美國水務 (AWK) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to American Water's 2008 Second Quarter Earnings Conference Call.

As a reminder, this call is being recoded and also being webcast through the Company's website. A replay of this conference will begin today at 11:00 a.m. Eastern Time. The dial-in number for the replay is 1-800-475-6701. International numbers may call 320-365-3844 with the access code 955085.

At this time, all participants have been placed in a listen-only mode. Following Management's prepared remarks, we will then the call for questions. (OPERATOR INSTRUCTIONS.)

Participating in today's American Water are Don Correll, President and Chief Executive Officer, Ellen Wolf, Senior Vice President and Chief Financial Officer, Ed Vallejo, Vice President of Investor Relations. I would like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you. Good morning and welcome to American Water's 2008 second quarter earnings conference call. If you did not receive a copy of the earnings release, you can find it by visiting American Water 's Investor Relations page of the Company's website at www.amwater.com. The slides used in this morning's conference call will also be available to download following the call.

Before we begin, let me remind you that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company knows certain matters to be discussed by members of Management during this call may constitute forward-looking statements. Such statements are subject to numerous risks, uncertainties, and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the Company's SEC filings.

Today, American Water's President and Chief Executive Officer, Don Correll, and Ellen Wolf, American Water's Senior Vice President and Chief Financial Officer, will be discussing our second quarter and year-to-date results.

Following the presentation, we will be accepting questions.

Now I'd like to turn the call over to Don Correll.

Thank you, Ed. Good morning, everyone. Today we'll be commenting on our second quarter results, as well as our year-to-date results, reviewing some of the highlights and how they all relate to our business strategies. Ellen will go into further detail regarding our second quarter, but first I'd like to give a brief overview of our chief financial results.

For the quarter, the Company reported an operating revenue increase of 5.5% to approximately $589.4 million. Net income was $45.5 million compared with $49.2 million in the second quarter of 2007. Ellen will detail the changes in net income during her portion of the call. The substantial increase in operating revenues is a result of our successful rate cases. Earning an appropriate rate of return is a core strategy for American Water, and a critical competency of any regulated utility.

In the second three months of 2008, we received authorizations for additional annualized revenues from general rated cases of $19.2 million, which brings the total for the first half of the year to $47.2 million. At present, we have 11 rate cases pending across the country.

A main driver of increasing rates is our capital investment. Company-wide year-to-date, American Water has invested approximately $426 million on infrastructure improvements. This prudent investment, also a core strategy, is needed to ensure the reliability of our services and is on target with our anticipated annual capital investment plan. We expect to invest in the $1 billion range per year for the foreseeable future.

These investments include both infrastructure renewal programs and construction to meet new customer growth and help to ensure our continued compliance with water quality standards. American Water takes great pride in meeting or surpassing water quality standards, and in fact, during this past quarter, we earned nine more Directors' Awards from the Partnership for Safe Water. This is the Environmental Protection Agency's voluntary program to meet more stringent water quality goals than is required. In total, American Water has earned 70 Directors' Awards across our business since the inception of the program.

American Water continues to look for opportunities to grow our regulated business and pursue public/private partnerships. The evolving need in the marketplace for water and waste water solutions create a wide range of growth possibilities. Currently, we are pursuing numerous regulated or regulated-like opportunities that range in size and include many tuck-ins. Growing our regulated business through tuck-ins allows us to integrate systems, operations, and management, as well as achieve efficiencies. A recent example of this was the June acquisition of a small system in Eastern Pennsylvania called Mountaintop Estates. Our subsidiary in Pennsylvania already provided water and waste water services in a number of nearby communities, and as such, this acquisition was a great fit for Pennsylvania American Water, and we're able to meet a 100 person community water needs.

In addition, Pennsylvania American Water acquired the assets of Claysville Donegal Joint Municipal Authority water and waste water systems. The purchase price is approximately $2 million. The new-acquired systems provide drinking water to approximately 550 customers, as well as waste water treatment services to nearly 500 customers. The transaction represented Pennsylvania American Water's first waste water acquisition in Western Pennsylvania.

And just this past weekend, the residents of Fayetteville, West Virginia voted overwhelmingly to sell the town's water and sewer systems to West Virginia American Water. The town has been purchasing water from West Virginia American Water since January. With the sale now approved by voters, the Company awaits final closure on the $3.9 million purchase agreement likely to occur at the end of September. That system serves approximately 2,200 customers.

While our business mix focuses on predominantly on regulated activities. We continue to pursue public/private partnerships, including O&M and military contracts and services and other non-regulated businesses that are complementary to our regulated businesses.

Other news for American Water includes the appointment of our newest Board Member, Julia Johnson. Ms. Johnson brings more than 20 years of experience and a wealth of knowledge in the utility industry to American Water. She is an excellent addition to our Board and an independent member.

American Water also announced some key organizational changes that we believe will better position this Company to execute its key strategies and deliver positive future results. Walter Lynch has been appointed President of Regulated Operations, and John Young was named President of American Water Services, and continues to serve as President of American Water Works Service Company. Walter and John are key leaders in American Water, and have vast experience in this industry.

In his new role, Lynch will be responsible for the successful performance of American Water's 20 regulated States, as well as the Company's two national customer call centers. All of the States' Presidents will now report to him. John will work to align the organization's capabilities to support various growth opportunities, like the Company's recent successes with the Tampa Bay Desalination project in Florida, and the Lake Pleasant Water Treatment plant in Arizona. Young will also continue to lead multiple operational functions, as well as the business transformation related to the Company's Information Technology initiative. This critical effort will ensure the Company employees the proper technology to meet future customer and business needs. I have every confidence that through these two new positions, both Walter and John will help this Company achieve its full potential.

We also declared our first dividend payment since going public in April. We realize the importance of meeting shareholders' expectations. This declaration represented the first dividend payment since American Water's IPO and re-initiated a policy that was a longstanding tradition of American Water's prior public history.

Finally, though Ellen will have further information on the financial impact of the weather, I want to acknowledge and congratulate the American Water Teams in our Central States. While the Midwest has not seen flooding like this since 1993, thanks to the additional steps that were taken by the Company during and after the floods, American Water's operations had no difficulty maintaining service to our customers. It's an absolute credit to our employees, and reflects our commitment to those we serve.

With that, I'll turn the call over to Ellen to discuss the second quarter and year-to-date financial results in more detail.

Thank you very much, Don, and good morning, everyone. American Water's second quarter results continued to show our commitment to investing appropriately in our infrastructure, applying for and receiving rates of return on that investment, and addressing our customer requirements. For the second quarter ended June 30, 2008, American Water reported net income of $45.5 million, or $0.28 earnings per share compared to $49.2 million, or $0.31 earnings per share for the comparable quarter of 2007. Included in our second quarter results, our incremental employee expenses related to job reclassifications, and awards granted in relationship to the initial public offering, amounting to approximately $5 million on a pretax basis.

In addition, the second quarter results for 2007 included a one-time gain on sales property of approximately $6 million on a pretax basis.

For the six-month period, we reported a net loss of $687 million, or $4.29 earnings per share. After taking into account a net after-tax impairment charge in the first quarter of 2008 of $738.5 million, net income for the six months ended June 30, 2008 was $51.5 million, or $0.32 earnings per share compared to $51.8 million, or $0.32 earnings per share for the six months ended June 30, 2007.

A key contributor to our net income for the second quarter was our growth in revenue. For the second quarter of 2008, American Water reported an increase in revenues of 5.5% to $589 million from $559 million reported in the second quarter of '07, or $30.6 million increase. This increase was driven by an increase in our regulated revenues of $17.6 million and $11.6 million increase in revenues from the non-regulated business.

As I just mentioned, for our regulated businesses, revenues from customers increased by approximately $7.6 million. This is mainly due to the implementation of granted rate increases resulting in additional revenue for the quarter of approximately $26 million. However, the full benefit of this rate increase was offset by a decrease quarter-over-quarter in the volume of water sold. This is largely attributable to the weather conditions in the Midwest where the rainfall was approximately 70% higher than average in Iowa, 40% higher in Missouri, and 30% higher in Indiana and Illinois.

For the Company as a whole, sales volume for our residential customers decreased 2.1%, volume of water sold to commercial customers decreased by 1.4%, and the volume of water for our industrial customers decreased 2.8% in the second quarter of 2008 versus the second quarter of 2007.

The non-regulated businesses increase in revenue comes principally from our contract operations group and homeowner services group. These increases were partially offset by decreased revenues in our applied water management group, which has been impacted by the slowdown in the housing market, mainly in New Jersey.

Offsetting the increase in revenues were $39.5 million higher operating expenses for the three months ended June 30, 2008. The increase in operating expenses primarily resulted from higher operating expenses in our regulated businesses of $23.7 million during the three months ended June 30, '08 compared to the three months ended June 30, '07, and an increase in operating expenses in our non-regulated businesses of $16 million for the three months ended June 30, 2008 compared to the prior three months ended June 30, 2007.

The rise in operating expenses in our regulated businesses reflects our continued commitment to enhancing customer service and ensuring that we meet both the customers' and regulators' expectations. This involves, just to name a few, making sure we are appropriately staffed to answer the phones on a timely basis in our call centers, responding to customer concerns quickly and efficiently, turning on and off services required and making sure our meters are read in a timely and accurate manner.

Employee-related expenses increased by approximately $12 million from $119 million in the second quarter of '07 to $131 million in the second quarter of '08. Included in this $12 million increase in our expenses for the second quarter of '08 is the $4.7 million previously mentioned related to job reclassifications and a grant of stock to employees at the time of the IPO. This grant vested in July, and was valued at approximately $2 million, of which approximately three-quarters was recognized in the second quarter of this year.

Also included in employee-related expenses is a $3 million increase year-over-year in our pension expense. After taking into account these items, other employee-related expenses increased approximately $4 million, or 3.6%.

We are beginning to see a slight increase in our production costs, particularly related to fuel, purchased water, and chemicals of approximately $2 million quarter-over-quarter. Based upon the increases that we are seeing in these areas, we have been or will be able to update our rate cases in States such as New Jersey, Missouri, West Virginia, and others for these known and measurable increases.

While we have seen some impact of the slowdown in the housing market on our non-regulated businesses, we have not seen any substantial change in our bad debt for the regulated business. Also, in comparing expenses for the three months ended June 30, 2008 versus June 30, 2007, it should be noted that the expenses in '07 were offset by a gain on sale of assets of approximately $6.3 million.

We continue to make significant progress in our compliance with Sarbanes-Oxley. The expenses to ensure our compliance with and remedy of any material or significant weaknesses decreased from $9.1 million in the second quarter of '07 to $2.9 million in the second quarter of '08. This overall decrease in spend year-over-year demonstrates our success in resolving any and all material weaknesses. We do expect to incur an additional $2.8 million for the second half of the year.

Other items affecting income from continuing operations for the three months ended June 30, '08 as compared to the same period in the prior year include increased allowance for funds used during construction of $3.2 million, attributable of the increase in the construction work in progress, primarily in New Jersey and Missouri, and also lower income tax expense of $2.5 million.

During the second quarter of 2008, American Water continued to prudently invest in the water and waste water infrastructure of its system. Cash outflows for capital investment increased from $138 million in the second quarter of '07 to $237 million in the second quarter of '08. For the six months of 2008, American Water has dedicated approximately $426 million of capital to its system. Additionally, the Kentucky Commission approved our building a new source of supply in Lexington for an expected cost of $162 million for an approximately 20 mgd plant. One of our key strategies in ensuring that we receive an appropriate return of our prudently-invested capital is filing rates.

During the three months ended June 30, 2008, we received authorizations for additional annualized revenues from general rate cases in California and Arizona amounting to $19.2 million. While California rates were not granted until May of 2008, they are retroactive to January 1, 2008, which resulted in American Water recognizing $1.4 million of additional revenue in the second quarter. Arizona's rates were affected in the second quarter of 2008.

In the first six months of 2008, we received authorizations for additional annualized revenues from general rate cases of $47.2 million. As of July 31, 2008, we are awaiting final orders for $6.8 million in total additional annual of revenues for general rate cases that were filed in October and November of 2007.

In the first six months of 2008, we filed general rate cases in nine additional States to ensure an appropriate return on the capital we have prudently invested in the infrastructure, as well as a recovery of any increase in cost or decreases in demand. The filed rate cases should provide $271 million of additional revenues if approved as filed. There is not assurance that the filed amounts, or any portion thereof, of any requested increases will be granted. As a reminder, it generally takes up to 12 months between the riling of a rate case and the rates being authorized by the State's Commission.

I want to note that in July 2008, 11 months after we initially filed the rate case, the Illinois Commission approved and granted authorization to increase rates in our service territories in Illinois, which will provide additional annualized revenues of $24.9 million.

During the six months ended June 30, 2008, we met our capital resource requirements with internally-generated cash, commercial paper issuance, the issuance of $200 million of private-placement debt, and a capital contribution of $245 million from RWE. The capital contribution received from RWE was in connection with the IPO, and we do not anticipate any such contribution in the future.

As you are aware, American Water's common stock began selling on the New York Stock Exchange on April 23, 2008, and on April 28, 2008 the Company completed its IPO with the Company selling shareholder selling 58 million shares of the Company's common stock at a price of $21.50 per share. Subsequent to the IPO, American Water announced the underwriters' partial exercise of their options to purchase 5.2 million shares to cover over a lock. As of this date, there are approximately 63.2 million shares in the public market where the remaining shares are approximately 60% of outstanding shares still owned by RWE.

I'd now like to take a few minutes and address the issue of goodwill that is on our balance sheet. As a reminder, this goodwill relates to the premium that RWE paid for American Water when it acquired the Company back in 2008. Over the past years, American Water has written off approximately half the goodwill, and has a balance of $1.7 billion remaining as of June 30, 2008. The Company's policy is to reassess the value of that goodwill on an annual basis in the fourth quarter of every year, and we expect to conduct that test at the same time for 2008.

As you may recall from our last earnings call, in light of the initial public offering price, we performed an interim impairment test. Based on that assessment, we recorded in our first quarter financial statement a pretax impairment charge to goodwill related to our regulated business of $750 million. Since the IPO, there have been no triggering events that would warrant our performing another interim test.

As Don noted earlier, we were proud to have recently announced our first quarterly dividend since our return to a public Company. As we noted on our last quarterly call, and in our S1, I wanted to reiterate that our policy, subject to approval by our Board of Directors, is to declare and pay a dividend on a quarterly basis of $0.20 per share, and in the long run to have a payout ratio in the 50% to 70^% range of net income.

We at American Water want to thank you for your continued interest in our Company. That concludes our prepared statements for American Water's second quarter financial results, and I'd like to turn the call back to [Kevin] for our question-and-answer session.

(OPERATOR INSTRUCTIONS).

Elizabeth Parrella, Merrill Lynch.

Thank you; I wonder if I could ask a question on the non-regulated businesses. You press release mentions that revenues were up $11.6 million and expenses were up $15 million in the quarter. Can you talk about whether there were any unusual items in the expenses, or any timing mismatches between revenues expenses?

No problem. There were no unusual items or mismatches. We had really three things sort of driving it; first in homeowner services, because of the unique weather, we had more frequency of breaks, and therefore having to fix those breaks so the expenses were up a little bit there. Second, on some of our contracts, we are seeing start-up costs related to the military contracts, and then third, we did start a DBO in Fillmore and that has a lower margin on it on the DB part because it's really more a pass-through.

So again, nothing unusual there.

Okay, and you mentioned on the reclassification of certain employee costs that's in this $4.7 million, based on your comments on the compensation piece, is the right way to think about it is that the employee cost is about $3 million out of the $4.7, and the other is maybe $1.5 or so?

That's correct.

Okay, and just one other question on that. Is that $3 million cost, is there any benefit to you either later in the year or down the road, does any of that come back to you, or should we view that as sort of a one-time cost without a --?

It should be deemed as a one-time cost.

Okay, and then if I could ask one other question on the regulatory side. Can you provide any update on the New Jersey case in terms of how that's going, and also the Trenton acquisition proceed

We're -- hello Elizabeth, this is Don -- we're proceeding as planned. We're, our testimony has been in for some time. We're doing the discovery now for the intervener's testimony. Hearings are scheduled for this fall. We're still on track for both the rate case and the acquisition to get a decision by the end of the year, or worst case the very beginning of 2009. We're always optimistic and hopeful at the possibility of trying to reach some kind of a settlement in advance. But there's been no activity on that front at the moment, and I think it's just safe to say that we're still on target to have this done at or about the end of the year.

Okay thank you.

Maria Karahalis, Goldman Sachs.

Thank you, good morning. I wanted to ask a question regarding the broader economic environment, and if you could comment on the environment for tuck-in acquisitions. I know you've talked about a couple of them during the quarter, whether you've seen a greater willingness or more optimism about the ability to conclude those in the second half of this year and into next without being specific.

And secondly, I guess the economic environment can cut the other way. Excuse me -- are you seeing more push-back than usual on your proposed rate increases? Thank you.

Okay, I'll cover the first part and allude to the second, I'll let Ellen talk a little bit more about the rate cases. We are indeed seeing more receptivity by, more openness by municipal officials across sectors of our business to at least consider either the sale of some type of public/private partnership, particularly for communities like the ones that I alluded to earlier, and Fayetteville, West Virginia being a great example of that.

I think communities of that size are beginning to accept that perhaps they may not have the critical mass necessary to be able to support the financial investments, and to be able to have the technical and managerial capabilities to run the systems and invest in the systems, and we're seeing more of a willingness, particularly throughout the Midwest and to some extent, here in the Northeast to have these municipalities think about some options other than just doing it the way they've always done is.

So we are seeing that as a result of the economic downturn, the continued pressure on the municipal budgets, the continued pressure on State budgets and the lack of funding coming from both the States and the Federal Government that more of the municipalities are at least having a dialog.

Now, as far as trying to close some of them by the end of the year, it does take a while to bring these things from the discussion stage until closing, so I wouldn't necessarily expect the flood gates to open between now and the end of the year, but it certainly is a positive sign that we're beginning to see some of them entering the front end of the pipeline.

And let me ask Ellen to speak to some of the rate issues.

Sure, good morning. In terms of the rates, let's start with the recently-announced decision by Illinois where we did get a 10.35 return on equity and an acknowledgement of all of the infrastructure and costs that we've put into the system. As with anything, I think when you continually file rates, everyone will react, but again, we're watching that very closely. We're making sure that we are communicating both with the public as to the quality of our investment, as well as with the regulators as to the necessity of that investment, and the push-back we're seeing, I think is no different than we see with any normal rate case that's filed right now.

Okay, thank you Ellen.

Ryan Connors, Boenning & Scattergood.

Good morning, this is [Michael Rumberg] sitting in for Ryan. Just a question regarding the rate cases coming up. With all the inflationary pressures that we're seeing in the electric and gas spaces, we guess that some of the regulators are a little bit overwhelmed. If this is true, then it seems like it would have some impact on water utilities in that their request would either be fast tracked or alternatively swept under the rug, increasing lead times, etc. Can you provide some color on whether and how you see this affecting water utilities, and more specifically American Water's ability to get rate increases?

I have to admit I, we haven't seen that nor have we heard that on the ground. I mean it is unfortunate that there may be more activity in front of the public utility commissions across the company as a results of inflationary pressures and the like. But we have not, certainly New Jersey being a good example, we've not seen any indication that we're being swept under the rug or we're getting second billing.

I think all of the commissions that we've dealt with across the country take their responsibility very seriously. They do what they need to do to meet their regulatory and legislative mandates to process cases in as timely a fashion as possible. So the fact that we're getting a tick-up in some expenses or some electric companies filing again now that they're stay-[off] periods have ended, we really haven't experienced that kind of push-back or delays in any of the commissions that we're dealing with.

Okay that's helpful, and switching gears a little bit, based on trends in July and August, do you expect weather issues that hurt volumes in the second quarter to normalize in the third quarter?

I think it's fair to say we've not seen any floods in July like we saw in May and June, but beyond that, it's really premature to make any comment about what the weather is going to be or what normalization might be.

Sure, okay, and then just one last housekeeping question. We saw that depreciation was down year-over-year, and given the heightened level of CapEx, we I guess would have thought that depreciation would have been a little higher. Can you provide some color on that?

Sure, remember depreciation is always a function of the type of assets that we're putting in and the life of those assets, and a lot of money we are spending on infrastructure, pipes in the ground, etc., which have a very long depreciable asset as granted to us by the regulators. We do work with the regulators over the composite life of any asset. So I think what you're seeing is a slight mix in how we're spending the dollars, and therefore on longer-lived assets.

Great, thank you.

(OPERATOR INSTRUCTIONS).

Heike Doerr, Janney Montgomery.

Good morning, hello everyone. Two quick questions; Ellen you mentioned that the industrial consumption was down 2.8% I believe is the number you gave. Can you quantify how much of that is weather and how much of that is economic slowdown impact?

We generally don't have that kind of breakdown, but I can tell you we are not seeing in any of our areas right now any of the industries going out of business. We're not seeing any impact where major, we've lost major customers along those lines right now, Heike.

Okay that's helpful. And can you refresh our memory how that Trenton approval is tied in to the rate case, and should the commission come back and say that the $100 million I believe you requested in rate base is too high; how does that process go if you go back to Trenton and renegotiate that? Can you walk us through some of those scenarios?

Well, we can, to some extent we'll be speculating, but I think that the fundamental thing to remember is that our contract with the City of Trenton is that we, the $100 million is the purchase price to be included in rate base. If the PUC would decide for whatever reason that $100 million was not the appropriate price, our contract with the City of Trenton is that we will only pay them what is included in our rate base.

So how it would work mechanically I'd be speculating about somewhat, but practically, if the PUC were to say that we're going to approve something less, our obligation is to only pay what they're including in the rate base, and that's what we would pay for the asset, assuming Trenton was prepared to accept that.

Yes, the only other thing I'd add Heike is that the $125 million that we did apply for as a rate increase did include in it the capital invested in Trenton. So if we pay less, we might see that $125 adjusted accordingly to reflect the amount that's in the rate base.

Great, that's helpful, thank you.

Tim Winter, Jesup & Lamont.

Good morning Ellen and Don. There's been a number of positive developments in the California regulatory environment with revenue stabilization, expense stabilization, and streamlining the rate cases. Where is your California subsidiary on the rate case front and implementation of these mechanisms?

In terms of rate, revenue stabilization, we've just done, or about to do our initial filing in that area. We have filed our general rate case and we have filed for an overall return on equity to be applied to all of our rates, and I would have to check, but I don't believe it's until 2010 that's when our total three-year cycle begins for all of our rate cases. So we are not this coming year, but probably the year after, 2010 or '11, and Tim I would have to get back to you on that.

Okay, and then in Pennsylvania, I know you got a rate increase in late last year, but what kind of rate case cycle are you on? Is it like Aqua Pennsylvania, a two-year cycle? And the reason I'm asking is because of a constructive decision with the higher allotted ROE that your neighbor just got, will you be filing some time later this year or early next?

I would first remind you that we do have the disk in Pennsylvania, and that disk allows us to spend up to 7.5% of revenue, or to get an increased rate to 7.5% of revenue, and we would time our rate cases accordingly to match when we feel our expenses have gone, increased enough to go in for a rate case, or we're not recovering enough of our capital under the disk program. We're really governed by our own expenses and making sure our services are appropriate rather then necessarily by what others are doing in the industry.

Faisel Khan, Citigroup

In your prepared remarks, you mentioned that your production costs were up but generally aren't those production costs captured in your rates?

It depends on the State and the regulatory environment Faisel. In some States, for example California purchase water increases we get to treat through a balancing account. We also get to do that in a couple of our other States. Fuel and power though as they go up, that's part of the concept of the regulatory lag. So unless we have it covered in rates, if they go up above what we have in rates, there is a lag between that and when we apply for new rates.

But the production costs that you mentioned in the second quarter, are those kind of ongoing higher production costs then you'd modeled in the past or are they kind of -- or is that more of a regulatory lag that's taking place?

That is a little bit, it's a combination of both. One is just regulatory lag, and then second, we are seeing a slight increase in purchased water because of the cost of electricity to our provider, and we are seeing an increase in chemicals and I believe everyone is seeing the increase in fuel.

Sure okay.

Just a little further color on that regulatory lag. To the extent that we have, as both Ellen and I noted, multiple rate cases pending, we have had and continue to have the opportunity to update some of those costs during the pending regulatory cycle so for instance, in New Jersey where we filed the early part of this year, we have the opportunity to update our costs in the case to try to capture some of these higher costs prospectively.

But given that we have to absorb them now, and we haven't had a rate case decision in New Jersey for a year-and-a-half, I mean, we're essentially eating those costs right now. But the fact that they are going up while the case is pending as opposed to just having settled the case recently, we do have the opportunity to try to capture them in these current filings.

I got you. And in terms of the year-over-year volume decline, I understand a lot of that is related to weather, but is there any way for you to quantify how much of that could be also related to conservation?

At this point, a lot of what is related to conservation generally we find is offset by, to a great extent by organic growth. So we would feel the majority of this decline is really weather related.

Okay fair enough, and is there any update on RWE's ownership position in your Company and when, and the timing of when they might monetize that position?

No, the last official statement that they've made that we continue to repeat is that their expectation is to be below 50% before the end of this year. So we would expect that there would be a second traunche sometime this year but there's no further details or announcements with regard to size or timing on that.

(OPERATOR INSTRUCTIONS.)

Okay and at this time, being no further questions in queue, I will now turn the conference over to Don Correll for closing remarks. Please go ahead.

All right, well thank you very much for everyone's attention. This does conclude today's call. I want to thank all of you for joining us, and if you do have any more questions, please feel free to contact the Investor Relations directly, and I'll turn it back to the Operator.

Thank you, and this does conclude today's conference call and webcast. You may now disconnect at this time. Have a good day.