美國水務 (AWK) 2016 Q1 法說會逐字稿

Good morning and welcome to American Water's first-quarter 2016 earnings conference call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company's Investor Relations website.

Following the earnings conference call, an audio archive of the call will be available through May 12, 2016 by dialing 412-317-0088 for US and international callers. The access code for replay is 10084204. The online archive of the webcast will be available through June 6, 2016 by accessing the Investor Relations page of the Company's website located at www.amwater.com.

(Operator Instructions)

Again, please note today's event is being recorded.

At this time, I would like to introduce your host for today's conference Greg Panagos, Vice President of Investor Relations. Mr. Panagos, you may begin.

Thank you, Jamie. Good morning, everyone, and thank you for joining us for today's call. We will keep the call to about an hour. At the end of our prepared remarks we will open the call up for your questions.

During the course of this conference call, both in our prepared remarks and in answer to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based upon our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.

Additional information regarding these risks, uncertainties and factors is provided in the earnings release and in our Form 10-Q, each as filed with the SEC. I encourage you to read our Form 10-Q for a more detailed analysis of our financials and other important information.

Also, reconciliation tables for non-GAAP financial information discussed on this conference call, including adjusted return on equity and our O&M efficiency ratio, can be found in the appendix of the slide deck for this call, which is located at the Investor Relations page of the Company website, as well is in our earnings release. We will be happy to answer any questions or provide further clarification if needed during our question-and-answer session. All statements in this call related earnings or earnings per share refer to diluted earnings and earnings per share from continuing operations.

And now I will turn the call over to American Water's President and CEO, Susan Story.

Thanks, Greg. Good morning, everyone, and thanks for joining us.

With me today are Linda Sullivan, our CFO, who will go over the first-quarter financial results, and Walter Lynch, our COO, who will give key updates on our regulated business.

The employees of American Water delivered solid results in the first quarter of 2016 through the continued execution of our strategies. These strategies include building constructive regulatory relationships through transparency, providing excellent service to our customers, growing our businesses, and continuing to become even more efficient in our operations to ensure affordability for our customers.

As you can see on slide 6, we are off to a solid start in 2016. We reported operating revenues of $743 million, a 6.4% increase above first quarter 2015. Earnings from continuing operations were $0.46 per share for the first quarter, a 4.5% increase above first quarter 2015.

Turning now to slide 7, let me discuss a few highlights of our strategy execution. As you know, the foundation for our earnings growth is the capital investments we make in our regulated operations to provide clean, safe and reliable service to our customers. Capital investment through March 31, 2016 totaled about $236 million, with $202 million in our regulated infrastructure investment.

We plan to invest $1.3 billion to $1.4 billion this year, of which $1.2 billion will be dedicated to water and wastewater system improvements. We are able to make these needed investments while minimizing our customer bill impact by our continued focus on controlling O&M costs and through constructive regulatory mechanisms. Walter will talk more about these in just a moment.

We had excellent growth news during the first quarter, a special highlight with our announced acquisition agreement with the Scranton Sewer Authority. Our Pennsylvania employees have provided water service to this community for decades, and we are excited for the opportunity to be the future wastewater services provider to those 31,000 customers in Scranton and Dunmore.

We also closed seven acquisitions in six different states during the quarter, welcoming another 7,000 customers to the American Water footprint. Walter will also share with you an exciting announcement from just last night which will add 3,100 more new customers.

Moving to our market-based businesses, in February, we began providing water and wastewater services to the city of Camden, New Jersey through our Contract Services group. We already serve a portion of Camden through our regulated New Jersey American Water subsidiary, and we're excited to serve the rest of that community. Camden will also be the home of our future corporate headquarters later this decade.

We continue transition activities at Vandenberg Air Force Base, and we look forward to serving our country's fine military men and women and their families there beginning June 1. This is our 12th military contract, which we announced toward the end of last year.

We do see a few challenges this year in American Water Enterprises, or AWE, and Keystone Clearwater. Earnings were flat in AWE compared to the first quarter of last year, mainly because we accelerated $1.5 million in homeowner services marketing costs into the first quarter of this year.

The first-quarter results in our Military Services group were up compared to the same period last year, but we expect federal budgetary constraint to impact planned future capital upgrade projects for the remainder of 2016. That said, we are seeing significantly more bases in the RFP pipeline for privatization. We continue to believe in the long-term growth potential of this business segment.

Keystone continues to manage through the current challenging market, characterized by low natural gas prices and excess supply. These conditions have persisted longer and been more severe than we originally anticipated and discussed with you at our Investor Day on December 15, when we shared that we believed that Keystone would be accretive to earnings in 2016. However, through a sharp focus on cost management as well as continuing to expand our customer market share in the Appalachian Basin, we expect that Keystone will be earnings neutral and cash flow positive for us in 2016.

The Energy Information Administration and many industry experts are predicting decreasing natural gas supply by late fall, and increasing prices later this year and into 2017. And our own analysis tracks with these projections.

We believe our business model, growing market share and solid balance sheet for the business will be a competitive advantage for us as the market recovers and other water services providers have found it difficult to survive. We are committed to Keystone, and still believe it's a good strategic fit for us going forward.

As slight eight summarizes, we continue to make progress toward our achieving our new and long-term goals. Based on the results for the quarter, we affirm our 2016 guidance of $2.75 to $2.85 per share. We also continue our progress toward achieving our long-term goal of 7% to 10% EPS growth through 2020.

Based on our solid performance, our Board of Directors increased our quarterly cash dividend payment by 10.3%, from $0.34 to $0.375 per share in April. This is our fourth consecutive double-digit increase in dividend. This also continues our commitment to provide strong dividend growth aligned with our financial performance, while also providing needed investment in our system for the benefit of our customers and our communities.

With that, Walter will now give you his update.

Thanks, Susan. Good morning, everyone.

As Susan mentioned, we're off to a solid start in 2016, growing our customer base, continuing our commitment to investing in our infrastructure, while focusing on improved O&M efficiency and cost reductions to mitigate the rate impacts for our customers. In recognition of the investments we make to ensure clean, safe and reliable service, we received a rate order in West Virginia during the quarter reflecting an annual revenue increase of $18.3 million. The main driver of the request was the $167 million we've invested since 2012. Key to this investment is our continued commitment to manage expenses.

We reduced operations and maintenance expenses by $1.1 million compared to our last rate filing, which was about four years ago. This past week, we filed a request for a D6 style mechanism in West Virginia known as an infrastructure replacement program, or IRP. IRP is modeled after rate mechanisms recently afforded gas utilities in West Virginia. If approved, the IRP would begin on January 1, 2017.

Our commitment to invest in our infrastructure while focusing on customer affordability is clear in the cases filed during the first quarter. In Illinois, we invested $342 million since 2012 and reduced operating expenses by 3%. In Kentucky, we invested almost $79 million since 2012, while keeping operating expenses flat.

We also filed three other rate cases since the end of the quarter. In Iowa and New York, we requested an additional $13.6 million in combined annualized revenue. In California, we filed a proposed application to set new rates in each of our service areas for 2018 through 2020. The new rates would take effect January 1, 2018 pending approval by the California Public Utilities Commission.

The application is seeking to raise revenue by approximately $50 million over the next three years, beginning with a $34.8 million increase proposed for January 1, 2018. The California Public Utilities Commission, which is the lead agency for the environmental review of the desalination portion of the water supply project has informed us that the review is delayed for about a year. Our team in California along with public officials and many other stakeholders is working with the Commission to mitigate the impacts of this delay.

Following our request, the Commission issued a ruling agreeing to expedite its consideration of two other portions of the water supply portfolio, which includes groundwater replenishment and aquifer storage and recovery. And together, these projects would provide nearly half of the water needed in the Monterrey water district.

Finally, as part of our ongoing investment in our systems, we dedicated a new $18 million dewatering facility in Tennessee. This plant will reduce sludge effluent sent to the local sewage treatment plant by 95%. While the capital costs of this facility impacted rates about $1 a month for the typical Chattanooga water customer, the project reduces operating expenses and has added a couple of permanent jobs. It also provided 150 to 200 jobs during construction.

As you can see on slide 11, those benefits were recognized by city Council Chairman, Moses Freeman, who said this is proof positive that these rate increases are improving the water for our people. All of this is for the betterment of our water and the community.

On slide 12, you'll see the success we've had in working with state governments on legislation enabling solutions to water and wastewater challenges. In Pennsylvania this past April, the Governor signed fair market value legislation into law. This authorizes water and wastewater companies to pay for and earn on municipal water and wastewater systems at appraised value rather than at the depreciated cost.

In Indiana, the governor signed two pieces of legislation into law. Act 257, the Distressed Water and Wastewater Utilities Act, allows for water and wastewater systems of any size to qualify as distressed. This opens the appraisal process to a simple agreement between mayoral council and the perspective buyer, and the utility determined to be distressed will not be subject to the existing referendum laws.

The second piece of legislation signed into law was the System Integrity Adjustment Act. This act creates the first water and wastewater revenue stability mechanism in state history, allowing for a recovery of differences between authorized revenue and actual revenue.

As you can see on slide 13, during the first quarter, we closed on seven acquisitions in six states, welcoming approximately 7,000 new water and wastewater customers. As Susan mentioned, we are pleased to reach an agreement with the Scranton Sewer Authority. This is the perfect example of the type of solution we can bring to communities, with long-term rate stability being one of the most important benefits for our customers.

In fact, the cumulative savings and customer sewer bills will total more than $350 million over the next 30 years. This translates to approximately $7,600 per residential customer. The pending regulatory and environmental approval, as we anticipate closing this acquisition by September 30.

Additionally, Pennsylvania American Water just announced that we signed an agreement pending regulatory approval to acquire the wastewater system of the borough of New Cumberland. This system serves 3,100 customers. Again, the system is an area where we already provide water services.

So we are really excited about the opportunity to be a future provider of wastewater services for our New Cumberland customers. You can also see on this slide how legislative efforts are helping us provide water solutions across our footprint.

Moving to slide 14. We continued to improve our O&M efficiency ratio, achieving 35.6% for the last 12 months. Again, we are on track to meet our O&M efficiency target of 34% by 2020.

Let me give you a couple of examples of what we are doing to drive these results. The first example is in Illinois, where we are using geographic information systems, or GIS, to map key components of our systems. This work improved our hydrant and valve inspection program by removing the overlap in routes, and reducing travel time and fuel costs. In one district alone, we were able to cut annual travel distance by more than a 5,500 miles.

The GIS mapping information is also used to better identify and prioritize areas to invest capital. By locating areas more prone to main breaks, we can maintain our systems while minimizing costs.

The second example is in West Virginia, where our team has deployed new technology and practices to reduce unaccounted for water. By investing in a new leak detection system and utilizing a number of management tools, such as industrial site audits and district metering area analysis, we identified specific areas for corrective action.

These efforts have reduced unaccounted for water from 28% to 22% in a 12-month period. Reducing the amount of unaccounted treated water by 1 billion gallons during that period. These are just two examples of what we're doing to achieve this target. It's a great effort across the business, and it's all about bringing value to our customers.

And now I'll turn the call over to Linda for more detail on our first-quarter financial results.

Thank you, Walter, and good morning, everyone.

In the first quarter of 2016, American Water continued to deliver solid financial results. Slide 16 shows the contribution by business segment to our quarterly results.

Earnings per share from continuing operations for the first quarter was $0.46, up $0.02 or 4.5% over the same period last year. The Regulated Businesses contributed $0.49, up $0.04 compared to the first quarter of 2015.

The Market-Based businesses contributed $0.03, down $0.01 compared to the same period last year. With AWE coming in flat compared to the prior year, and Keystone coming in with a slight loss. Parent, which is primarily interest expense on parent debt, was, as expected, down $0.01 versus the same period last year.

Turning to slide 17, let me walk through the components of our quarter-over-quarter increase in earnings per share. The primary driver was our Regulated Business, which was up $0.04. Regulated revenue was up $0.06 from authorized rate increases, infrastructure surcharges and the new revenue from recently completed acquisitions.

Depreciation was up about $0.02, primarily from growth associated with our Regulated system investments. The Market-Based businesses were down $0.01 for the quarter. Keystone, which was not included in first quarter 2015 results, reported a net loss of about $1 million, or $0.01 per share.

As Susan mentioned, natural gas market conditions are more challenging than we anticipated at the start of this year. The rig count in the Marcellus and Utica is about half of what it was last year. As a result, we are not planning for drilling activity to pick up in 2016, and Keystone has taken austerity measures which began in early March to position it to be earnings neutral in 2016, and we expect Keystone to generate positive operating cash flow.

AWE was flat for the quarter, due to accelerating $1.5 million of pre-tax marketing expenses in our Homeowner Services Group to the first quarter. We accelerated these expenses because of a planned system implementation in July.

Military Services results were up for the quarter, but we expect a reduction in the amount of capital upgrades on our existing bases in 2016 due to reduced military base budgets. As we have noted previously, these capital upgrades can be lumpy in nature from year to year based on the Department of Defense budget cycle. However, we are seeing stronger activity for base privatization Request for Proposals, and we continue to see the long-term growth potential of our military business consistent with our five-year plan.

Now let me cover the Regulatory highlights on slide 18. We currently have six general rate cases in process for a combined annualized rate request of $110.6 million. This includes three cases we filed post quarter in Iowa, New York and the preliminary application in California.

Additionally, in April, the Missouri PSC approved the stipulations in our general rate case. These provide for $4.7 million of additional revenue, which excludes infrastructure replacement surcharges of $25.8 million. This case is subject to final order by the Missouri PSC.

For rates effective from April 1, 2015 through today, we received a total of $82.8 million in additional annualized revenues from general rate cases, infrastructure charges and step increases. Including yesterday's approval of our D6 filing in Indiana of $3 million. More information is included in the footnotes on this slide.

Slide 19 highlights our continued strong financial performance. During the first quarter of 2016, we made total capital investments of $236 million. Primarily for regulated system investments, mainly replacement and renewal of transmission and distribution infrastructure.

We expect capital expenditures to be in the $1.3 billion to $1.4 billion range for 2016. Included in this range is our agreement to purchase the wastewater system from the Scranton Sewer Authority. We are seeking to close this by September 30, 2016 once the necessary approvals are obtained.

The purchase price of $195 million includes cash of approximately $38 million, and is subject to purchase price adjustments. As part of the acquisition, we have assumed the obligations to comply with a consent decree from the EPA and the Pennsylvania Department of Environmental Protection, requiring system upgrades of $140 million over 10 years, providing future capital growth potential.

For the first quarter 2016, cash flow from operations increased $49 million, or 24.7%, to about $247 million, mainly due to stronger collection of accounts receivable and the timing of unbilled revenues. Our adjusted return on equity for the past 12 months was 9.41%, an increase of 53 basis points compared to last year from continued execution of our strategies.

We also announced in April a $0.375 common stock dividend payable on June 1, 2016 to stockholders of record as of May 9, 2016. This represents a 10.3% increase over the previous dividend.

Turning to slide 20, let me discuss our earnings guidance. The headwinds we are currently facing in our market-based businesses fall within the key variables of the earnings guidance range we shared with you at our Investor Day in December of last year. In addition, we are taking appropriate measures to mitigate some of these headwinds. As such, we are affirming our earnings guidance for the year in the range of $2.75 to $2.85 per share.

And with that, I'll turn it back over to Susan.

Thanks, Linda.

Before we move on to Q&A, I do want to mention that we were very honored to be named to the S&P 500 on March 4. We are proud to be the only water utility in the S&P 500, as well as in the Dow Jones utility average, which we joined in 2015. Additionally, in recognition of our environmental and sustainability leadership, we are also very pleased to be part of the Dow Jones Sustainability Index.

To be named to the S&P 500 is a direct reflection of our employee's commitment to deliver clean, safe, reliable and affordable water to our customers every day. Our employees put our customers first. This results in a more positive constructive relationship with both customers and regulators.

When regulators can trust our efforts to serve customers efficiently and effectively, they have confidence in our ability to invest productively in our water systems. Investing more in our water systems gives us more reliable service, better satisfied customers and growth. It's this virtuous cycle that begins and ends with the employee customer relationship.

The successful execution of this equation is what drives our performance. The actions of our employees everyday are the reason American Water is part of the S&P 500, the Dow Jones Utility Average and the Dow Jones Sustainability Index, and I'm proud to be part of their team.

And with that, we're happy to take any questions you've got.

(Operator Instructions)

Walter Liptak from Seaport Global.

Thanks. Good morning, everyone.

Good morning, Walter.

I wanted to ask about the Market-Based businesses, and specifically Keystone. It looks like Market-Based was nicely profitable this quarter, and so I assume that the Keystone was profitable as well. But I wonder what is it about the rest of the year that brings it down to breakeven?

Well actually if you look at the charts, Walter, and Linda mentioned. That in the first quarter, we had a $1 million loss at Keystone that starting March 1, they have taken on several austerity measures to get back to the earnings neutral and cash flow positive for the rest of the year.

So actually, we are mitigating what happened in the first quarter and moving to earnings neutral for Keystone. On AWE, we basically, if you look at the chart that Linda ended with, it's within the realm of plus and minus as we looked last year at Investor Day and projected the growth of AWE. So the business is running well.

Also Linda mentioned, if you look at AWE being year-over-year quarter being flat, we did accelerate some of the homeowner services marketing costs. Because we have a system implementation in July, and we didn't want to have marketing materials and what we tend to get are extra calls during a period of time when we were doing that. So actually, we are pretty much on our plan as we looked at AWE and Keystone, based on the actions that we've taken in the first quarter.

Walter, this is Linda, and I'll add to that. That in terms of the Military Services group, for the quarter, we were slightly up on a year-over-year basis. But we do see headwinds associated with the capital future upgrades for the remainder of the year, based on the military Service or the Department of Defense budget.

Okay got it, thank you for that. Just going back to Keystone, $1 million loss doesn't sound bad considering the deep depression that the energy sector is in, and it's great that you'll be able to get it back to breakeven.

And I guess there seems like there's a lot more consolidation opportunity in this business, as some of the providers go into distress or market share gains as you called out. I wonder if you could provide us with a little bit of outlook about any potential M&A or market share gains, because I'm sure you're seeing as a very strong player in that energy business.

Right, Walter. So let me talk about the water services providers first. Because Keystone, and we mentioned, they had about 20% of the market share when we bought them. And due to being affiliated with American Water not owned by a competitor E&P Company, we did start seeing market share grow up to now close to 30%.

We've picked up several new large customers this year. So while the market has gone down from an E&P, our share of that market for Water Services has gone up.

Just like the industry experts, EIA are basically targeting fall to see the supply numbers based on some projections for the summer going down and having to increase production. We see the same thing based on our discussions with our customers. So, but we are very conservative in our outlook and our projections.

So as Linda mentioned in her script, we are assuming no increase in production through the year. And looking at cost controls for Keystone that include, about 80% of our costs can be variable, we're looking at a lot of process improvements, we continue to grow market share.

And you're exactly right, we're seeing some of the smaller water services providers who simply can't make it through this year. It's very difficult when you don't have as strong of a balance sheet as we do, nor have a growing customer segment for those water services.

So our Keystone management team has done an outstanding job, as you noted, in a time like this with a market like this to get us to the position we are in. And we're very proud of that.

Okay great, thank you.

Thank you.

Richard Verdi from Ladenburg Thalmann.

Hello, Rich.

Good morning, and congrats on another good quarter here. I wanted to follow up on the first caller's inquiry pertaining -- you had two questions, first pertaining to the Keystone side.

I'm just curious, are you seeing any or any maybe customer bankruptcies on the horizon, or having to enforce any of those take-or-pay contracts? Or what's the sense of that customer base? Because when I look at some of the other companies that are somewhat similarly, you are seeing that happen.

First of all, when we bought Keystone, they did not invest in a lot of pipelines. Those are relatively new for the future of building pipelines, and we are ensuring there are strong third-party creditors, the credit worthy partners there. So we don't really have the take-or-pay exposure now, so that's good.

But you are right. What we are seeing, and you all read the papers every day, you have bankruptcies of some of the smaller E&Ps and you're seeing a consolidation in the oil and gas industry. And let me remind you that in the Marcellus and Utica, the Appalachian Basin, basically all of our support is for natural gas, it's not for oil.

And we are also seeing to that effect the consolidation of the oil and gas companies, we're also seeing that they want credit worthy partners. So to have a larger water services backed by a company by American Water is very attractive to some of our Partners.

Also keep in mind that you have to build an infrastructure for water before you need it or before you actually start producing natural gas. So we are seeing some interest expressed later in the year to start some projects.

That's great. Thank you, Susan.

And then continuing on the non-regulated side. You want to keep it somewhat of a smaller portion compared to the overall consolidated Company. But obviously with the water theme and the prowess of American Water, that regulated side is going to, at least in our view, meaningfully grow over the next 5 to 10 years.

And so that means you're going to probably have to grow the non-regulated side to keep it consistent with its current percentage of overall sales. And so what's the internal thinking of let's say over the next 5 to 10 years for the non-regulated side where American Water might dive into that is still the core water competency but expands that non-regulated side? Or do we just intend to grow what we have in the portfolio right now?

Rich, that's a good question. First of all, let me tell you that dealing with faster Regulated growth is a problem that we sincerely hope that we have. And as we've said that 15% to 20%, that's more of a limitation, not a target. So if the Regulated business, if we see that through things that are happening nationally that there is an acceleration in the number of governmental entities that want to sell their water and wastewater, and people having been saying this for a long time, we see it very steady legislation helps.

If that happens, it doesn't mean we necessarily must ensure that market base is 15% to 20%, it's more of a limiter that from a risk profile standpoint it will not be more than that. That does not mean it has to be that percentage. So I'll just say that up front.

Now in terms of growing the business, so we believe at American Water that there's enough opportunity related very tightly to our core competencies that we like to keep our growth engines related pretty directly to water and wastewater. So I will tell you that as we look at our businesses in Market-Based, we are looking at of course our homeowner services, military and contract. We look at any potential new business and say, does this really play off our competencies.

Because our Market-Base business benefits because of the tremendous amount of expertise in our Regulated business. It also helps our Regulated business by bringing in a lot of competitive entrepreneurial type ways to look at things, so we think it's a very healthy relationship.

We go through a very disciplined process to look at new businesses. Just as one example, and this is public, we are very excited about the pilot project we did on geothermal on Long Island at a school where geothermal has been around for decades, but it's always utilized ground as the heat transfer agent. And you have to have pipes, for example, if they're vertical, 250 feet in the ground, or horizontal you need a lot of land.

We're basically using our water main system to be the agent, and it's not having effects on the water and it's able to heat and cool buildings through geothermal system. Well we know that our military bases, this is another cross connection between our businesses, several of our military bases, or all of them, are under a eventually a net zero charge from an energy standpoint. This type of technology can save 30%, 40%, 50% on an energy costs. So we're looking at those areas that we have expertise, that we're aligned with, that have really good applications as we look at different ways to grow in the Market-Based business.

That's great. Thank you, Susan. And then my next question pertains to the metering side of things.

Obviously, smart metering is an initiative that American is pursuing. And I'm wondering if there's a possibility where instead of building out some of the infrastructure that will be required for smart metering, if you've ever thought -- if American, I should say, has ever thought about sharing the same infrastructure with the electricity companies to save on costs?

Well actually, it's interesting you bring that up. We actually are doing some sharing in two locations, in the Monterey Peninsula where of course we have the conservation measures in drought, we have a pilot in Monterey that we are partnering with Pacific Gas & Electric to use their backhaul system, use water meters, smart water meters use their backhaul system to actually look at the data.

We just announced about two months ago that we are partnering with Commonwealth Edison, ComEd. We serve parts of metro Chicago, and we're actually partnering with them to utilize a different type of smart meter technology to again utilize some of their backhaul infrastructure.

How this is a win-win is that in our business, as we've said, one of the strong parts of our investment thesis is that we have years and years of capital investment we need to make because of the system nationally of the water and wastewater infrastructure system. So for us to say we'll put in the meters and the electricity company may already have some backhaul capability there from their smart meters, then we where we can partner and utilize some of that infrastructure, it's great for customers.

And the regulators love it because it shows directly a reduction in the amount of cost per customers. It benefits the electric utility, and it benefits us because if we are not building the backhaul we just put that money into more pipes, plants and pumps replacements.

This is Walter. These are two great examples. But our AMI strategy, we are looking for other opportunities across our footprint. Because as Susan said, the benefits to our customers are huge and that's what we want to drive in the business.

Thank you, Walter, and thank you very much, Susan. I appreciate it and that's it for me. Congrats again, guys, I appreciate the time.

Thanks, Rich.

(Operator Instructions)

Jonathan Reeder from Wells Fargo.

Good morning, Susan and team. So in terms of the 2016 guidance, you mentioned the non-regulated weakness expectations for the remainder of the year. Are regulated and parent segments are either of those doing better, or they just tracking in line thus far?

Jonathan this is Linda. And what we did at the analyst day was we set forth some of the key variables that we expect in our earnings guidance range for the year, and so we've reiterated that chart here. When we look at 2016, we are square within those variables based on what we know today and the first-quarter results.

Okay. And then in terms of 2017, are you expecting Keystone to turn a profit or is it just too early to tell?

For Keystone, we are expecting that they will take austerity measures and that they will be earnings neutral this year.

Right, but for 2017, are these austerity measures things that are going to continue over?

It's too early to tell Jonathan. I think when we look at our five-year plan, we continue to see that the market expectations are about the same as they were in December over the long term. And so we continue to believe in about 1% growth from the Keystone acquisition.

Okay. And then I don't know if you can provide any more detail on the military base RFP comments. Are you seeing more bases I guess being put up for grabs than you expected, and do you expect any 50-year contracts are close to being awarded something we might see later this year?

Jonathan, we are seeing quite a tick up in activity in the pipeline of Requests for Proposals. We currently -- the Department of Defense has about nine proposals that are out right now and that we are active in.

Also, Jonathan, interestingly for the military bases in terms of the capital upgrades. One of the areas that has not been really identified in the past has been the area of stormwater. It's been water and wastewater.

And so the legislation we believe allows the military bases to utilize us for stormwater services, but there's been a question about clarification. And I will tell you that there have been out of, for example, the House Armed Services Committee as well as some of the Senate, they said this was intended.

So we are working to get clarifying language so that on these bases we serve, we would have an additional opportunity to help them address their needs from a stormwater standpoint. So we see that as a potential opportunity in the future.

Okay, and that would just come in the form of additional I guess capital upgrades?

Yes, that's correct.

Okay. And then now just turning quickly to the Regulated. West Virginia, I know that sub was somewhat in a state of disarray, but now in light of your rate case outcome and the pending infrastructure mechanism. Can you just update how you're thinking about that state as a core operation that you want to stay in?

Yes, Jonathan, Walter. We think we got a fair rate case order out of the Commission. We are working with them to address customer issues in the states like we are anywhere else, and we feel positive about the future in West Virginia.

The infrastructure mechanism that we just proposed last week is a positive step forward, and it's going to allow us to continue to invest and invest more into the infrastructure in West Virginia. So it's a positive for us and for our customers.

Okay, great. And then last question on the California desal plant. The one-year delay, does that have any impact on projected total capital CapEx? Or I know it wasn't a huge amount, so I'm assuming you're just planning on backfilling that CapEx with other investments. Is that accurate?

Yes, that's accurate, Jonathan. It's a big plant, but within our capital program, it's not significant. So it's all going to be within the same four to five year period.

Right. So you'll see some of the dollars shifting from year to year, but it's still within that five-year capital plan.

Okay. And then I guess even with that shift -- the one-year shift, so you can offset like half the supply you're talking about some mitigating measures you're taking. Isn't there just an issue with I guess having adequate supply for those customers? What do you have to do to get the other half of the supply in the interim?

Yes, we're going to have to build a facility. And again, the facility is going to be delayed for about a year and we're working with the Commission to mitigate that by moving these other components forward. But right now, we're looking at probably starting construction in mid-to-late 2018.

Yes, and, Jonathan, to that point, if you remember, Walter mentioned there were two, which were the groundwater replenishment which is recycled water as well as the ability to do additional reservoir storage for half. The other half though we are working hand in glove with the local officials there as well as during a hearing in Monterey, the Public Utilities Commission because of the delay has said that they also would advocate for us to have an extension of the Carmel River withdrawal.

It was supposed to seize, as you know, the end of this year, to extend that until we can get the desal part built. And in fact, it was very positive that we could continue and work on these other components for half of it before we actually build the desal plant for the other half. So it actually ensures we build part of the project earlier, and then hopefully get with everybody supporting the communities and the state hopefully then get the extension on the water withdrawal permit for the Carmel River.

Okay, so there's some flexibility there from the requirements. Okay great, thank you so much for the time.

Thank you, Jonathan.

(Operator Instructions)

We do have a follow-up from Richard Verdi from Ladenburg Thalmann.

Hello, and thank you for letting me back into the call. I appreciate it.

Sure.

I just wanted to jump down, but I had one other question. I asked this of Aqua yesterday, and I'm just curious what American's take is.

So maybe at the end of March very early April, I had a conversation with one of the more prominent leaders at Nisuka. He was telling me that the consumer advocates were looking to meaningfully push back on the DSIC, because basically they feel it's being abused. They think that you file a DSIC, and then there's another DSIC and it's just basically one after the next.

So I had asked Aqua yesterday if they were seeing that, I'm wondering if you are seeing that at all. And if you are, how American tends to deal with it.

Sure. I will tell you I won't talk in general about Nisuka, but in each of our states, we tried to work very closely with the consumer advocates office up front when we are filing these mechanisms. We try to ensure -- and I will tell you we're very transparent about the process. This also goes back to why our ability to not only increase and improve our O&M efficiency, but we have a lot of projects on how we also increase our capital efficiency. What are we doing to ensure that every dollar we spend is being spent at the highest level of productivity.

So it's a one-on-one thing. It's not with the general Nisuka, but in each of our states, our state presidents, our staff, sit down with the consumer advocates and basically walk through very openly what we need to do, why we need to do it, and what we're doing to mitigate the costs. And I'll tell you when we go in for DSIC and capital infrastructure, we say this and I know some of you think we say it too much, but I don't think it can be said enough. The ability to manage our O&M costs, so that for every dollar of O&M saved, we can put $6 of capital in the ground.

When you hear like what Walter said is in West Virginia over four years or three and a half years, we reduced O&M costs $1.1 million. We filed in Illinois, we've reduced our O&M costs by 3%. The ability to show that we are being good stewards of the customer's dollar goes a long way.

That's great. Thank you, Susan. And if I may, you had mentioned about how each one of your employees that runs each state. I've got to say, and you might be happy about this, I can see that because Jim Jenkins is hard at work for you. I just wanted to let you know he's doing a great job in my view. So thank you for the time, Susan, I appreciate it.

Thank you, Rich, and thanks for the comments about Jim. He is extraordinary, and I tell you, the team we've got, I could go down a list and talk about the amazing people we've got. We all just feel fortunate to work with them. Thank you, Rich.

That's great. Thank you.

And at this time, we've reached the end of the question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

Thank you, Jamie. I will be short. I appreciate everybody participating in our call today. If you've got any questions, as always, you can call Greg and Melissa and they'll be happy to help you. I will remind you that we're having our annual stockholders meeting on Friday, May 13 in Voorhees, that will be lucky Friday May 13. Thanks again for participating in our call, and we look forward to talking with you all later.

Ladies and gentlemen, with that, we will conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.