美國水務 (AWK) 2008 Q4 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to American Water's 2008 Fourth Quarter and Year-End Earnings Conference Call.

As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation through the Company's website, www.amwater.com.

Following the earnings call, an audio archive of the call will be available at 11:00 a.m. Eastern Time today by dialing 800-475-6701 in the US and 320-365-3844 for international callers. The passcode for replay participants is 982411. The call replay and online archive of the webcast are scheduled to be available through March 6, 2009 by accessing the Investor Relations page of the Company's website located at www.amwater.com.

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

Today's call is scheduled for one hour, including the questions and answers.

I would now 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, everyone, and welcome to American Waters' Fourth Quarter and Year-End Earnings Conference Call. With me and [Voorhees] are Don Correll, our President and Chief Executive Officer, and Ellen Wolf, our Senior Vice President and Chief Financial Officer.

We released our earnings announcement last night, and we anticipate filing our 10-K shortly. If you did not receive a copy of the earnings release, you can find it by visiting our website at www.amwater.com.

As usual, we'll keep our call to about an hour. At the end of our prepared remarks, we will have time for questions.

Before we begin, I'd like to remind everyone that in accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are advising you that 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.

I would like to turn the call over to Don Correll.

Thank you, Ed, and good morning, everyone. I want to thank everyone for joining us today and for your interest in American Water.

It's with great pleasure that I'm able to comment on our fourth quarter and our year-end results. This time last year, we'd still not had our initial public offering, but what a difference a year makes.

American Water has been a public company since April 2008. We've had many accomplishments that the entire company can point to with pride for this past year. But before I comment on the highlights of our fourth quarter and year-end results, I think it's fair to say that even at the time of American Water's initial public offering in April, few would have predicted the economic downturn that would soon follow.

Having said that, I think that our results for the year show that despite all of the external conditions, American Water's strategy has proved to be a solid one that has allowed our business to weather these times and stay the course to provide our customers with high-quality drinking water and reliable water and wastewater services.

These strategies include investing in our infrastructure, earning an appropriate rate of return, and growing through acquisitions and public/private partnerships.

Although the country has seen credit and investment scarcity, American Water managed through the credit crunch, that reached its peak in the fall of 2008, by accessing our $840 million unsecured backup credit lines without a problem. This past November, the Company successfully completed a debt offering of $75 million aggregate principal amount, 10% senior monthly notes. We closed a similar debt offering this month of $75 million aggregate principal amount of 8.25% senior monthly notes.

Despite the harsh stock market conditions, as I mentioned in the last earnings call, the American Water share price continued to outperform both the Dow Jones and the S&P 500 indices since our IPO in April. This held true through the fourth quarter and year-end.

I should also mention American Water was added to multiple Dow Jones Wilshire Indices and to the Large Cap Russell 1000 Index since going public.

2008 was also a solid year for the Company financially.

Revenues for the quarter ending December 31, 2008 rose 2.7%, and revenues for the year increased 5.5%.

Excluding goodwill impairment charges, earnings per share for the fourth quarter 2008 totaled $0.23 per share, compared to $0.17 per share for fourth quarter and 2007, an increase of 35.3%.

For the year, again, excluding goodwill impairment charges, earnings per share grew from $0.99 per share to $1.10 per share, an 11% year-over-year increase.

Ellen will discuss our financial results in more detail a little later.

In 2008, the Company completed rate cases in 14 states, generating $206.3 million in additional revenues annualized. This includes a New Jersey rate case, which will result in approximately $72.1 million in additional revenues; the Missouri rate case, which will result in approximately $34.5 million in additional annual operating revenue; and the Illinois rate case, which will add approximately $22.7 million in annual operating revenues per year.

As of December 31, 2008, the Company has general rate cases awaiting final order in seven states that would provide $104 million of additional revenues if approved as filed. The extent to which these rate increase requests will be granted by the various regulatory agencies will vary. Again, the increase in revenues reflects a recognition of our commitment to making the necessary infrastructure investments to deliver a reliable service to our customers.

We began or completed some major projects to ensure reliability this year, including the 20 million gallon-a-day water treatment plant and 31-mile transmission main in Kentucky. Once complete, we estimate this will be an approximately $162 million investment.

We also completed a $44.5 million water treatment plant in Missouri, a $51 million water treatment plant in Illinois, and a $48.5 million water treatment plant expansion in New Jersey.

We are on plan to invest between $4 billion and $4.5 billion over the next five years in our infrastructure.

American Water also had success in growing the business with acquisitions in Pennsylvania, West Virginia, and New Jersey. In total, we had 10 tuck-in acquisitions in 2008, equating to approximately 5,000 water and 1,700 wastewater customers.

On the non-rate side of the business, we were awarded two major military contracts in Texas and Louisiana, and our homeowner services expanded its customer count to more than 680,000 customer contracts in 15 states.

This type of growth in our non-regulated business complements our regulated business and our capabilities. It also demonstrates American Water's capacity to provide water resource solutions to communities in need.

We're also pleased that we're making progress toward the acquisitions of certain assets of the City of Trenton's water system, located in four suburban townships. The transaction would add approximately 40,000 customers to New Jersey American Water's customer base.

This type of acquisition is not only aligned with our business strategy; it is a great example of how American Water can work with communities to assist them with sustainability and infrastructure issues. As the mayor of Trenton said, "This is a model of great public/private partnership."

This has been a year of successes for American Water. We appointed two additional independent board members, [Julia Johnson] and [Richard Gray]; we reinstituted a longstanding tradition at American Water, the declaration of quarterly dividend payments; and recent announced William Patterson has joined the American Water team as a Senior Vice President of Corporate and Business Development.

Bill will lead the advancement of American Water's integrated business development strategy, and he'll work to bring water solutions to communities in our existing markets, as well as pursue other opportunities, including public/private partnerships.

At the beginning of the year in Tampa Bay, American Water cut the ribbon on what is the largest seawater desal plant in the United States. Already named the Desalination Plant of the Year by Global Water Intelligence, the Tampa Bay plant was selected as the 2008 Trendsetter by Public Works Magazine and earned an award from the National Council of Public/Private Partnerships for Innovation.

The accolades for Tampa Bay followed the January announcement that American Water had also received the 2008 Excellence in Public/Private Partnership Award from the US Conference of Mayors for its partnership with the City of Buffalo.

After the first six years of working with American Water, the City of Buffalo recognized $21 million in savings through operational and financial improvements.

In April, the Company successfully completed what was one of the year's biggest initial public offerings. In conjunction with the IPO, the Company launched its new brand and communication strategy to educate our customers on the value of the services the Company provides. Nearly a half a year later, the communication plan and its materials earned 37 MarComm awards, one of the most prestigious forms of international recognition for marketing communications excellence.

And rounding out the year, the Lake Pleasant Water Treatment Plant, operated by American Water and owned by the City of Phoenix, earned the 2008 National Design/Build Award from the Design/Build Institute and recently won the outstanding award for public/private partnerships from the US Conference of Mayors.

Our Applied Water management team also won an achievement award from the Environmental Business Journal for the design build of the [Solair] in Battery Park, New York City.

The year ended in a similar fashion to how it began, with American Water being recognized for its industry-leading expertise. This expertise and the many accomplishments achieved in 2008 were due to the hard work of American Water's 7,000 employees. We're proud of the progress the Company has made in 2008, and we are excited about the potential for our future successes.

Before turning the call over to Ellen, I'd like to briefly address the 2009 stimulus package that President Barack Obama recently signed into law. The stimulus bill provides for $2 billion for drinking water projects and $4 billion for wastewater projects.

While these numbers may seem small compared to the total package, I think it's important that Congress has recognized this critical area among the nation's infrastructure challenges. Too often, because many of our assets are buried beneath the ground, the need to invest in water and wastewater systems is overshadowed by more visible crumbling roads and bridges.

While this money may represent just a small portion of what the EPA has estimated as a trillion-dollar challenge for repairing and updating water and wastewater infrastructure over the next 20 years, we're pleased that the legislation includes incentives for states and local governments to take advantage of financing and public/private partnerships.

The increase in money towards the state revolving funds, as well as the increase in the caps placed on private activity bonds, equating to about $15 billion, will allow municipalities to tap into much-needed private sector capital.

The challenge now is for the public and the private sectors to work cooperatively to make the most responsible use of this new funding. We at American Water have had a solid history working with the public sector, and we look forward to helping to deliver more water and wastewater solutions to communities and systems in need.

And with that, I'll turn the call over to Ellen Wolf to discuss the fourth quarter and year-end financial results in more detail.

Good morning, and thank you very much, Don.

Good morning, everyone. I would also like to thank each of you for your continued interest in American Water as we approach our one-year anniversary of our return to being a public company.

As Don mentioned, our results for the year and the quarter ended December 31, 2008 were driven by continued implementation of our core strategies of prudently investing in our infrastructure, applying for and receiving appropriate rates of return on that investment, while also making continuous improvements to the service provided to our customers.

Through a disciplined approach to executing our strategies, we delivered solid results in 2008 despite the unusually wet weather experienced in the Midwest states, as well as increases in certain employee-related expenses.

While the state of the economy has had some impact on our industrial sales and other aspects of our business, we continue to see growth in revenues and net income through continued focus on the rate recovery aspects of our strategy.

Also, as we will discuss shortly, our results for the quarter and the year also reflect a decline in those expenses that were necessary to enable our transition to a public company.

For 2008, American Water reported a net loss of $562.4 million, or $3.52 per common share, compared to a net loss of $342.8 million, or $2.14 per common share in 2007. Included in both '07 and '08 are goodwill impairment charges of $501.5 million and $738.5 million, respectively.

After adjusting for goodwill impairment charges in '08 and '07, net income for the year was $176.1 million versus $158.7 million in '07, and earnings per common share was $1.10 and $0.99, respectively, resulting in an approximate 11% increase in both net income and earnings per share year over year.

For the fourth quarter ended December 31, 2008, American Water reported net income of $36.4 million, or $0.23 per share, compared with a loss of $234.6 million, or $1.47 per share, for the comparable quarter of '07.

Excluding the goodwill impairment charge taken during the 2007 fourth quarter, 2007 earnings would have been $27.3 million, or $0.17 per share, representing an earnings-per-share growth rate of 35.3% quarter over quarter.

On the following slide, I'll be discussing in more detail the main drivers of the growth from 2007 to 2008. A more detailed discussion of our 2008 results will be provided in our 2008 Form 10-K, which we anticipate filing shortly.

For the year, American Water reported revenues of $2.3 billion, a $123 million increase in revenues, or 5.5%, over the $2.2 billion reported in 2007.

Revenues from our regulated business increased by $95.2 million, or 4.8%, from 2007 to 2008. The non-regulated business's 2008 revenues increased by $29.5 million, or 12.2%, compared with '07.

For 2008, regulated revenues increased by $132.8 million, primarily due to rate awards and various surcharges granted by regulators in both 2007 and 2008.

We received $206.3 million and $158.9 million in annualized rate authorizations in '08 and '07, respectively. By comparison, in 2006, we received only $41.3 million in rate awards. This is one example of our commitment to executing our strategies. Regulated revenues also increased slightly due to organic growth and tuck-in acquisitions.

As I mentioned earlier, offsetting the impact of rate awards on our regulated revenue was a decline in water sales, driven mainly by historically wet weather in our Midwest state operations, as well as less dry weather compared to 2007 in the Mid-Atlantic region.

To a lesser extent, we continue to see a reduction in per-customer consumption, and the economic downturn appears to have also reduced industrial and other sales. As a result, reduced overall demand offset revenue increases from rate awards by $52.3 million.

The overall demand reduction can be seen in our water sales volume for the year. For the Company as a whole, sales volume decreased from 2007 to 2008 by 18.5 billion gallons, or 4.4%. Our residential customer usage decreased 4.2% to 214 billion gallons. The volume of water sold to commercial customers decreased by 3.3% to 89.9 billion gallons. And the volume of water for our industrial customers decreased 5.8% to 42 billion gallons.

This year's increase in revenue for the non-regulated business comes mainly from our contract operations group and homeowner services group. For the year, revenues from our contract operations group increased by $31.1 million, a result of incremental revenues derived from a design/build/operate project for a large treatment plant, as well as from military construction and [L&M] contracts in Texas and Louisiana.

Our homeowners' services group revenues increased by $7.1 million due to increased penetration within its existing customer base and expanding into new markets. These increases were partially offset by the decline in design and build activity for smaller facilities associated with new housing developments. This is the result of the downturn in the new home construction and primarily impacted our applied water management group.

For the fourth quarter of 2008, American Water reported revenues of $568.6 million, a 2.7% increase in revenues over the $553.8 million reported in the fourth quarter of '07. This included a $15.7 million, or 3.2%, increase from our regulated business and a $2.6 million, or 3.9%, increase from our non-regulated businesses.

For the fourth quarter of 2008, regulated revenues increased by $32.6 million from rate awards and various surcharges in the fourth quarter of '07 and throughout '08.

During the quarter, we received rate authorizations totaling $120.1 million in regulated revenue. Two of these rate awards granted in our larger operations of New Jersey and Missouri were received in the latter half of the first -- fourth quarter and will be reflected in our 2009 revenues.

As was the case for the entire year, the increase in revenue for the quarter from rate awards was offset by declines in demand associated with weather and per-customer usage.

Throughout October, we continued to see the impact on our revenue of the unusually wet weather in the Midwest and also experienced wetter weather than normal during the quarter in portions of the West.

The economic downturn appears to have had a more noticeable impact on revenues in the fourth quarter. Compared to the same quarter of '07, water sales volume decreased in the fourth quarter by 7.1 billion gallons, or 6.7%. Our residential customer usage decreased 6.3%, commercial customer usage decreased 5%, and industrial customer usage declined 11.6%. The reduction in water sales volume offset our increase from rates by $27.3 million.

For the quarter, revenue growth totaled $2.6 million in the non-regulated businesses for reasons similar to that for the full year.

Taking a look at our expenses in 2008, operating expenses for the year increased by $324.7 million, compared to the same period in 2007, primarily the result of an increase in impairment charges of $240.7 million over last year.

Adjusting for goodwill impairment charges of $750 million in '08 and $509.3 million in '07, operating expenses increased by approximately $84.1 million, or 5%.

Operating expenses of our regulated business increased by $63.9 million, or 4.3%, from $1.49 billion last year to $1.55 billion this year.

Directly related to the increase in revenues, our non-regulated businesses saw an increase in operating expenses of $22.8 million.

Overall, employee-related expenses for the year increased $42.2 million, or 9.1%, compared to the prior year. These expenses consist of salaries and wages, pensions, group insurance, and other benefits.

Salary and wages increased $27.3 million over last year. With a focus on continuous service improvement, salaries and wages increased due to growth in number of employees, wage rate increases, and other compensation expenses.

This included stock-based compensation expense of $3.7 million, mainly related to the issuance of awards granted in connection with our April IPO, as well as $4.3 million of wages related to job reclassification of certain hourly employees for services performed.

Associated with the increase in employees, other related expenses, such as the 401K and defined contribution benefit plan, our stock purchase program, and group insurance increased $2.5 million, or 3.9%.

In addition, our pension expense increased by $9.3 million, or 31%, over 2007. Our pension costs could increase substantially in 2009 as a result of the stock market performance. I'll be discussing this in more detail shortly.

During the year, consistent with economic trends, we experienced an increase in our production costs of approximately $10.5 billion, or 3.8%. This includes fuel and power costs, chemical cost, waste removal, and purchased water cost.

Chemical costs increased 12.5% due to escalating prices, as well as additional usage requirements related to weather-related source-of-supply conditions in some states.

Whenever possible, we seek to manage the timing of chemical and other production cost increases to correspond with rate recovery procedures. Our other production cost increases were more modest and held relatively flat.

Operating supplies and services decreased $10.2 million, or 3.5%, for the year, compared to the same period in '07. The majority of the decrease was due to lower expenses incurred to ensure our compliance with Sarbanes-Oxley and remediation of any material weaknesses. For the year, these costs decreased by $22.6 million.

Our Sarbanes-Oxley remediation costs are substantially complete, and I will provide further information regarding our SOX status later in the call. Higher contract services expenses in our contract operations group associated with the design/build/operate project offset some of the decline in the SOX cost.

Maintenance, materials, and services, which include emergency repairs, as well as costs for preventive maintenance, increased $8.3 million, or 6.5%, to $136.3 million in '08. The main driver of this increase was the higher cost of removal expenses of $5.5 million in certain of our operating companies and an increase in expenses of $1.7 million as a result of higher-usage frequency for our service line protection customers.

Customer billing and accounting expenses increased by $5.8 million, or 15%, for the year. As I spoke about on our last call, this increase was primarily due to an increase in uncollectible accounts in the third quarter. We have addressed this by implementing stricter and earlier shut-off practices. We can see the benefit of that action by the reduction in uncollectible expense in the fourth quarter of 2008 compared to the prior year.

Uncollectible accounts also increased in our non-regulated businesses by $2.9 million, primarily related to uncertainty around the collection of receivables from home developers, a result of the downturn in new home construction activity.

Depreciation and amortization expense increased by $3.9 million, or 1.5%, when compared to '07. This increase is primarily associated with additional utility plan assets being placed in service. Our weighted average composite depreciation rate for 2008 was relatively unchanged when compared with 2007.

General tax expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by $15.9 million, or 8.7%. The increase for the year is primarily due to increased gross receipt taxes of $7.6 million in New Jersey, where gross receipt taxes are assessed based on prior-year revenues.

There's also higher property tax expense of $4.2 million in a number of our states, and additionally, payroll taxes increased $2.7 million, consistent with our increased salaries and wages.

Other items affecting net income not included in operating expenses are interest expense and allowance for funds used during construction, or AFUDC.

As we relayed on our last call, we continuously monitor the capital markets, both debt and equity, to most efficiently fund our capital needs.

Interest expense, the primary component of our other income, increased by $2 million for the year compared to '07. The increase for the year is primarily due to the increased borrowings associated with our capital expenditures. Offsetting the change in interest expense is an increase in AFUDC of $11.5 million for '08 as a result of increased construction work in progress.

Our consolidated provision for income taxes increased $25 million, or 28.8%, to $111.8 million for the year as a result of our increase in pretax income adjusted for the impairment charge.

I would like to spend only a few minutes on our operating expenses for the quarter as many of these areas have already been touched upon in discussing the year-over-year results.

Operating expenses for the fourth quarter were $439.5 million in '08 and $708.9 million in '07, resulting in an overall decrease of $269.4 million.

In 2007, operating expenses included a goodwill impairment charge of $266 million. Excluding the effect of the impairment, operating expenses decreased $3.7 million. Operating expenses of our regulated businesses increased by $2 million, or 0.5%, from $382.8 million last year to $384.8 million this year. Our non-regulated business experienced a decrease of $3.4 million, or 5.3%, from last year.

For the quarter, employee-related expenses decreased $2.3 million, or 1.9%, over the fourth quarter of '07. The decrease in expense is a result of reduced group insurance expenses related to post-retirement benefit expenses, including a subsidiary's rate case regulatory asset adjustment.

Production costs did increase by $2.2 million, or 3.4%, from $65.5 million in the fourth quarter of '07 to $67.7 million in '08. Increases in chemical prices were largely responsible for this increase.

Operating supplies and services decreased by $7.6 million, or 9.2%, to $74.8 million in 2008. Costs associated with our SOX compliance efforts were $6 million lower than in the prior-year quarter and was the most significant driver of this decrease.

Maintenance, materials, and services expenses decreased by $8.7 million due to several factors, including lower tank-painting costs and other maintenance expense reductions in several of our regulated subsidiaries and in our non-regulated contract operations group.

And in 2008 for the quarter, customer billing and accounting was $1 million less than the same quarter of the prior year due to lower uncollectible [inaudible - technical difficulty], and general taxes increased $5.7 million in the fourth quarter of '08 compared to the same quarter in '07. The reasons for this increase parallel those for the yearly increase.

Other items affecting net income in the quarter not included in operating expenses are interest expense and AFUDC.

Interest expense increased by $1 million, or 1.4%, for the fourth quarter of '08, compared to the same period in the prior year.

And similar to the full year, the increase for the quarter is primarily due to the increased borrowings associated with capital expenditures.

Offsetting the change in interest expense is an increase in AFUDC of $2.6 million over the same quarter of last year.

Our consolidated provision for income tax increased $15.6 million, or 122.8%, to $64.6 million for the year, as a result of our increase in pretax income.

We continued to file and receive rate case awards during 2008. Rate authorizations were received in New Jersey, Missouri, Pennsylvania, Illinois, Indiana, West Virginia, and Arizona, as well as other states.

Of these, we received authorizations for additional annualized revenues from general rate cases in Ohio, Missouri, Pennsylvania, and New Jersey in the fourth quarter, amounting to approximately $115.5 million.

For the year, we received authorizations for additional annualized revenues from general rate cases of $187.7 million, assuming constant sales volume.

Our allowed ROE for the rate cases finalized during 2008 were generally above 10%, with the range being from 8.8% to 10.8%.

Several of these rate cases remain outstanding. While we are awaiting the final orders in seven states, one of which is for Hawaii, which did put in interim rates, the six other states, we're awaiting final orders for general rate cases filed in '08, requesting additional annualized revenues of $102.7 million. There's no assurance that the filed amount or any portion thereof of any requested increases will be granted.

As Don mentioned earlier, we either completed or started some major projects this year, all reflecting our continued commitment to providing water resource solutions to communities in need and our commitment to our customers to continue to deliver reliable service.

Consistent with this commitment, our capital expenditures for the year were about $1 billion. To fund these investments, we utilized the equity infusion of $245 million, incurred incremental debt of $270 million, and used our cash flow from operations.

In 2008, our cash flow from operations was $552.2 million. This represents a $78.5 million, or 16.6%, increase over the prior year.

As of December 31, 2008, American Water had approximately $369.1 million available capacity under its $840 million credit facility and had no outstanding commercial paper.

As of February 23, 2009, we had outstanding commercial paper of $178.5 million, and we had $345 million outstanding under our credit facility. We also, during the fourth quarter, successfully completed a debt offering of $75 million aggregate principal amount of 10% senior monthly notes due 2038, and then subsequent to year-end, we issued an incremental $75 million at 8.25% under similar terms and conditions.

Earlier, I had mentioned a significant increase expected in our pension expense for 2009. Similar to other businesses, due to the impact of the decline in the capital markets in 2008 and the resulting losses in our pension plan in 2008, there is a potential for a significant increase in our 2009 pension expense to the extent that we're not able to minimize any regulatory lag or otherwise recover the increase through rates.

This is a direct result of the volatility in the capital markets and is not germane to our company or industry or the quality of the investments we had in our pension plan.

Because of the current volatility in the capital markets, pension expenses might also be somewhat volatile over the next few years. We are prepared to navigate through these potential volatile times and expect to make sufficient cash contributions to our plan to avoid any at-risk status.

This year, as many of our continued remediation efforts to address the material weaknesses that we had mentioned in the past quarters, we established necessary policies and procedures and taken actions that we believe address the areas of material weaknesses.

Based on these actions and the length of time controls have been operating at a level that would prevent or detect a material misstatement in the consolidated financial statements, we no longer consider control deficiencies to be material weaknesses as of December 31, 2008 except for control deficiencies relating to the maintenance of contracts and agreements, which, in our opinion, does remain as a material weakness until we can complete further testing in the first quarter of this year.

As of December 31, 2008, the Company had incurred $58.4 million to remediate these material weaknesses and to document and test key financial reporting controls.

As a condition of state PUC approval of the RWE divestiture, we agreed that costs incurred in connection with our initial internal control and remediation initiative would not be recoverable in rates charged to our customers.

As you know, in the fourth quarter of '08, American Water filed a registration statement with the Securities and Exchange Commission relating to a proposed sell-down of shares by RWE and new shares by American Water of its common stock. That statement remains on file with the SEC. Any progress of that offering remains subject to market conditions, and due to legal restraints, we cannot discuss the matter any further on this call or in our question-and-answer portion.

And, finally, as Don mentioned, we are proud to announce that since going public, we have reinitiated our quarterly dividend, and in 2008, we declared and paid two quarterly dividends. Additionally, we began the year by declaring our first quarter 2009 dividend.

Our policy, subject to approval by our board of directors, is to declare and pay a dividend on the quarterly basis of $0.20 per common share, and in the long run, we do expect to have a payout ration in the 50% to 70% range of net income.

That concludes our prepared statements on American Water's year-end and quarter financial results. To echo Don, it is a great feeling to be a public company again and to be able to relay our year-end results to those of you who are interested in investing in our Company.

Thanks again, and [with] that, I'll turn the call back to Don.

Thank you, Ellen.

In closing and before we move to the Q&A, I want to repeat some of American Water's attributes that we discussed on this call.

We demonstrated our leadership through the third party recognition received and the awards we earned throughout the year.

We grew our revenues to our commitment to invest in our infrastructure and to seek an appropriate rate of return.

The increase in revenues also reflects our progress in the regulatory process, contributing to our favorable risk profile.

And our management team led the company through one of the year's largest IPOs and one of the largest utility IPOs in US history, all while we implemented our core strategies.

2008 has been a strong year where we met our stated earnings goals, and while acknowledging the challenge that our company and nation face, we remain committed to achieving the goal that we laid out at the time of our IPO, growing our earnings per share in the 7% to 10% range over the long term.

With that, I thank you for your continued interest in American Water, and I'll turn the call back to the Operator for our question-and-answer period.

Thank you. (OPERATOR INSTRUCTIONS)

And our first question is coming from the line of Maria Karahalis from Goldman Sachs. Please go ahead.

Thank you. Good morning. Two questions, please.

The first is can you discuss a little bit how you may be able to recover potential -- current and potential higher pension expenses and higher debt expenses in rates going forward?

And, secondly, can you give us an update on your expected timing for Trenton and how we should be thinking about the incremental revenue that may come from that asset? Thank you.

Let me take your first question on how to recover the pension expense and the debt expense.

Pension expense, half of our states, we are on what's called -- are under FAS 87 rules, and the other half, we are under ERISA rules.

For those where we are under ERISA rules, we are able to set up the pension expense as a regulatory asset, and so we'll be recovering it over time.

For those under FAS 87, we are starting a process where we will be discussing with the regulators how we may go about also potentially setting up an asset for that or talking about how we may find a way to put that in rates outside of a rate case cycle.

And then, finally, for those where we are in the process of a rate case right now, we are going to go in and ask if we can update that rate case to include the new costs that are related to pensions.

On the debt expenses, we timed the raising of our debt to generally coincide with the rate case filings so that we are raising the debt or going into long-term debt about the time we go in for rate cases, and then we would be able to recover it through that rate case.

Your second question was relating to Trenton. Just as a reminder, this is a project that we started on at American Water almost two years ago. There was a procurement process that the city went through. We were the successful bidder, and then we had to go through the negotiation of a contract and then ultimately a regulatory approval.

The last step has proceeded through the regulatory approval process. We have a signed agreement with all of the various parties of interest. The signed agreement has received the necessary approvals from the City of Trenton Council, and it is subject now to BPU approval, and we're hopeful that that's something that might happen within the next 30 days.

We, obviously, can't predict the actual timing of that kind of approval, but the agreement is before [then], it's been approved by the administrative law judge, and it is subject to the BPU's approval. So we're hopeful that if that happens in the next 30 days, that within two to three months from that period, we would be able to proceed with the closing, and that's the status of it today.

Okay, thank you, Don.

Thank you.

Thanks, Ellen.

Thank you. Our next question will come from the line of Debra Coy from Janney. Please go ahead.

Yes, thanks. Good morning, all.

Morning.

Good morning.

Two questions, as well, one on the consumption decline.

Ellen, thanks for the detail on the various customers impacted, but can you break down on a relative percentage basis how much of it you think was weather related versus how much may have been conservation or economic related?

And, obviously, the reason for my question is if we assume normal weather, always a difficult assumption, but if we could count on normal weather going forward, what would be the impact? How much of the decrease do you think was weather versus these other factors?

Yes, Debra, it's extremely hard to break that down into the consumption versus weather versus economics, namely because it's hard to tell what's driving it unless we go knocking door to door. I think on the customer side, consumer side, most of that is either weather related, very little consumption related.

As I mentioned earlier, where we are starting to see more of the economic impact is on the industrial side, and again, particularly in the Midwest area, which is connected to the auto industry, very heavily connected to the auto industry. And so I would think on our industrial side is where you may see more of the economic impact. And then on the consumer side, I think some of that is consumption, but the majority of it is weather.

Well, we would expect to see the industrial -- we could expect to see that continue through 2009, most likely?

I guess it will depend, on some cases, what happens in other industrial sectors. For example -- I can give you one example. In January, some of our industrial customers were closed down two days a month. They're back being opened through February. So it really does depend on what's happening in their related industries.

Okay. That's helpful.

And then, secondly, on the capital spending side, Don, you mentioned that you're on track for the $4.5 billion over the five years, $1 billion of that obviously in the first year of the five.

Can you talk a little bit more about your CapEx plans for 2009 and perhaps some of the individual states, such as Governor Corzine asking for utilities to step up CapEx, kind of as an economic stimulus? How are you thinking about CapEx for this year given the uncertainties in the debt and equity markets, particularly the equity market?

Thank you for the question. It's obviously a very valid question given these economic times, and that's something that we looked at very carefully the fall of last year because while we were committed to the anywhere from $800 million to $1 billion range, which is how we get to our 4 to 4.5 over the next five years, you can only spend it if you can access the capital markets. Since we do need to -- we don't generate all of our funds from internally generated operations, we need to have access, whether it's debt or equity.

And we, like every other business last fall, took a hard look at what might we need to do under a variety of contingency plans.

We are still prepared to be in the $800 million to $1 billion range going forward. We've had to adjust a little bit based upon some of the activities last fall, so we're probably at the lower end of that for 2009. But we still have confidence, borne out by our recent ability to raise some debt, to be able to continue to fund this at this level going forward. We certainly want to be able to access both the debt and the equity markets going forward, but we are looking to spend at that level for 2009.

Frankly, we have always invested in, to use your example, in New Jersey, and Governor Corzine, I know he has had some initiatives for the energy companies, and we're doing -- we have always invested $100 million, give or take a little bit, in New Jersey and continue to plan to do that.

We have an application pending before the New Jersey Board of Public Utilities now to implement something similar to what we have in other states, where we would have an infrastructure surcharge. And we're encouraged that it's getting some momentum now and that that will also support the continued investment in infrastructure in New Jersey, as well as in other places.

So we're -- we don't see ourselves returning to the days of our industry where we were replacing our infrastructure on a 3 to 500-year replacement cycle. We think it's important to be doing it in accordance with the physical lives of the assets, which is more like 100 years for some of the long-lived pipe, and we're committed to doing that throughout our systems.

Okay, that's helpful. And then just one follow-up on that.

Ellen, you talked through the source of capital for 2008, and I know you can't comment on the equity offering per se, but can you talk through the sources of capital for the 800 for '09? Assuming perhaps somewhere again in the 500-plus million operating cash flow range, then that would leave you about $300 million or so, what you still have left on debt capacity versus what you'd need to raise on equity to meet that 800?

Without going through specific numbers, Debra, we will address our capital needs through, as you mentioned, operating cash flow, raising of debt, and raising of incremental equity so that, as we've told the market before, our goal is to be between 45 and 50% equity in our debt-equity ratio.

We'll also be -- to the extent we qualify, be looking for debt through the economic stimulus package, and the items that Don had mentioned earlier, to the extent we can access that, we will also be looking to access that source of cash.

Thanks.

And then just the last question. Just to follow up with Maria's question on the pension expense, can you just roughly characterize which half of the states allow the regulatory asset versus which half don't? In other words, is it your bigger operating states that allow that or smaller? Kind of how would we drop [inaudible] the customer base into buckets?

It's about 50/50, Debra.

50/50 on customer base, not just number of states?

Yes, that's correct.

Okay, great. Thank you.

Sure.

And next, we'll go to the line of Ryan Connors from Boenning & Scattergood. Please go ahead.

Good morning.

Morning, Ryan.

A question for you on the issue of rate cases. We spend a lot of time talking to the municipal utilities to try to get an idea of which -- what the key trends are in the industry, and one of the things we're hearing is that a lot of the municipal utilities are trying not to raise rates in this environment just given the economic times and the pressure on the consumer, etcetera.

So my question is, to the extent that is the case, does that make it tougher just politically for you all to try to sell your own rate cases? And if so, how do you see that impacting the $100 million plus that you have pending, and then anything that's filed in the near term?

Well, thank you for the question, Ryan. Good times -- good economic times or bad economic times, we spend a great deal of effort not only with our regulators but with all of our customers explaining the value of the service that they're receiving and the value of the product that we're delivering, the reliability of it, whether we're in inflationary times, recessionary times, or good economic times.

We know that there are some who will point to the difference between municipal rates and our rates, and that is an ongoing educational process that we have with our customers and with the regulators, also, because it's not only in tougher economic times that we find that some municipalities don't invest; it's also in good economic times. And the fact is you're just delaying the inevitable.

We have -- part of our 100-plus-year history is to continue to invest in the pipes and the infrastructure and in the pumps and in the water treatment and the dams, and that's not always the case of a consistent investment by many municipal or government systems. There are some who do that, but there are quite a few that don't.

So when we're continuously investing and some of them aren't, just by definition, the investment cost of the infrastructure costs that we put in the ground are going to be higher than some of theirs, and that will cause a rate differential. So I don't see it as being any more or less difficult to explain that to regulators today than in the past, and this is a long-term business, and you have to explain it that way to your customers and to your regulators.

Ryan, if I could just also add, while we cannot predict the future, we need to -- we can only take a look at the most recent decisions in both New Jersey and Missouri, where even though those were large increases, they were a continued recognition by the regulators that even in these times, they need to encourage us to continue to put money into the infrastructure, and they do see a connection between that and the jobs that it creates. So, again, we can only look at the past right now.

Great. That's helpful.

And then kind of staying on the same theme, one of the other things that we hear in our conversations with the municipal side is many of them say that the costs have been stubbornly high for things like the basic materials, the hydrants, the valves, etcetera, that the cost for those things have not come down as much as they may have expected given the steep declines and the underlying input costs, the commodity prices.

So I'd be interested to hear what you're seeing there, whether you're seeing those things not coming down, also, and if so, how that impacts your outlook in terms of operating costs for '09?

In terms of the capital, hydrants, etcetera, all of that goes into our capital budget, and that's included in our $4 billion to $4.5 billion.

In terms of commodity prices, as I've said, we had seen the drastic increase in chemicals. I think you, as well as the rest of us, can see what's happening with fuel prices. It sort of hit a high mid-summer, and it's been coming down since, and we did not see much of an impact of that, as I mentioned, in the fourth quarter. What really drove our expenses in the fourth quarter were the chemical costs, which some of those still have continued to remain high.

Okay, great. Thank you.

Thank you.

Next, we'll go to the line of Tim Winter from Jesup & Lamont. Please go ahead.

Good morning, Ellen and Don.

Morning, Tim.

Morning, Tim.

Thanks for quantifying some of the customer segment. I was wondering if you could quantify the industrial revenue decline for the quarter and the year, and if there is any more color there. Are there large industrial customers that have shut down, or is this a seasonal thing, you know, with trying to deplete inventory at year-end?

Sure. In terms of quantifying it, as I mentioned and Ed mentioned earlier, we will be filing our 10-K shortly, and I think at that point, there's a lot more detail in there that I would ask you to go through. It is difficult for us to quantify each and every one in terms of dollars because every state has a different industrial customer rate, but as I mentioned, the Midwest seems to be the area right now.

We're not seeing any customers -- a lot of customers closing up on the industrial, but we do see they may close for a day or two, which they hadn't done before, and we are seeing a couple of bankruptcies but not significant that it would make a huge impact at this stage.

Okay. And can you remind me where your California American subsidiary is in the implementation of the [ram] or the decoupling? Did -- where is --

Yes, as you know, we have a couple of rate cases outstanding right now. One is on the rate case for the overall return on equity. We have a couple that have been filed, individual areas, and then, finally, we will be filing the one consolidated rate case, where I believe this will most likely be addressed in another year. We do have it in one of our smaller subsidiaries out there, and that is going through the process right now and--.

So, for the most part, you have not experienced a benefit of the decoupling yet?

Not at this point, although we do have ram accounts on a couple where we have been able to start to see some benefit, and that would be '09, not in '08.

Okay. Thank you.

Thank you.

Thank you. Next, we'll go to the line of [Jonathan Reader] from Wachovia. Please go ahead.

Morning, Ellen and Don.

Morning, Jonathan.

Morning.

Two more questions I have. Most of them have been asked, but is there any way you can quantify the increase in the 2009 pension expense or just give us a rough ballpark as it's still probably a bit of a working number?

It is very much a working number, and again, we have -- I think if you would wait to take a look through the financials, the 10-K, both the pension footnote, as well as further disclosure in the liquidity section about our increase in cash contributions, that will help you get there. And, again, remember that some of our states are ERISA-type states.

Okay. And then the last one, could you just talk about, I guess, what you're expecting as far as the weather-normalized sales trends go in 2009? I mean, obviously, 2008, we saw the deceleration as the year went on. Are you seeing, I guess, a stabilization? At what point during the year might it kind of pick up? Maybe you can just kind of expand on that?

If I could go to the consumption area, I think as you look through both our S-1 and 10-K, you will see that we do expect and have seen continuously a decrease in consumption, ranging from 0.6 to 1.5%, and that's a sort of 10-year average as it goes down. So once you normalize for the weather, we do expect to continue to see that consumption decrease, and that is also -- well, we do try, but it's part of the regulatory lag that you'll see in our ROE between our net income and our authorized returns of, let's say, 10%. You'll see a lag. Generally, it's related to this decrease in consumption, as well as increases in expenses. So we do expect to continue to see a decrease in consumption along those lines.

[Inaudible] on kind of the economics. I mean I know it's hard to separate it out, but I'm trying to get at more just, you know, through the economy, not just the long-term, I guess, declining consumption trend.

And while I appreciate where you're trying to get to, I don't think we could predict what's going to happen.

Okay. Thank you.

Thanks.

This concludes the question-and-answer portion of the call. I would now like to turn the conference over to Don Correll for closing remarks.

Well, thank you all for joining our call and your continued support of American Water. This does conclude today's call, and if you have any more questions, please feel free to call our Investor Relations team directly.

And I'll turn it back to the Operator now. Thank you again.

Thank you.