST 48 1.387*-2.770* CANAAN PENN VEST 480138 2.TSS%3 470% NESHAMINY PENN VEST M 0 1 . 7.702%^ 4 3 * TINICUM BOOSTER PENNVEST 2.SS6%-3.195% PICKERING PENNVEST 1 ?78%-7 556% N E M l l n i 2005 PENNVEST ISO 2.501%-3 33% PSW WELL t20 PENNVEST 1811 1.376%-2.72e% NUI PENNVEST Ml009 1.362%-!668% N E PA M a i n PENNVEST (810-1.367%-2.726% TAFTON PENNVEST (85110 1.3e7%-2.774% SHICKSHINKYPENNN VEST ( t 1.3e7%-7.770% WAPWilUOPIN PENN VEST I t 1.942*-3.052% MOSCOWPENN VEST (85117 2.77%-3.4?* INGRAMS MILL PENNVEST (66C 1.387* FAWN LAKE PENN VEST (66015 {RC} 1.00% RALPHO TANK PENN VEST 169017 t .3ST%-3.774* W U A R PENN VEST (68155 2.566%3.365% PAUPACK PENN VEST I891S7

968.407 0.15* 900% 0.01% 10,000.000 1.S9* 5.99* 0.10* 10,000.000 1.58% 5 88% 0.10% 10.000.000 1.S9S 6 8 7 * 0.10% 10,000.000 1.59* 5 9 7 * 0.10* 4,534.000 0.73% 5.69* 0.04% 4.4S9.MO 0 . 7 1 * 5.69* 0.04% 5,46a.CO0 OB7H 5 8 7 * 0.05% 5,461.1X10 097% sec* 0.05* 2.132.0)0 0.34* 6 2 5 * 0 .02*

63,100.407

1.200.000 0.19% 4 3 1 * 0 . 0 1 * 25.000.000 3.98* 5.40* 0 2 2 * 30.000.00) 4.77* 6 5 6 * 0 2 7 * 25.CCO.0CO 3.99% 5 74% 023% 25.C00.0O} 3.98* 6 2 4 * 0 25% 18.360.001 2.82% 8 3 2 * 0 19* 14,000,000 2.23% 5 49% 0.12* 21.770.0O» 3 49% 5.25% 0 18* 24,155.003 3.85% 524% 0 20% 75.375 SXQ 4 04% 523% 0 21% 24.675.000 3 83% 5.28% 0 3 1 * 73.915.000 3.61% 6.47% 0.21% 73.015,000 3.81% 5.47% 0 2 1 %

! 658,571 0,11% 1.41% 0.00* 543.974 0.09* 1.09* 0 0 0 * 539,884 0 .09* 1.03% 0.00% S9Z977 0.09* 4 10% 000% 74,076 0.00% 1.11% 0.00*

309.791 0 0 5 * 1.04% 0.00* 125.457 0.02* 9.89* o.oo* 292.836 0 0 5 * 4 .10* 0 .00* 31S.765 0.05% 1.04% 0.00%

4.331.611 0.69* 3.60* 0 0 3 * 261.004 0 .04* 1.39% 000%

> 353.344 0 0 5 * 1.39* 0.00* ! 325.072 0 0 5 * 3 68% 0 0 0 *

999.728 0.14* 4.10% 0 0 1 % 981.307 0.16% 3.08% 0 . 0 1 *

5.954.547 095% 2 9 0 * 0 0 3 * 1 430,339 007% 2.62% 0 00% 1 1.887.257 030% 1 43% 0 00% ! S32.747 0.09% 4 10% 000% 1 1,719.143 0 27% 3 8 4 * 0 0 1 % 1 1.009.294 0 18% 3 86% oois 1 1.230.597 0.19% 2 82% 0 0 1 %

1.579.465 0 75% 1 43% 000% 4.034.178 0.S4* 2.91% 0.02*

122.660 0 04% 3.45% 0.00% 339.202 0 0 5 * 2 .00* 0.00%

1 1.099.279 0.18* 1.32% 000% 544,183 0.08% 3.36% 0 0 0 *

4.591.244 0.73% 2.77% 0 02% 1.975.416 0.31% 1.40% ooo*

530.100 0 09% 1.47% 0.00% ! 301.389 0.05* 1,43% o.oo* < 298.974 0.05% 1.43% 000%

975.352 0.16% 1.99* o.oo* 7.409.502 1.18% 3.52% 0.04% 1.817.947 0 2 9 * 1 4 3 * 0.00% •920.743 0.10H 1.04% 0.00%

1,520.000 0.34% 1.43* 0.00% 1.939.017 028% Z 6 1 % 0.01%

Total Long -ttim Ota Unvnomnd C*9 Premium Urwfrawn Ca ih ftaatfcfed to Tu-***mtr t PrcjMU

Lfing Tamt- Dabt

628.447.454 (632.924)

(52.154.357)

1 575.680^773

Annual iud Cent

AnwrnTaDon of Lota en Ravcqulnd Dab! UrHjrann C i t h Restrctod for Tax-dxampl PfDJKtt

Teal C M

S o u i » 01 InlorTTUban: Company provided 6at i

(2.950.094]

i 34.374.943

A t n l b J a U d on pa||i 2 of chia achadulo.


Schedule 6 [2 of 4]

Anua PtnmHtoirit inc CalciJatton ot the Effective Cotl cf Umg-Tarm Debt by Seriei

AauBl«IJiai8 30. 2007

FIRST MORTGAGE BONDS 9.19011 SERIES DUE MOB 9.930% SERIES DUE 1013

s.w/.SEiunsDUEZGu

9.130% SERIES DUE 2010 9.29011 SERJES DUE 2026 ftiTOKSEJUESDUEMil 9.17014 SERIES DUE 2011 [R C) 9.U5i SERIES DUE 2019 (StmO ei60V. SERIES DUE 2022 (Shu) i j m SERIES DUE 2022 (Sht/i)8.l40K SERIES DUE 201} 7.1SOK SERIES DUE 3008

MEDIUM TERM NOTES 7.720% 8.990% 8.750% 6.140% 5930% 6,310% 5.080% 5.170% S.751W 5.751« 6.06W 6.060% S.Bfl014

SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES

DUE 2025 DUE 2015 DUE 2007 DUE 2006 DUE 3012 DUE 3011 DUE 301S DUE 3017 DUE 3019 DUE 10)9 DUE 2027 DUE 2027 DUE 2028

NOTES 9000% NOTE DUE 2013 5.95% SERIES DUE 3033 5.B5H SERIES DUE 2024 5.95% SERIES DUE 3033 S.HS SERIES DUE 3034 5.64% SERIES CUE 3014 5.64% SERIES DUE 3016 5.64% SERIES OUC3030 S.M% SERIES DUE 3031 5.64% SERIES DUE 3017

TAX EXEMPT 6 PENNVEST 3.Jiw TAX EXEMPT DCIDA DUE 2010 S.ISW TAX EXEMPT DCIDA DUE 2032 S.1SW TAX EXEMPT DCIDA DUE 2031 5 . i i ! t TAX EXEMPT BCiOA DUE 3)32 6.00M TAX EXEMPT DCIDA DUE 2029 6.00K TAX EXEMPT MCIDA DUE 2030 (She) i.0S% TAX 1LXEMPT NCIHA IJUE 2039 (RCJ LOO* TAX EXEMPT DCIDA DUE 2016

i.00% TAX EXEMPT DCIDA DUE 2037

S.W4 TAX EXEMPT DCIDA DUE 203!

S.QOK TAX EXEMPT DCIDA DUE 203! 5.00% TAX EXEMPT CCIDA DUE 2040

S.W% TAX EXEMPT CCIDA DUE 2041

! J721i-2.7I1W COAL IWP PENN VESTllMiJ

1.000% WHITE HAVEN PENNVEST "TOOIS I 000% IWWLEY PENNVEST «SOI2

.1 2375V4.017K PICKERINQ DAM PENNVEST ISOH

1.000% SHICKSHDWY PENNVEST •30W4 (Stun) 1.000% PENNVEST 'iltni

(Simi)24O0W-3.631M PENN VEST '35143

3.23711-1 01?% OI-ENSIDETANK PENNVEST 435144 1 COOIl WESTERN PENNVESI fiOIUS

2 M2K-MSK BRISTOL PENNVEST <80i3!1 1.000%-1.349% HAWLEY PENNVEST I KM] (HQ 1.001V-l.3»i FERNDALEPENN VEST 11009! (Siuq) 2.4WB;.3.6J1K VEDA PENH VEST •«0W)

3 237%-] 047% NORTH WAYNE'S PENNVEST 180106 (Shtn) I.Sil!r3.03111PENN VESTIB0107 2.752%-3.46!i CHUM PENN VEST 180117

2.T74%.3 461'/. WHITE ROCK PENN VEST 1180125 1 JS7W-2_714% MDWA Y MANOR PENN VEST #80126 3 237%^»J7% FERNHILL TANK PENNVEST "S0135 3003%-3.-»W TANK PAINTINOS PENNVEST«S0136 3<M5%-3.S1K NMTH WAYNE 13 PENNVEST 110137 3.7J4%-3.43« MEYERS TRACT PENN VEST * 80138 n87%-2.771JK CANAAN PENN VEST»!0I39 2.76914-3,4 TDK NESHAMINY PENN VEST «!0140 2.7nlK-3.43il TINICUM BOOSTER PENNVEST 480142 2.55614-3.19!% P1CKERIN0 WEST PENNVEST «B014! l.Z78%-2.5S6% N E Miim 2005 PENNVEST '801 SO 2.50114-3.33% PSW w m j . '20 PENNVEST •1IW1 l.T!6%-I.726% NUI PENNVEST'81009 lJ*21V:.M8-/i N E PA Miim PENNVEST '81012 I J!7W-2.,72tS TAFTON PENN VEST '85(10 l.3!7%-i.774« SHICKSHINNY PENNN VEST «!5111 I JBT%-2.770V. WAPWALLOPIN PENN VEST 'SSI r3 1,942%-3 052% MOSCOW PENN VEST '85117 3.77%-1.47M INORAMS MILL PEHN VEST '880(3 1JI7K FAWN LAKE PENN VEST '88015 IRQ l.OOKRALPHOTANK PENN VEST«8B017 1.3S714- 2.774% WILBAR PENN VEST '89155 3.56B%-336J% PAUPACK PENN VEST '89157

Principal Discount N K

Dale of D a t t o l CewHrii Antounl and Net P/oceedB EftetO.e

Malui lv R J W IHued E * M n » Pfoceeds Roto C « l Rats 1

07as/B! 0SAI1/D8 9.69% 15.000.000 i 30.993 S 4.969,007 99.38% 8.96% 07/25/11! 06*1 /13 9.93% 5.000.000 38.741 4.861.258 99.23% 10.01%

omsiw 06/01/1 e 9 97% 5,000,000 46.489 4.953.511 99 07% 10.07%

01/15/10 9.12% 20,000.000 165.853 18.834.147 89.17% 9.21%

17117191 09/15126 9 2 9 % 12.000,000 90.933 11.908.017 89.24% 8.36% \V\1V\ 09/15/31 9.17% B.ooo.000 44.193 7.955.B06 89.45% 9 22%

masi 09/15111 9.17% 5,000,000 21.663 4.978.337 99 57% 9 2 1 % l2A)l/89 13/01/19 9.53% 4,000.000 79.762 3.920,238 99.01% 9.74% UI01IV2 11/01/22 6.26% 1.500,000 47.870 1.4S3.030 96.60% 8 58%

}i/OII91 11/01/22 6.32% 3.500,000 63.691 3.436.309 98.18% 8.43% 11I0IJ9J 11/01)35 6.14% 4.000.000 62.676 3.937,334 98 4 3% 6.28% 04A)IJ93 04/01/OB 7.15% 33.000.000 305.647 2l,7W.3S3 99.07% 7.25%

05 /1*95 05/1 &3S 7.720% 15.000.000 160.438 14,839,571 98.93% 7.81% 12/19«5 12/15/15 6.890% 12.000.000 128,343 11.671,657 88.93% 6.69%

07/15/97 06/15(07 6.760% 10.000.000 113.618 8.886.383 88.86% 6. B I S

01/16)99 02(01/118 6.140% 10.000.000 53.213 9.847.787 99 48% 6 3 1 % 06/2002 07(01/12 5 930% 25,000,000 167.493 24.832.508 89.33% 6.03% 10/25/01 11/01/11 6.210% 15,000,000 49.350 14.950.650 99.67% 6 25% 05/1004 05/15/15 5.080% 20.000.000 117.143 19.883,656 99.41% 5.15% 06/10134 05/10/17 5.170% 7.000.000 46.816 6.951.394 99.31% 5 24% 05/1 OM 05/15/19 5 7 5 1 % 15.000.000 119.820 14.880.060 99.20% 5 83% OS/IOIW o&ri&ig 5,751% 5,000.000 39.819 4.960.181 99.20% 5.63%

OSIMXW 05/10/27 6.C60% 15.000.000 183.818 14.816,164 Bfl .77« 6.16% 05/10/04 05/15/37 6.060% 5. WO. 000 61.118 4.938.892 98.78% 6.16% 05/10/04 os/iwa 5.880% 3,000.000 38.430 2,961.570 98.72% 6.08%

.12/30102 12/31/13 9.000% 1.957.462 1.967,462 100.00% »«(% 0301/08 0301123 5 950% 10.000.000 38.083 9.971.9 IB M .72% 5 98% 03/31/08 03/31/24 5.950% 10.000.000 26,063 9.971.918 99.72% 5 98% 03/31/06 0301/33 5.950% 'O.MO.DOO 38,062 8.971.918 99.72% 5.97% 03O1/06 0301 /31 5.950% 10,000.000 28,082 8.971,818 99 72% 5.87%

0900/14 5.040% 4.584.000 13.341 4.570.660 99.71% 5 69% 09/2ft06 0900/18 5.640% 4.488.000 13.341 4.475.660 99 70% 5 68% 0 9 ^ * 0 6 09/3020 5.640% 5,486,000 13.341 5.453.680 99.76% 5.57% 09/28106 0900/21 5.640% 5.481.000 13.341 5.447.680 88.76% 5 66% 05/1 SOT 05/15/17 5 640% 3.133.000 95.163 3036,838 95 54% 6.25%

1201/02 00(01/10 3.750% 3,300.000 111.989 3,088.011 86.50% 4 .31% (MJ26/02 09/0102 5150% 35.000.000 945.606 34,054.393 96.33% 5 40% 11/01/01 10/01(31 5 350% 30,000.000 930.951 29.069.049 86.80% 5.56% 06/01/02 09/01/32 5550% 35.000.000 666.173 24.331.827 97.33% 5.74% 101)7/99 Ofl/Dl/39 6000% 25.000.000 821.676 " 24,178.324 85.71% 6.24%

07/01/30 6.000% 18,360,000 778.702 w 17.581.288 85.76% 6.33% 11/01/04 10/0109 5.050% 14.000.000 958.459 , • , 13,041.541 83.15% 5.48% 05/1W35 11/0106 5000% 31,770.000 633.029 20.947.171 98.22% 5.25% 05/19*5 11/0107 5 0 0 0 S 24.165,000 995.366 23.269.834 96.39% 5.24% 05/19/05 11/01/38 5.000% 25,375,000 921,434 24.453.586 96.37% 5.23%

02/01/35 5.000% 24,675,000 1.034.107 23.640.993 85.81% 5 28% 01/16/07 02/01/40 5.000% 23.eis.ooo 1,731.809 33.193.081 93 80% 5.47%

01/i aw 02/01/41 5.000% 23.915,000 1.722.351 22.193.649 93 80% 5 47% 04/21105 05(01/36 1.372% 1.054.866 7.465 1.047.403 99.29% 1.41%

03(09/12 1.000% 1.129.906 7.998 1.121.910 99.29% 1.08% 05«1 /W 10(01/21 1.000% 9 7 Z 0 4 I 6.878 965.163 99.29% 1,03% 1113000 06/01/31 4 047% 920.803 6.517 914.285 99 29% 4.10% 05/15*2 01101/09 1.000% 76.330 540 75.790 99 29% 1.11% 12iD1/Bl 12/01/11 1.000% 1,250.000 8.846 1,241.154 89 38% 1,04% OBtOMX 12/01/30 3.631% 175.725 1,244 174,481 99 29% 3.66%

13/01/30 4 047% 415,350 2.939 412.311 98 2814 4.10% 03/17/97 06/01/1 ' 1.000% 694.500 4.915 668.565 99 28% 1,04%

otiimo 06(01/19 3.550% 5.949.630 42.106 5.807.524 89.29% 3 60% 04/1SrtlO 12/01/20 1 349% 343.845 2.433 . 341.412 99 29% 1.39% 03/22/00 12/01/20 1.350% 651,125 4.608 646.517 89 28% 1,39% 11/39fl» 05/01/21 3.631% 487.000 3.447 483.553 99 38% 3 68% 11/28/00 06/01/21 4 047% 1,174,916 8.315 1.166,601 89 28% 4.10% 03/13/01 09/01/21 3.032% 1,715,000 13.137 1,703.663 99 29% 3 08% 08/07/03 05/01/25 1752% 9,975,741 70.600 9.805.141 99 29% 2.60% 05/25/05 05/01/26 2.774% 677,638 4.797 673.042 99.28% 3.82%

07/01/27 1.387% 2,611.360 16.481 2.592.699 99.28% 1.43%

wmno 12/01/20 4.047% 768,543 5.439 763.104 9 9 2 9 % 4.10% 13/13A)1 I S / I M I 3.790% 2025.180 14.333 3.010.846 9 9 2 9 % 3.84% 0 3 / 1 M 1 08»1/33 3.810% 1.348.773 9,531 1.337,342 96.29% 3.86% 07/23rt)3 07/23/23 2.774% 1.547.054 10.949 1.536.105 98.29% 2 6 2 % 13/19^)3 03101/24 1.387% 1.646.400 11.653 1.634.748 99.29% 1.43% 08(07/03 01(01/35 3769% 6.366.625 45.057 6.321.568 99.29% 2 8 1 % 13/13/01 13/13(31 3430% 356.520 3.523 353,997 99.29% 3 4 8 % 07/25/00 10/01/27 3 5 5 6 % 2.225.000 15.747 2.209,253 99.29% 2.60% 07/35/06 04(01/27 1278% 1.253.000 8.666 1,344.132 99 29% 1.32% 04/10*2 04/10(22 3.330% 643.227 5,968 837.258 99 29% 3.38% 06/27/02 034)1/24 3 7 3 6 % 5.538.900 39.199 5.498,701 98.39% Z 7 7 % 03/23/05 03/23/25 1.383% Z 123.650 15.024 2.107.828 99 28% 1.40% 12/01/04 01/0105 1 387% 600.000 4,246 595.754 99.29% 1.42% 05/25/05 04/01/26 1.387% 331.523 2.275 319.347 99 29% 1 43% 06/01104 06ID1/24 1 387% 333.678 2.363 331.515 99 29% 1 43% •8/3 &05 1O/01/36 1 942% 1.151.000 8.146 1.142.854 89 29% 1.98% 11/14101 11/14/21 3 470% 9.583.806 67.619 9.514.987 89 28% 3 53% 1105/02 04/01/34 1.387% 2201.840 15.583 2.186.357 '99.29% 143% 13/13/02 11(01/33 1.000% 778.625 5,510 773.115 99.29% 1 0 4 % O&fll/OS 05(01/37 . 1367% 1.520.000 10,757 1.508.343 99 28% 1.43% 1CW2/05 10/01/28 2568% 2.249.960 15.933 2,234,037 99 28% 2.61%

NoteK CI The etlectwe eoK fex each tau« d lha yiddlomjtunly uling a i inpuB Ihe data o( Inue. the date of matum/. Uw . coupon rale, and the rwi proewfe ratio. ° InduOeithe unamonam) debt lnuince ooeti S389.587 on the 6.375% NCIDA bonOs Ihalweie rchrunad and

the debt tsiuanca and on IM replscsmefll debt al 5568,672 « Indudsa the unamartiud debt ImoneoaxtJ 0(1450.071 on the 6.35% DCIDA bonttt Uialwer* rnfintncwl end On

(feMI(iuanc«coationttierepl>cai»ent OtlXGf 1606,684 ntrtd (he oritfnjl ixuanca premium ol 1229,020 W Includes (he debt itiuanos coiti o( 1675.647 net 0( the original Isauance premium ol 5334,401. HI Indudei Oro dgU Issuance costs ol 5708.478 net ol the anginal ntuance premium OIS225.584

Source ol Inlormaiion: Company provided dala

ftquj Pantm^Vfila. Int. CêuWnncfUwEmbwHgdCoilglLong.Ttim CHU

MinHUUM.JB.ZQg


Schedule 613 of 4]

FIRST MOHTGAGE BOHOS 9 Bsmt SERIES DUE icoe 9.930% SERIES DUE 2013 9.970% SERIES DUE 2019 9.120% SERIES DUE 2010 9290% SERIES DUE 2028 9.170% SERIES DUE 2021 9.170% SERIES DUE 2011 (R C) 959% SERIES DUE 2019 ( S U H ) 8.260% SERIES DUE 2022 (Ston) 8.320% SERIES DUE 2022 (Shan) 8.140% SERIES DUE 2025 7.150% SERIES DOE 2008

7,720% 6.890% 6.750% 6140% 5.930% 6210% 5.080% 5.170% S.761% 5.751% eoaya 8.060% 5960%

MEniJM TERM HO TES SERIES DUE 2025 SERIES DUE 2015 SERIES DUE 2007 SERIES DUE2C06 SERIES DUE 2012 SERIES CUE 2011 SERIES DUE 2015 SERIES DUE 2017 SERIES DUE 2019 SERIES DUE 2019 SERIES 0062017 SERIES DUE 2027 SERIES DUE 2038

NOTES 9.000% NOTE DUE 2013 5 .95* SERIES DUE 2023 5.95% SERIES DUE 2024 595% SERIES DUE 3033 5.95% SERIES DUE 2034 564% SERIES DUE 2014 6.64% SERIES DUE 2016 5.64% SERIES DUE 2020 554% SERIES DUE 2021 564% SERIES DUE 2017 e iX% SERIES DUE 2017

S.OQO.COO 5,000,000

20.000.000 12.000.NX) 5.GOO.O0O 5.0CO.0CO 4.0CO.0CO 1.500.0CO 3.5C0.0C0 4.0C0.0CO

6S.SOO.000

15,000.000 12.000.000

25.000,000 15.000.000 20.C00.C00

7.000.000 15.000.000 5,000,000

15.000.000

s.oco.ooo 3.0OKO0

137.OCC.000

884.563 lO.OOO.COO !o,ooo.oao 10.000,000 10.CO0.CO0 4.5B4.C«0 4.4B9.1W1 5.466.000 5.451.000 Z132. COO

6O.IJO0.CO0 122.996J63

TAX EXEMPT A PENNVEST 3.75% TAX EXEMPT DCIDA DUE 2O10 800,000

. 5.15%TAXEXEMI>TDCIDADUE2032 2S.0CO.000 5 35% TAX EXEMPT QCIDA OUE 2031 30.00O.CCO 555% TAK EXEMPT BCIDA DUE 203! 25.000.000 6 00% TAX EXEMPT DCIDA DUE 2029 25.000.000 6.03% TAX EXEMPT MCIDA DUE 2030 (Sten) 16.3aj.0Q3 5.05% TAX EXEMPT NCIDA OUE 3t09 (RC) 14,000.003 5.00%TAXEXEMPTDCIDADUE3336 21,770,000 5 .00* TAX EXEMPT DCIDA DUE 2037 24.165,000 5.00% TAX EXEMPT OCI DA DUE 2036 2S.375.CO0 5.00% TAX EXEMPT OCI DA DUE 2036 24.675,003 500% TAX EXEMPT CCIDA DUE 2010 33.915,000 5.00* TAX EXEMPT CCIDA D U i 2341 23.915,CO0 5.00% TAX EXEMPT MCIDA DUE 2042 2S.DOO.000 5 D 0 * TAX EXEMPT MCIDA DUE 2043 25,00,000 1 372* -2 .711* COAL TWP PENNVEST 41265 963,423 1 000% WHITE HAVEN PEN WEST 120015 428.837 1.000% HAWLEY PENNVEST (25012 504.657 3 237%-4 047% PICKERING DAM PENNVEST I 560.560 I.COOH SHICKSHINNY PENNVEST f3C064 13.483 (Ston) 1.0CO% PENNVEST 135035 243.286 (Sui<i)2.400%-3631* PENNVEST (35143 115,024 3.237%-4.047% GIENSIOE TANK PENNVEST I 276.193 1000SIA£STERNPENNVE5T#50039 273.051 3 6 4 2 * ^ . 5 5 * BRISTOL PENNVEST (90081 4,041.767 1.000%.1.349% HAWLEY PENNVEST «8C091 243257 <RC) 1 OOVl35% FERNOALE PENN VEST UU 329.318 ( S w U Z400V3.631% VEDA PENN VEST 18<X 306,763 3J37%-4.047* NORTH WAYNE f 2 PENNVESI 851,703 (Shan) 1.551 * - 3 0 3 2 * PENN VESTr8O107 934,816 2,762%-3 46% CRUM PENN VEST *60117 7.629.206 3.774*^.468% WHITE ROCK PENN VEST MO 595,345 1.367*.2-774* MIDWAY MANOR PENN VEST Z611,3e0 3 2 3 7 * J 0 1 7 * FERNMIU. TANK PENNVEST I 602,465 3.003%^ 79% TANK PAINTINGS PENNVEST » 1.64B.023 3.045K^.B1% NORTH WAYNE f 2 PENNVEST 958.642 3 7 7 4 * J 43% MEYERS TRACT PENN VEST * 1.163.460 1.3S7%-2.770* CANAAN PENN VEST 180139 1.493.083 2.769%-3 470% NESHAMINY PENN VEST U01 5.257.806 2.702%-3.43% TINICUM BOOSTER PENNVEST 299,134 Z55S%-3.195% PICKERING WEST PENNVEST Z22S.0CO 1378N.2 5 6 6 * N E M>™ 2005 PENNVEST <8 1,243510 Z501 V 3 . 3 3 * PSWVltLL *20PENf«EST 181 63Z679 1,376V3.726% NUI PENNVEST «ai009 4.441380 1 J 6 2 * - 2 6 6 8 * N E PA Maim PENNVEST MIC Z062.239 ) .367V2 726% TAFTON PENN VEST M5110 S66.S22 I JB7V2 .774* SHICKSHINNY PENNN VEST t 286.500 1.3S7VZ770* WAPWALLOPIN PENNVEST t 273700 1.942V3.C62* MOSCOW PENN VEST M5117 974,221 Z77%347%INCRAMSMILLPENNVEST (68 7.468.536 1 3 8 7 * FAWN LAKE PENN VEST IS8015 1.823.554 (RC) 1.00% RALPHO TANK PENN VEST (8801 565.774 1.3a7%-2.774% W1LBAR PENN VEST M916£ Z441.200 2 5 6 S M 365% PAUPACK PENN VEST (89157_ Z249.959

Tolal Long .T«nn Dvbl Unvnorl iud Cal PrvrnK/n Urwfnwn Cash Rt t t r id td tot Ta j i ^wnp l P n t K U

Long Tsrnt. Debt

Annus Icpd Cov tontrfiiabonfri L e u on Raacqdrad Dsbl (Avdnwn Ctth RdtftSnJ (ot Ttt^jwmpl

391512J22

717.1 Q6.7BS (599.989)

(70,S28.357>

1 41.785,929 3Z935

P w « n l Olodrv. WugtilKS ID Csil

ToUl R t l * 1 , 1 1 Rn.

O.CO* 9.96% 0.00% 0.70* 10.01% 007% 0.70% 10.07% 0.07* Z 7 9 * 9.21% 0.26% 1.67* 9 3 6 * 0.16* 0.76* 9 2 2 * 0 0 7 * 0.70* 9 3 1 * 0 0 6 * 0.56* 9 . 7 1 * 0 .05* 0.21% 8 5 6 * 0 0 2 * 0 .49* 8 4 3 * D D I * 0 5 6 * 8 2 8 * 0.05* 0.00* 7 3 5 * .0 .00*

Z 0 9 * 7 . 8 1 * 0,16* 1.67% 6 9 9 * 0.12* 000% 6 9 1 % 0.00% 000% 6 3 1 % o.oo* 349% 6.02% 0.21% 209% 6.25% 0.13% 2.79% 5.15% 014% 0 9 8 * 5.34% 005% 2 0 6 * 5.83% 012% 0.70% 5.83% 0 04% 2 0 9 * 6.1S* 0 1 3 * 0.70* 6.1 S * 0 0 4 * 0.42% 6.08% 0.03%

0.12% 9.00% 0 0 1 % 1 39% 598% 008% 1-39% 5.96* 0 .08* 1.39% 5.97* 006% 139% 5.97* 008% 064% 5 69% 0 0 1 % 0.63% 5.66% 0.04% 0 7 6 * 5.67% 0.01% 0.76% 568% 0 0 1 % 0 3 0 * 635% 002% 6 3 7 * 6.01% 0 5 1 %

0 1 1 * 4 3 1 * 0 0 1 % 3 4 9 * 540% 0.19* 4 I S * 5.56* 0 2 3 * 3 4 9 * 5.74* 0 2 0 * 3 49% 6 3 4 * 0 3 2 * 2.56% 6 .32* 0.16% 155% 6.49% 0.11% 3 04% 525% 0.16% 3 3 7 * 5 3 1 * 0 1 8 * 3.54* 5.23* 0.19% 3 44% $ 2 8 * 0.18* 3.34% S.47% 018% 334% 547% 016% 3.19% 5.17% 0.18% 3 49% 5.17% 016% 0.13% 1 41% 000% 006% 108% 000% 007% 1.03% 003% 008% 4.10% 000% OCO* 1.11% 0.00% 0 0 3 * 1.01% 000% 0.02* 3.68% 000% 0.04* 4.10% 000% 0 . 0 1 * 1.04% OOO* 0.56% 3 6 0 * 002% 0.03* 1 3 9 * 000% 0.05% 1.39* 000% 0.01% 3 6 8 * o.co* 0.12% 4.10* 0 . 0 1 * 013% 3.08* o.co* 1.06% 3 5 1 * 0 0 1 * 0.08% 2.82* o.ro% 036% 1 4 3 * 0.01% 007% • 10 * o.0o% om 3.81% 0 0 1 % 0.13% 3.86% 0.01% 0.16* 3 48% 0.01% 0 2 1 * ZB3% 0.01% 0 7 3 * 352% 0.03% 0.04* 3.48% 0.00% 0 . 3 1 * Z60% o.oi* 0.17* 1 32% 000% OM* 3 3 8 * 0.00% 0 6 2 * 2.77* 0.02* 039% 1.40% 0.00% 008% 1.42* 0 .00* 0 0 1 % 1 4 3 * 0 .00* 0 0 1 % 1 4 3 * 0 0 0 * 014% 1.96* 0 .00* 1.04* 3 .52* 0.04% 0 2 5 * 1.43* o.oo* 0 0 8 * 1.04* 0 0 0 * 0 3 4 * 1.43% 0.01% 0 3 1 * 2.61% 0.01%

ToUICoH

A l nlcUllEO an page 1 ol llat icfwdiM

S o u « ol Inlormaiion Company QioviiJtd dau

Aaia P t r r r f av i i lne CNaîWi D( IM EllKOve Cotl ol LanB-Tvin OtM b» S«

AmmiiJiiiwJO TOPI

Exhibrt 4-A Page 13 of 31

Schedule 6 (4 of A]

Pnnopal Drecounl N t l O a l i s l D a i i o i Coupon Anwunl ana N i l Procaedi EHsclivf

Bttin lUUB Mitunlv Rat i Ibnjad Expente P/ocvada Ralig C o i ! Raia 1

FIRST MOftTGAGE BONOS SEJUfiS DUE ICOI »7i3Vf l ovo i i oe 9 « 9 H 15.000.000 f 30.993 (4.969.007 9936% 9.98%

l .BWH SEW1S DOE » l ) S.OOO.OOO 3S.74I 4.961359 69 23% 10.01% 9.970% SERE! DUE 1011 117/Utl KIQUW 9.97% 5.000.000 45.499 4.953.511 99.07% 10.07% 9.IJ0% SERIES DUE ID ID 01/12.VO 01115110 9.12% 20.000.000 16S.S53 19.634,147 99.17% 9 3 1 %

SERIES DUE 10I« n i i m i vmsm 9 29% 12.000.000 90.89} 11,909.017 99 24% 9.36% 9.170% SERIES DUEJW1 l l ' lL -S l OW IS/31 9.17% 9.000.000 44,192 7,955.606 99 4 5% 9 22% 9.170?* SERIES DUE 7011 i i / i M I 0911^11 9.17% 5.000.000 31.663 4,976,337 99.57% 9 2 1 % ( R C ) U J % SERIES DUE M19 IllOIHV 13/01/19 9.5J% 4.000.000 79.762 3.930336 96 0 1 % 9 7 4 % (S« iq )M«0t i SERIES DUE I 0 H I W W J 11/01/23 S29% 1.500.000 47.970 1.452.030 96 90% 8.56% (Shes) tJ10% SERIES DUE 2021 i i w i i m 11/01/32 ( 3 2 % 3.500,000 63.691 3.436.309 99.16% 6 4 1 % (Si™) 1.140%SERIES DUEKf ] } H D I f l l 11/01/35 S.14% 4.000.009 62.678 3.937.324 99 43% 6.29% 7.159% SERIES DUE 1001 04/01/09 7.15% 23.000.000 205.647 21.794,353 99 07% 7.25%

MEDIUM TERM MOIES 7,720% SERIES DUE 2025 05/19/95 05/15/25 7.720% 15.000.000 160.429 14.639.571 96 83% 7.91% 6 690% SERIES DUE 2015 12/19/95 13/15/15 6.690% 12,000.000 128.343 11,871.657 99.83% 699% 6.750% SERIES DUE 3007 07/16/97 <Mt 5/07 6 750% 10,000,000 113.618 9.866,352 99 96% 6.81% 6.140% SERIES DUE 2008 01/19195 03/01/W 6 1 4 0 % 10,900,000 52.213 9.947,787 9948% 6 3 1 % 5.930% SERIES OUE 2012 0676/92 07/01/13 5.830% 25,000,1)00 197.492 74,832,508 99 3 1 % 6 02% 6 2 1 0 % SERIES DUE 2011 10/25/01 11101/11 6210% 15.000.000 49.350 14,950.650 9967% 6 25% 5.090% SERIES OUE 2015 05/10104 05/15/15 5060% 20.000.000 117.142 19,682.858 99 4 1 % 5 15% 5.170% SERIES DUE 2017 05/10/04 05/10117 5.170% 7,000,000 46.616 8.951.384 99 3 1 % 5 34% 5.751% SERIES OUE 2019 05/1OAM I1U1S/19 5 751% 15.000.000 119.920 14.860.060 OS 20% 5 83% 5.751% SERIES DUE 2018 05/10/04 05/15/16 5 751% 5.000,000 39.619 4.980,181 99 30% 5 63% 6.060% SERIES DUE 2027 05/10/04 mom 6.060% 15.000,000 183.816 14.816,184 88.77% 6.16% 6.060% SERIES DUE 2027 05/10/04 OS/15/37 6060% 5.000.000 61.118 4.938.883 98 78% 6.16% 5.960% SERIES OUE 2028 05/IU04 « /15 f !S 5.980% 1,030,000 3»,<J0 1.961.570 9 6 7 2 % 6 0 8 %

9.000% NOTE DUE 2013 12/30/93 13/31113 9.000% 1,967.483 1.967.463 100.00% 8 0 0 % 6.95% SERIES DUE 2023 01/31/06 03/31/33 5.050% 10.000.000 36.083 9.971.916 99.72% 5.99% 5.95% SERIES OUE 2024 03/31/08 0V31/24 5.950% 10,000.000 28.082 9.971.918 99 72% 6.99% 5.85% SERIES DUE 3033 03/31/08 03/31/33 5950% 10,000,000 26.083 9.871.9 IS 99.72% 5.97% 5.95% SERIES DUE 2034 03/31/06 03/31/34 5.950% 10.090.000 36.083 9.971.916 99.72% 5 97% 5.64% SERIES DUE 2014 09139/06 0W30I14 5 640% 4.564,000 13.341 4.570.660 99.71% 5.89% 5.64% SERIES DUE 2016 09/29/08 09/3O>16 5 640% 4.469.000 13,341 4,475.660 99 70% 5.68% 5.64% SERIES DUE 2020 09/29/06 09/30130 5 6 * 0 % 5.466.000 13.341 5.4S2.660 99 78% 5 6 7 % 5 6 4 % SERIES DUE 2021 09/39/06 owtni 5 840% 5.481.000 13.341 5.447.660 99 76% 566% 5.64% SERIES DUE2017 05/15/07 05/15/17 5640% 2.132.000 95.163 2.018.838 95.54% 835% 8 00% SERIES DUE 2017 11/3<W7 11/30/17 8 000% 60.000.000 168.000 59.632.000 9972% 6 04%

T/W EXEMPT 4 PENNVEST J.7i% TAX KXEMIT DCIDA DUE 2919 13/31/02 0601/10 3.750% 3,200,000 111.989 3.086.011 96.50% 4 1 1 % 5.15% TAX EXEMFT CCIDA DUE 211)2 0878/02 OtOl/32 5.150% 25.000.000 945,608 24.054,193 96 22% 5 40% 1J5% TAX EXEMPT CCIDA DUE lOil 11/01/01 1901/31 5 350% 30.000.000 930,951 38.069.048 96 90% 5 58% y S i % TAX EXEMPT BCIDA DUE 2031 06/01/02 01/01/32 5.550% 25.000,000 688.173 24.131.837 97,33% 5 74% & DOS TAX EXEMPT DCIDA DUE 103* 1I>07J99 0801/29 6 000% 25.000.000 821.676 "

1 34.178.334 9 8 7 1 % 6 24% 6 00% TAX EXEMPT MCIDA DUE 1030 (Sbn) 06/28/00 07/01/30 8 000% 16.360,000 778.702 " ' 17,581,398 95 76% 6 32% 3.01% TAX EXEMPT NCIDA DUE 3039 (HO 11/01/04 1001/39 5 050% 14.000.000 956.459 ' ' ' 11,041.541 93.15% 549% i 00% TAX EXEMPT DCIDA DUE 30J6 05/1W05 11 IT) 1/36 5000% 21.770.000 823.839 20.947.171 96 22% 5 25% 5.90% TAX EXEMFT DCIDA DUE 303T 05/IB/OS 1101/37 5000% 24.165,000 895.166 23.269.614 96 29% 524% 5.00% TAX EXEMFT DCIDA DUE 20)t 05/19/05 11(01/38 5000% 25.375.000 931,434 74,453.566 96.37% 5.23% 5/10% TAX EXEMFT DCIDA DUE 3031 12/26/05 0201/35 5 000% 24,675.000 1.034.107 23.640.993 95 8 1 % 5 28% 5.00% TAX EXEMFT CCIDA DUE 2040 01116/07 03fl>l/40 5.000% 23.915.000 1.721.909 22,193.091 92.80% 5 47% 5.00% TAX EXEMFT CCIDA DUE 3011 01/1607 0201/41 5000% 21.915.000 1.733.351 32.193.649 92.80% 5 47% 300% TAX EXEMPT MCIDA DUE 2041 12130/07 12/31/42 j.ooo% 25.000.000 871.425 34.339.575 97.11% 5.17% 3 00% TAX EXEMPT MCIDA DUE 204} 12/20/07 12/31/43 5000% 25.000,000 671.425 34.336.576 97.31% 5 17% 1 J72»-2.311% COA1 TWP PENN VEST * 12652 0471/05 0501/26 1.372% 1.054.868 7.465 1.047.403 88 29% 1.41% 1 000% WI IITF. i lAVEN PENNVEST »200l J 03/08/03 0M39/I2 1.000% 1.129,906 7.996 1,121.910 99 29% 1.08% 1.000% 1 (A Wl JL Y PENNVEST #31011 05/01/94 100171 1.000% 972.041 6.679 965.163 9929% 1.03% 3.237%-t.lN7% PICKEJUNO DAM PENNVEST *3>0J) 11/38/00 0 1 0 1 7 ! 4 047% 920.602 6.517 914.285 99 28% 4.10% 1.000% IHICKSIIINN Y PENNVEST 130064 05/15/92 0101/09 1 000% 76.310 540 75,790 9929% 1.11% ( S i n ) 1.000% PENNVEST «1M!S 13/01191 1201/11 1000% 1.250,000 6.846 1.241.154 99 39% 1.04% (SaiqlHOO-.iO 631% PENN VEST 135143 08/08/00 1201/20 3.631% 175.735 1,244 171.481 99 39% 3 69% 3337114 W 7 % OLENSIDE TANK PENNVEST •35I4J 08/06/00 120170 4 047% 415,250 7,939 412.311 99 29% 4 10% 1.000% WESTERN PENNVEST "10039 03/17/87 04/01/14 1.000% 694.500 4.915 689,585 99 29% 1.04% 2.1411-3 5 ) % BRISTOL PENNVEST 11001] 06/18/00 0601/19 3 550% 5.949,630 42.108 5.907.534 99 29% 3 80% 1 D00%.| 349% HAV/LEV PENNVEST " W M I 04 /19m 12/01/20 1,349% 343,845 2.433 141.412 99 39% 1 19% (RC) ! « » H J 3 % FEHNDALE PENN VEST JIOOT1 0372/00 1301/20 1.350% 651.125 4,608 649.517 99 29% 1.39% {trnttjl J 400%.l 631% VEDA PENN VEST •10099 11/2*00 050171 3 6 3 1 % 487.000 3.447 491.551 99 29% 3 69% 3J37%JW7%NO[ lTH WAYNE ' 3 PENNVEST HOIOri 11/79A>0 08/01/21 4 047% 1.174.916 8.318 1.166.601 99 29% 4.10% (SJ-a) 1.551%-3 031% PENN VEST " ID 107 03/1 M l 09O171 3 032% 1.715.000 13.137 1.703.863 89 28% 3 09% 2.752%.) J M i CHUM PENN VEST «f01l7 08/07/63 05/01/25 3 180% 9.975.741 70.600 9.905.141 89.29% 3.51% I . r j 4 % - H 4 l % WHITE ROCK PENN VEST "80125 05/35/05 0501/26 2.774% 677.639 4.797 873,013 99 29% 7 82% 1 JI7%-1.774« MIDWAY MANOR PENN VESTI I01M 0405106 0701/27 1.387% 2.811.380 18,481 2.582.889 99 39% 1 4 1 % 33J7%-HH7H F U N W L L T A N K PENNVEST '10133 0606/00 1301/20 4 047% 768.541 5.439 781.104 99 29% 4.10% 3.003K-3.7»%TANKPADJT1NCS PENNVEST •(0136 12/13/01 13/1171 3.760% 23125.180 14.312 2.010.848 99 28% 1.84% 3 M 5 % - 3 I I % NORTH WAYNE J2 PENNVEST •SO 137 03/13»1 0601/22 3 610% 1,346.773 - 9,531 1.117.212 99 29% 3.88% 2,774%-} 4 )% MEYERS TRACT PENN VEST "iOI 31 07/33/03 077373 3 430% 1.547.054 19.949 1,536.105 98 29% 148% 1 J87%.3.770% CANAAN PENN VEST H0139 13/19101 030174 3 770% 1.646,400 11.652 1.834,748 98 29% 2.82% 3.7(9%-M7IJ% NESHAMINY PENN VEST '10140 0807103 0 IO175 3 470% 6.366.625 15.057 6,121.569 99 29% 3 52% 2.702%-) 43% TINICUM BOOSTER PENNVEST '18142 13/13/01 1211371 3 430% 356.520 7.523 351.997 99 29% 348% 2-}»%-3.193WPIC}:ERINaWESTPENNVESTI10l41 07/35/06 1001/37 2 556% 2.22S.000 15.747 2.209.251 9929% 2.60% l 2 7 1 ^ 1 J ] o % N E M ^ u 2 0 0 5 PENNVEST '(0150 07/3508 04/01/37 1 776% 1353.000 6.868 1.241.112 9928% 1 32% 2_SOHM-33%P5W WELL'TO PENNVEST Ml001 04/10103 04/1072 3.330% 643327 5.968 817.259 99 29% 3.38% 1 jT6%.J.73t% NUI PENNVEST IllOOT 0677/02 010174 3.726% 5.538.900 19.199 5.499.701 99 29% 2.77% 1 J62%-3-M!% N EPAMiiniPENNVEST M1012 0373/05 03/2375 1.382% 2.122.850 15,034 2.107.826 99 29% 1.40% 1 JtT%-3.7J6% TAFTON PENN VEST ' ISUO 1301/04 0101/35 1,387% 600.000 4,246 585.754 99 29% 1.42% lJt7%-l .T74% SHICKSHINNY PENNN VEST'111 11 05/35/05 040176 1.307% 121.532 3275 119.247 99 29% 1.43% I JtT%-l.TT0% WATWAUlOP W FEHH V E S I M i 111 Q6n iA4 0 8 0 1 7 4 l . » T % 313.876 3.163 131.515 9 9 3 9 % 1 4 1 * l.943%-}012K MOSCOW PENN VEST '11117 087505 1001/36 1.942% 1.151,000 9.146 1.142.854 99 29% 1.98% 2,77%.3.47%INaRAMSMILLPENNVEST '11013 11/1401 11/14/21 3 470% 9.582.806 67.619 9.514.987 9928% 3 52% IJ17% FAWN LAKE PENN VEST'MO 11 110502 0 ( 0 1 7 1 1.367% 2.201.840 15,563 2.186.257 89 28% 1.43% (HQ 100% RALPHO TANK PENN VEST'tSOIT 12/1202 1101/23 1.000% 778.625 5,510 773.115 89 29% 1.04% 1 JI7%-2.774% WILPAR PENN VEST '19133 0 8 0 1 0 5 050177 1.387% 1.520.000 10,757 1.509.241 09 29% 1.43% 3 J 6 m - 3 J t 5 % PAUPACK PENN VEST'19157 10102/05 190178 2.568% 2.749.960 15.923 2,234.037 99 29% 2.61%

i'i Tht tlTacsvi coil Iv oatti l i tut it tn* yloM lo matuntr uuig u mpgS *<• data ol atua. ffia <uii si miMrty, 9K coivon lato. and Via ftal pfocfladt [alio

' Incfctfet Via unaimmed dobt tituwct costs ot S389.5B7 on tie 6.375* NCIDA bonda tfiit wcit leftnvictd and Via dobl inuanct cetu on ttia laplKarnEiil MCI ol 8568,872.

"i iTskjSn T,» unmortirt 6»Mktmrnce tits M ilSO.OT 1 on l»6.MW DCIDAiwifla mwwm irtnanceO itiit^t dcM atuanu m i l on ffsa (aplaeamcnl dot*of 1606.684 ntl ol OK enpnal luumct p/arNum o< 1329,020.

<•> Indudaa t n defct liwante com M 5675.647 net ol Vie mfginal rttuanea camiuni ol 5234.401. Inck/det 8ie dabt iHuancc cottt 0/1709,476 nelollhq ooginal issuance pletnnirn 013225.584

Souice ol Inloimaoon" Company pfovKlod dala

Water Group Monthly Dividend Yields

4.00%

2.00%

0.00%

2.58% 2- 6 3% 2.58% 2.59% 2 - 6 5 % 2.61% 2.65% 2.65% 2.66%

1?*-

•"a

it

2.71% 2.64%

...

2.69%

Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 IVIay-07 Jun-07 Jul-07 Aug-07 Sep-07

o r r (D Q. C CD CG

ro

Exh

Exh

o 6 —« CO i

>

10.00% r

Water Group Historical Growth Rates

8.00%

6.00%

4.00%

2.00%

0.00%

2.56%

5.50%

•if','.'. 371%

7.13% 6.88% •.~ r-\ -"^ r

7" • !

•.~ r-\ -"^ r

7" • !

4.38% < - • i

K .. . -". .. , •

e, , : . ; " p

i '* ' ' i

i*'' - f~ • -J

' ' ' ' 'i

R _ . i . - j i j - w b 1

-: • • s»- * ,

f . "--

3.94%

5.63%

. < 3 '

V

«5'

.4 4?

4

4?

Earnings per Share=EPS Book Values per Share=BVPS Dividends per Share=DPS Cash Flow per Share=CFPS

Percent Retained to Common Equfty=BxR

CO o IT Q. T3 C 0)

CO ^ £ "3! cn 5-'

Water Group Five-Year Projected Growth Rates

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%

9.63%

4?

10.67% 11.10%

9.25%

5.88% 6.25%

5.88%

^ ' " • - ."j 1 - 1

jo wi '

-

^ • ' '« , t ' -.3

" J t-

1 £ '- '• i

f • :.n-.s

7.25%

4 4 v V

4.25%

.9?

Earnings perShare=EPS Book Values per Share=BVPS Dividends per Share=DPS Cash Flow per Share=CFPS

Percent Retained to Common Equity=BxR

W o zr * - r ,

C Q)

(D x

o cr o ~

CO

o

7.00%

Interest Rates for Investment Grade Public Utility Bonds

6.50%

6.00%

5.50% -

5.00%

- - - - A a

A

Baa

Sep-06

5.81%

6.00%

6.26%

Oct-06

5.80%

5.98%

6.24%

Nov-06

5 .61%

5.80%

6.04%

Dec-06

5.62%

5.81%

6.05%

Jan-07

5.78%

5.96%

6.16%

Feb-07

5.73%

5.90%

6.10%

Mar-07

5.66%

5.85%

6.10%

Apr-07

5.83%

5.97%

6.24%

May-07

5.86%

5.99%

6.23%

Jun-07

6.18%

6.30%

6.54%

Jul-07

6 . 1 1 %

6.25%

6.49%

Aug-07

6 . 1 1 %

6.24%

6 . 5 1 %

w o zr CD

5* IP o £ 9.9.2: cn " i


Schedule 10 [2 of 5]

Interest Rates for Investment Grade Public Utility Bonds Yearly for 2001-2006

and the Twelve Months Ended August 2007

Aa A Baa Years Rated Rated Rated Average

2002 7.19% 7.37% 8.02% 7.53% 2003 6.40% 6.58% 6.84% 6.61% 2004 6.04% 6.16% 6.40% 6.20% 2005 5.44% 5.65% 5.93% 5.67% 2006 5.84% 6.07% 6.32% 6.08%

Five-Year Average 6.18% 6.37% 6.70% 6.42%

Months

Sep-06 5.81% 6.00% 6.26% 6.03% Oct-06 5.80% 5.98% 6.24% 6.01% Nov-06 5.61% 5.80% 6.04% 5.82% Dec-06 5.62% 5.81% 6.05% .5.83% Jan-07 5.78% 5.96% 6.16% 5.96% Feb-07 5.73% 5.90% 6.10% 5.91% Mar-07 5.66% 5.85% 6.10% 5.87% Apr-07 5.83% 5.97% 6.24% 6.01%

May-07 5.86% 5.99% 6.23% 6.03% Jun-07 6.18% 6.30% 6.54% 6.34%

• Jul-07 6.11% 6.25% 6.49% 6.28% Aug-07 6.11% 6.24% ' 6.51% 6.28%

Twelve-Month Average 5.84% 6.00% 6.25% 6.03%

Six-Month Average 5.96% 6.10% 6.35% 6.14%

Three-Month Average 6.13% 6.26% 6.51% 6.30%

Source: Mergent Bond Record

9.00%

8.00%

7.00%

6.00%

5.00% -

4.00% -

3.00% -

2.00% -

1.00% -

0.00% 1994 1995

Yields on A-rated Public Utility Bonds and Spreads over 20-Year Treasuries

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

05 o zr at

£--0

o - § 'A-rated Public Utility 8.31% 7.89% 7.75% 7.60% 7.04% 7.62% 8.24% 7.76% 7.37% 6.58% 6.16% 5.65%

— — Spread vs. 20-year 0.82% 0.94% 0.92% 0.91% 1.32% 1.42% 2.01% 2.13% 1.94% 1.62% 1.12% 1.01%

6.07%

1.08%

3.00%

2.50% -

2.00% -

1.50% 5

1.00% -

0.50% -

Interest Rate Spreads A-rated Public Utility Bonds

over 20-Year Treasuries

0.00% l % I 1 ' ' ' I I I I I I I t I I I I I I I I I I I I I 1 I I I I I I I I I I ) I I I t t 1 I

# ^ Jfr 5^ & &t& # & &{& & # ^ ofo $ £ en o zr

A ral«f Public UtSIy BonOi aver 20-Year Treasuries

A-raled 20-Year Treasuries Year PubUc UUIity YlekJ Spread

Oec-9S 6.91% 5.36* 1.55% Jan- 89 8.97% S,4S* 1.52% Feb-93 7.0S% 5.66% 1.43* Mar-SB 7.2611 5.87% 1.39% Apr-99 7.22* 5,82* 1.40% May-SS 7.47* 6.08% 1.39* Jun-99 7.74* 6.36% 1.38* Jul-99 7 .71 * 6.28% 1.43*

Auo-M 7 ,91* 6,43* 1.48% Scp.g9 7.93* 6.50* 1.43* Od-BS 8.09% 6.66* 1.40% Nov-B9 7.94% 8,48* 1.48% Dee-fie 8.14* 8.69* 1.45% Jan-00 8.35* 6.68* 1.49* Feb-O0 8.25% 8.54* 1 .71* War-O0 8.28* 6.38% 1.90* AprÔ B.29* 6.18% 2 . 1 1 * MayÔ 8.70* 8.55* 2.15* Jun-00 8.36* 6.28% 2.06% Jul-00 8-2S* 8.20* 2.05% Aufl-00 8.13% 8.02* 2.11% Sep-00 8.23% 6.09% 2.14% Od-OO 8.14% 8.04* 2.10% tiov-00 8 .11 * 5.98% 2.13* Dec-00 7.84* 5.64% 2.20* Jan-01 7.80* 5.85% 2.15* feb-OI 7.74* 5.62% 2.12* Mar-01 7.68* 5.40* 2.19% Ap'-OI 7.B4K 5.78% 2.16% May-Oi 7.BS% 5.02% 2.07% Jun-OI 7.85% 5.62* 2.03* Jul-01 7.78* 5.75% 2.03*

AUB-01 7.59* 5,56% 2 . 0 1 * Sep-01 7.75* 5.53* 2.22*

oa-oi 7,83* 5.34* 2.29* Kov-01 7.57% 5.33* 2.24% Dec-01 7.83% 5.76% 2.07% Jan-02 7.66% 5.8B* 1.97% feb-OZ 7.54% 5.61% 1.93* Mar-02 7.78% 5.93% 1.83% Apr-OZ 757% 5,85% 1,72% May-02 7.52* 5.81% 1.71* Jun-02 7.42* 5.65% 1.77% Jul-02 7 .31 * 5 . 5 1 * 1.60%

Aug-02 7.17% 5.10* 1.98% Sep-02 7.06% 4.87% 2.21% Od-OJ 7.23% 5.00% 2.23%

7.14% 5.04% 2.19% Dec-02 7.07* 5.01% 2.06* Jan- 03 7.07% 5.02% 2.05* Feb-OJ 8.93* 4.87* 2.08% Mar-03 B.79% 4.82* 1.97% A B ' - 0 3 S.64% 4 . 0 1 * 1.73% MayOJ 8.38% 4.52% 1,84% Jiin-03 6.21% 4.34% 1.87% JuM)3 6.57% 4.92% 1.65%

Aue'OS 6.78* S.39% 1.30% Sep-03 6.56* 5.21% 1.35* 00-03 6.43* 5 5 1 % 1.22* Nov-03 8.37* 5.17* 1.20* DecOJ 8.27* 5 .11 * 1.18% Jan-Oi 6.1SS 5.01% 1.14* F8b-04 . 6.15* 4,04% 1.21* MBM)4 5.97% 4,72% 1.25* Ap^04 6.35% 5.18* 1.19* May-IM 6.62* 5 4 6 * 1.16* Jun-04 6.46* 5.45% 1.01* JoMM 8.27* 5.24% 1.03* AU8-04 8.14* 5.07% 1.07% Sep-04 5.96% 4.88* 1.09* Ocl-04 5.94* 4 .85* 1.09% Nov-O* 5.97% 4.89* 1.08% Dec-04 5 9 2 * 4 88% 1.04% jarvOS 5.78% 4.77* 1.01% Feb-05 5.61% 4 . 8 1 * 1.00% Mar-05 5.83* 4.89% 0,94% Apr-Oi 5 6 4 * 4.7S* 0.89* May-OS 5 53% 4.58* 0.97% Jun-OS 5,40% 4.35* 1.05% Jul-05 5.51% 4 4 8 * 1.03%

5,50% 4.53* 0.97% Sep-05 5.52* 4 . 5 1 * 1.01% OCJ-OS 5.79* 4.74% 1.05% NOv-05 5.88* 4.83* 1.05% DeC-05 5.80% 4.73* 1.07% jan-06 5.75% 4.65* 1.10% FHb-Ofi 5.82% 4.73% 1.09% Mar-06 5.98% 4,91% 1.07* Apr-06 659% 552% 1.07% Hay-06 6.42% 5.35% 1.07% Jun-06 6.40* 559% 1.11* JuHM 8.37* 5,25% 1.12*

Aufl-OB B.20% 5,06* 1.12% Sap-OS fl.00% 4,03% 1.07%

oo-oe 5.96% 4,04* 1.04% Nov-Ofi 5.80* 4.76% 1.02* Dec-OS 5 .81* 4.78% .1.03* Jan-07 5.96* 4.95% 1.01* Feb-07 5,90* 4,93* 0.97% Mar-07 5.85* 4 , 8 1 * 1.04* Apr-07 5.97% 4.95* 1.02% May.07 5.99* ' 4.98% 1.01% JiKvQT 6 .30* 5 2 9 * 1.01% jul-07 8.25* 5.19* 1.06*

Aug-07 8.24% 5.00* 1.24%



g&P Composite Index and SAP PuMic Uliliiv Index Long-Term Corporate and Public Utility Bonds

Yearly Total Returns 1928-2006



S & P S 4 P Long Term Public Composite Public Utility Corporate Ulility

Year Index Index Sands Bonds

1928 4 3 . 6 1 % 57.47% 2,84% 3.08%

1929 •8.42% 11.02% 3.27% 2.34%

1930 •24.90% •21.96% 7.96% 4.74% 1931 -43.34% -35.90% -1.85% -11,11% 1932 -8.19% -0.54% 10,82% 7.25% 1933 53.99% •21.87% 10.38% •3.62% 193-1 •1.44% •20 .41% 13,84% 22,61% 1935 47.67% 76.63% 9.61% 16.03% 1936 33.92% 20.69% 6.74% B.30% 1937 -35.03% -37.04% 2.75% -4.05% 1938 31.12% 22.45% 6.13% 8.11% 1939 - 0 . 4 1 % 11,26% 3.97% 6.76% 1940 -9.78% -17.15% 3.39% 4.45% 1941 -11.59% -31,57% 2.73% 2.15% 1942 20.34% 15.39% 2.60% 3,81% 1943 25.90% 46.07% 2,83% 7.04% 1944 19.75% 18.03% 4.73% 3.29% 1945 36,44% 53.33% 4,08% 5.92%

t 1946 ' •8,07% 1,26% 1.72% 2.96% '1947 5 .71% -13.16% -2.34% -2.19% 1946 5.50% 4 . 0 1 % 4.14% 2.65% 1949 18.79% 31.39% 3.31% 7.16% 1950 31 .71% 3.25% 2.12% 2 .01% 1951 24.02% 18.63% •2.69% •2.77% 1952 18.37% 19,25% 3.52% 2.99% 1953 -0,99% 7,85% 3.41% 2.08% 1954 52.62% 2 4 7 2 % 5.39% 7.57% 1955 31,56% 11.26% 0.48% 0.12% 195B 6.56% 5.06% -6 .81% -6.25% 1957 -10.78% 6.36% 8.71% 3.56% 195B 43.36% 40.70% -2.22% 0.18% 1959 11.96% 7.49% -0.97% .2.29% 1960 0.47% 20.26% 9 0 7 % 9,01% 1961 26.89% 29 33% 4,62% 4,65% 1962 -B.73% -2.44% 7,95% 6,55% 1963 22.80% 12.36% 2.19% 3,44% 1964 16.48% 15.91% 4,77% 4.94%

1965 12.45% 4.67% -0.46% 0,50% 1966 -10,06% -4,48% 0,20% -3.45% 1967 23.96% -0.63% -4,95% -3.63% 1969 11.06% 10.32% 2.57% 1.87% 1969 -8.50% -15.42% -8.09% -6.66% 1970 4 , 0 1 % 16,56% 18,37% 15.90% 1971 14 .31% 2 , 4 1 % 11.01% 11.59% 1972 16.96% 8.15% 7.26% 7.19% 1973 -14.66% -18.07% 1.14% 2.42% 1974 -26.47% -21.55% -3,06% -5.28% 1975 37.20% 44.49% 14.64% 15.50% 1976 23.84% 31 .81% 16.65% 19.04% 1977 -7.18% 8,64% 1.71% 5,22% 1978 6.56% - 3 . 7 1 % -0.07% -0.98% 1979 16.44% 13.56% -4.18% •2.75% 19B0 32.42% 15.08% -2,76% -0.23% 19B1 •4 .91% 11.74% -1.24% 4.27% 1982 21 ,41% 26 52% 42.56% 33.52% 1983 23 ,51% 20 ,01% 6.26% . 10.33% 1984 6.27% 26,04% 16,86% 14.82% 1985 32.16% 33.05% 30,09% 26.48% 19B6 18.47% 28.53% 19.85% 18,16% 1987 5.23% -2.92% -0.27% 3.02% 1988 16.81% 18.27% 10.70% 10.19% 1989 31.49% 47.80% 16.23% 15,61% 1990 -3.17% -2.57% 6 7 8 % 8.13% 1991 30.55% 14.61% 19,89% 19.25% 1992 7,67% 8.10% 9.39% 6.65% 1993 9.99% 14 .41% 13.19% 10.59% 1994 1.31% •7.94% •5.76% -4,72% 1995 37,43% 42.15% 27.20% 22.81% 1996 23.07% 3.14% 1.40% 3.04% 1997 33.36% 24.69% 12.95% 11.39% 1998 28.58% 14.82% 10.76% 9.44%

1999 21.04% -8.85% -7.45% •1.69% 2000 -9 .11% 59.70% 12.87% 9,45% 2001 •11.88% -30 .41% 10.65% 5 85% 2002 -22.10% -30,04% 16,33% 1.63% 2003 26.70% 28 .11% 5 27% 10.01% 2004 10.87% 24.22% 8.72% 6,03% 2005 4 . 9 1 % 16.79% 5.87% 3.02%

2006 15.80% 20.95% 3.24% 3.94%

Geometric Mean 10.10% 8.80% 5,85% 5.45% Arithmetic Mean 12.03% 11.14% 6.17% 5.73% Standard Deviation 20.13% 22.55% 8.57% 7.69% Median 14.31% 11.74% 4,14% 4,45%

Tabulation of Risk Rate Differentials for S&P Public Utility index and Public Utility Bonds

For the Years 1928-2006.1952-2006,1974-2006. and 1979-2006



Average of the

Range Point

Estimate Midpoint of Range

Total Returns Geometric

Mean Median Midpoint Arithmetic

Mean and Point Estimate

1928-2006 S&P Public Utility Index Public Utility Bonds

8.80% 5.45%

11.74% 4.45%

11.14% 5.73%

Risk Differential 3.35% 7.29% 5.32% 5.41% 5.37%


10.99% 6.17%

13.58% 4.94%

12.53% 6.47%



12.79% 8.55%

15.08% 8.65%

14.77% 8.90%



13.42% 8.96%

15.94% 9.05%

15.27% 9.29%

Risk Differential 4:46% 6.89% 5.68% 5.98% 5.83%



Value Line Betas

Water Group Beta

American States Water 0.80 Aqua America, Inc. 0.90 California Water Serv. Grp. 0.90 Connecticut Water Services 0.90 Middlesex Water Company 0.85 SJW Corporation 0.75 Southwest Water Company 1.00 York Water Company 0.50

Average 0.83

Source of Information: The Value Line Investment Survey

July 27, 2007

6.00%

5.00%

4.00%

3.00%

1-Year

2-Year

5-Year

10-Year

20-Year

Yields on Treasury Notes & Bonds

Oct-06

5 . 0 1 %

4.80%

4.69%

4.73%

4.94%

Nov-06

5.01%

4.74%

4.58%

4.60%

4.78%

Dec-06

4.94%

4.67% •

4 .53%

4.56%

4.78%

Jan-07

5.06%

4.88%

4.75%

4.76%

4.95%

Feb-07

5.05%

4.85%

4 . 7 1 %

4.72%

4.93%

Mar-07

4.92%

4.57%

4.48%

4.56%

4 . 8 1 %

Apr-07

4.93%

4.67%

4.59%

4.69%

4.95%

May-07

4 . 9 1 %

4.77%

4.67%

4.75%

4.98%

Jun-07

4.96%

4.98%

5.03%

5.10%

5.29%

Jul-07

4.96%

4.82%

4.88%

5.00%

5.19%

Aug-07

4.47%

4 . 3 1 %

4.43%

4.67%

5.00%

Sep-07

4.14%

4 . 0 1 %

4.20%

4.52%

4.84%

CO o zr

c" "0

cc ro

To ^ cr

a ^ >

Yields for Treasury Constant Maturities Yearly for 2002-2006

and the Twelve Months Ended September 2007


Schedule 12(3 of 6]

Years 1-Year 2-Year 3-Year 5-Year 7-Year 10-Year 20-Year

2002 2.00% 2.64% 3.10% 3.82% 4.30% 4.61% 5.43% 2003 1.24% 1.65% 2.10% 2.97% 3.52% 4.02% 4.96% 2004 1.89% 2.38% 2.78% 3.43% 3.87% 4.27% 5.04%

2005 3.62% 3.85% 3.93% 4.05% 4.15% 4.29% 4.64% •

2006 4.93% 4.82% 4.77% 4.75% 4.76% 4.79% 4.99%

Five-Year Average 2.74% 3.07% 3.34% 3.80% 4.12% 4.40% 5.01%

Months

Oct-06 5.01% 4.80% 4.72% 4.69% 4.69% 4.73% 4.94% Nov-06 5.01% 4.74% 4.64% 4.58% 4.58% 4.60% 4.78% Dec-06 4.94% 4.67% 4.58% 4.53% 4.54% 4.56% 4.78% Jan-07 5.06% 4.88% 4.79% 4.75% 4.75% 4.76% 4.95% Feb-07 5.05% 4.85% 4.75% 4.71% 4.71% 4.72% 4.93% Mar-07 4.92% 4.57% 4.51% 4.48% 4.50% 4.56% 4.81% Apr-07 4.93% 4.67% 4.60% 4.59% 4.62% 4.69% 4.95% May-07 4.91% 4.77% 4.69% 4.67% 4.69% 4.75% 4.98% Jun-07 4.96% 4.98% 5.00% 5.03% 5.05% 5.10% 5.29% Jul-07 4.96% 4.82% 4.82% 4.88% 4.93% 5.00% 5.19%

Aug-07 4.47% 4.31% 4.34% 4.43% 4.53% 4.67% 5.00% Sep-07 4.14% 4.01% 4.06% 4.20% 4.33% 4.52% 4.84%

Twelve-Month Average 4.86% 4.67% 4.63% 4.63% 4.66% 4.72% 4.95%

Six-Month Average 4.73% 4.59% 4.59% 4.63% 4.69% 4.79% 5.04%

Three-Month Average 4.52% 4.38% 4.41% 4.50% 4.60% 4.73% 5.01%

Source: Federal Reserve statistical release H.15



Measures of the Risk-Free Rate

The forecast of Treasury yields per the consensus of nearly 50 economists

reported in the Blue Chip Financial Forecasts dated October 1, 2007

Year Quarter

1-Year Treasury

Bill

2-Year Treasury

Note

5-Year Treasury

Note

10-Year Treasury

Note

30-Year Treasury

Bond

2007 Fourth 4.2% 4 .1% 4.3% 4.6% 4.8% 2008 First 4.2% 4.2% 4.4% 4.6% 4.9% 2008 Second 4.2% 4.3% 4.4% 4.7% 4.9% 2008 Third 4.3% 4.4% 4.6% 4.8% 5.0% 2008 Fourth 4.4% 4.5% 4.7% 4.9% 5.1% 2009 First 4.5% 4.6% 4.7% 4.9% 5.2%

THE ALUE LINE Investment Survey®



File ai the front ot the Ratings & Reports

binder. Last week's Summary & Index

should be removed.

September 28, 2007 TABLE OF SUMMARY & INDEX CONTENTS S u m m a r y & Index

P a g e N u m b e r

Industries, in alphabetical order 1 Stocks, in alphabetical order 2-23 Noteworthy Rank Changes 24

SCREENS Industries, in order of Timeliness Rank 24 Timely Stocks in Timely Industries 25-26 Timely Stocks (1 & 2 for Performance) 27-29 Conservative Stocks (1 & 2 for Safety) 30-31 Highest Dividend Yielding Stocks 32 Stocks with Highest 3-to 5-year Price Potential .... 32 Biggest "Free Flow" Cash Generators 33 Best Performing Stocks last 13 Weeks 33 Worst Performing Stocks last 13 Weeks 33 Widest Discounts from Book Value 34

Stocks with Lowest P/Es 35 Stocks with Highest P/Es 35 Stocks with Highest Annual Total Returns 36 Stocks with Highest 3- to 5-year Dividend Yield .... 36 High Returns Earned on Total Capital 37 Bargain Basement Stocks 37 Untimely Stocks (5 for Performance) 38 Highest Dividend Yielding Non-utility Stocks 38 Highest.Growth Stocks 39

The Median of Estimated P R I C E - E A R N I N G S R A T I O S

of all stocks with earnings

26 Weeks Ago 18.6

18.1 Market Low

10-9-02 14.1

Market High 5-5-06 19.6

The Median of Estimated D I V I D E N D Y I E L D S

(next 12 months) of all dividend paying stocks under review

26 Weeks Ago 1.7%

1.7% Market Low

10-9-02 2.4%

Market High 5-5-06 1.6%

The Estimated Median Price APPRECIATION POTENTIAL

ol all 1700 slocks in the hypothesized economic environment 3 to 5 years hence

26 Weeks Ago 40%

45% Market Low

10-9-02 115%

Market High 5-5-06 40%

A N A L Y S E S O F I N D U S T R I E S IN A L P H A B E T I C A L O R D E R WITH P A G E N U M B E R N u m e r a l in pa ren thes is af ter the indust ry is rank for p robab le p e r f o r m a n c e (next 12 mon ths ) .

PAGE Advertising (77) 1917 Aerospace/Defense (5) 543 Air Transport (25) 253 Apparel (70) 1651 Auto & Truck (64) 101

-Auto Parts (34) ..763 Bank (81) 2101 Bank (Canadian) (67) 1565 Bank (Midwest) (94) 606 Beverage Alcoholic) (82) 1531 Beverage Soft Drink) (12) 1537 Biotechnology (48) 659 Building Materials (89) 845

*CableTV(7) 815 Canadian Energy (29) 416 Chemical (Basic) (17) 1233 Chemical Diversified) (44) 1960 Chemical (Speciaity) (33) 459 Coal (26) 512 Comp(jters'Pen'pherals{16) 1100 Computer Software/Svcs (15) 2174 Diversified Co. (21) 1376 Drug (13) 1244 E-Comme{ce(62) 1441 Educational Seivices (2) 1578

PAGE Electrical Equipment (8) 1001

-Electric Util. (Central) (65) 695 Bectric Utility (Easi) (74) 154 Eledric Utilily (West) (90) 1774 Electronics (20) 1021 Enterta'mmeni (43) 1861 Entertainment Tech (68) 1590 Environmental ,(6) 342 Finandal Svcs. (Div.) (53) 2128 Food Processing (49) 1481 Food Wholesalers (50) 1526 Foreign Electconics (35) 1556 Fum/Home Furnishings (80) 884 Grocery (51) 1514 Healthcare Information (9) 651 Heavy Conslruclion (1) 978 Home Appliance (73) 114 Homebuilding (99) 862 Holel/Gaming'fag) 1877 Household Products (55) 931 Human Resources (57) 1290 Industrial Services (36) 320 Information Services (42) 367 Insurance (Ufe) (46) 1198 Insurance (Prop/Cas.) (72) 583

PAGE Internet (IB) 2226 Investment Co. (24) 948 Investmen! Co.(Foreign) (45) 353 Machinery (14) 1331 Manuf. Housing/RV (87) 1548 Maritime (30) 274 Medical Services (22) 623 Medical Supplies (23) 176 Metal Fabricating (40) 564 Metals & Mining (Div.) (4) 1222 Natural Gas Utility (96 445 Natural Gas (Dw.) (56 429 Newspaper (88) 1904 Office Equip/Supplies (69) 1127 Oil/Gas Distribution -59) .522

SvcsfEquip. 3) 1936 Packaging & Container (47) 913 Papei/Foiest Pioducts (76) ;900 Petroleum (Integrated) 32) 397 Pelroleum (Producing) 63) 1926

-Pharmacy Services (10) 774 Power (71) 961 Precious Melals (93) 1213 Ptecision Inslrument (19) 120

-Property Management (31) 823

PAGE Publishing (52) 1892 Railroad (37) 280 R.E.I.T.(97) 1171 Recreation (85) 1841 Reinsurance (41) 1606 Restaurant (83) 289 Retail Automotive (79) 1668 Retail Building Supply (66) 876 Retail (Special Lines) (86) 1708 Retail Store (75) 1678 Securities Brokerage (58) 1424 Semiconductor (27) 1046 Semiconductor Equip (28) 1084 Shoe (91) 1696 Steel (General) (60) 573 Steel (Integrated) (92) 1414

-Telecom. Equipment (11) 747 -Telecom. Setvices (38) 718 TMt(98) 1161 Tobacco (95) 1572

-Toiletries/Cosmetics (61) 804 Trucking (78) 265 Water Utility (84) 1419 Wiieless Networking (54) 492

-Reviewed in this week's issue.

I n t h r e e p a r t s : T h i s ia P a r t 1, t he S u m m a r y & Index . P o r t 2 is Select ion & O p i n i o n . P a r t 3 ia Ra t i ngs & Repor t s . Vo lume L X 1 I I , No. 5.

Published weekly by VALUE LINE PUBLISHING, INC. 220 East 42nci Street, New York, N.Y. 10017-5891

O 2QQ7, Value Uno PiMshtng, Inc. All lights tosewad. Factual malarial is ofctalnad Itwv soutcas bolieMed to be leliablo ant) Is ptovided without warranllos ot any kind. THE PUBLISHER IS NOT RESPONSIBLE FOR ANY ERRORS OR OMISSIONS HEREIN. This publication Is striclly lor each subscriber's own, non-commercial, Internal use. No part ot this publication may be reproduced, resold, stored or trarismilled In any printed, electronic or other lorn, or used lor genetating or marketing any primed or electronic publication, service or product. S e e b a c k c o v e r f o r i m p o r t a n t d i s c l o s u r e s .

Table 2-1 Basic Series: Summary Statistics of Annual Total Returns

The Long Run Perspective Exhibit 4-A

Page 29 of 31 Schedule 12 [6 of 6]

from 192610:2006

Series GeomeUic Arithmetic Standard

Mean Mean Deviation Distribution,

large Company

Stocks

Small Company

Stocks

Long-Term

Corporate Bonds

10.4% 12.3% 20.1%

12.7 17.4

5.9

32.7

6.2 8.5

-1 l_ lJ

UJ—LI n i l J.

Long-Term

Government

5.4 5.8 9.2

iL Intefmediare-Term

Government

5.3 5.4 5.7

U.S. Treasury Bills 3.7 3,8 3.1

L Inflation 3.0 3.1 4.3

-90% 0% 90%

•The 1933 Small Company, Stocks Total Return was 142.9 percent.

Morningstar, Inc. 31

Comparable Earnings Approach Using All Value Line Non-Utility Companies with

Timeliness of 4; Safety Rank of 3; Financial Strength of B, B+ & B++; Price Stability of 55 to 85; Betas of .50 to 1.00; and Technical Rank of 3 & 4

Exhibit 4-A

Timeliness Safety Financial Price Technical Company Industry Rank Rank Strength Stability Beta Rank

ABM Industries Inc. INDUSRV 4 3 B++ 65 0.85 4 Advance Auto Parts RETAUTO 4 3 B+ 65 0.90 3 AmerisourceBergen MEDSUPPL 4 3 B++ 70 0.80 3 AutoNation Inc. RETAUTO 4 3 B++ 85 1.00 3 Avon Products COSMETIC 4 3 B++ 70 0.70 3 Bassett Furniture FURNITUR 4 3 B+ 55 1.00 3 Bio-Rad Labs. 'A' MEDSUPPL 4 3 B 55 0.90 4 Borders Group RETAILS P 4 3 B++ 65 1.00 4 CBRL Group RESTRNT 4 3 B+ 70 0.85 4 Con-way Inc. TRUCKING 4 3 B+ 65 1.00 3 Macquarie Infrastructure INDUSRV 4 3 B+ 85 0.60 3 Media General 'A' NWSPAPER 4 3 B+ 80 0.90 4 New York Community THRIFT 4 3 B 80 0.95 3 Newmont Mining GOLDSILV 4 3 B 55 0.90 3 People's United Fin'l THRIFT 4 3 B+ 80 0.95 4 Pool Corp. RECREATE 4 3 B++ 70 0.90 4 Reynolds American TOBACCO 4 3 B+ 60 1.00 3 Ruby Tuesday RESTRNT 4 3 B++ 60 0.95 3 Sunrise Senior Living MEDSERV 4 3 B 60 0.90 3 Sybase Inc. SOFTWARE 4 3 B+ 70 1.00 3 TCF Financial BANKMID 4 3 B 85 1.00 3 UST Inc. TOBACCO 4 3 B+ 85 0.85 3 Watsco Inc. BUILDSUP 4 3 B+ 60 0.95 4

Average 4 3 B+ 69 0.91 3

Water Group Average 4 3 B+ 73 0.83 3

Source of Information; Value Line Investment Survey for Windows, September-2007

Comparable Earnings Approach Five -Year Average Historical Earned Returns

for Years 2002-2006 and Projected 3-5 Year Returns



Company 2002 2003 2004 2005 2006 Average Projected 2010-12

ABM Industries Inc. 12.1% 8.2% 9.5% 9.6% 8.9% 9.7% 13.0% Advance Auto Parts 20.7% 25.4% 26.3% 25.5% 22.4% 24.1% 20.0% AmerisourceBergen 10.8% 11.2% 10.8% 8.3% 11.6% 10.5% 12.0% AutoNation Inc. 9.8% 9.6% 8.7% 8.5% 9.5% 9.2% 10.0% Avon Products - NMF 89.0% NMF 60.4% 74.7% 43.5% Bassett Furniture 3.3% 2.0% 3.8% 5.0% 2.5% 3.3% 7.0% Bio-Rad Labs. 'A' 17.7% 17.3% 13.1% 11.7% 11.4% 14.2% 14.0% Borders Group 10.8% 10.6% 12.1% 10.9% 3.5% 9.6% 11.5% CBRL Group 11.7% 13.4% 13.2% 14.6% 38.5% 18.3% 15.5% Con-way Inc. 8.9% 10.5% 19.4% 24.4% 29.3% 18.5% 16.5% Macquarie Infrastructure - - NMF 2.7% 5.8% 4.3% 9.5% Media General 'A' 5.0% 4.9% 6.8% 6.9% 8.4% 6.4% 7.5% New York Community 17.3% 11.3% 11.1% 8.8% 6.3% 11.0% 12.0% Newmont Mining 2.1% 5.6% 6.5% 4.8% 6.8% 5.2% 7.0% People's United Fin'l 5.9% 6.4% 7.8% 9.7% 9.3%. 7.8% 6.3% Pool Corp. 29.1% 26.0% 30.4% 30.6% 34.2% 30.1% 29.5% Reynolds American 6.2% 4.3% 10.2% 15.0% 16.1% 10.4% 17.0% Ruby Tuesday 22.7% 21.3% 20.9% 18.2% 19.2% 20.5% 20.0% Sunrise Senior Living 12.3% 12.7% 9.7% 7,3% 8.5% 10.1% 15.0% Sybase Inc. 13.7% 10.5% 8.7% 12.2% 11.3% 11.3% 13.5% TCF Financial 23.8% 23.4% 26.6% 26.6% 23.7% 24.8% 22.5% UST Inc. - - NMF NMF NMF - NMF Watsco Inc. 8.7% 9.7% 11.9% 15.5% 16.0% 12.4% 15.5%

Average 15.7% 15.4%

Median 10.8% 13.8%

Documents

Si * '-U 1 · 6 A. I am employed by Aqua Pennsylvania, Inc. ("AP", "Aqua Pennsylvania" or 7 "Company") as Senior Manager of Regulatory Accounting. 8 3. Q. Please describe your education