美國水務 (AWK) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to the American Water's 2009 first-quarter 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 at www.amwater.com.

Following the earnings conference call, an audio replay of the call will be available at 11 A.M. Eastern time today by dialing 1-800-406-7325 for US and 3035903030 for international callers. The pass code for the replay is 4058090. The call replay is scheduled to be available until May 13, 2009, and the online webcast is scheduled to be archived through June 3, 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 the managements' prepared remarks, we will open the call for questions. (Operator Instructions). Today is scheduled for one hour, including questions and answers.

I would now like to introduce our host for today's call, Mr. Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, please go ahead.

Thank you. Good morning, everyone, and welcome to American Water's first-quarter earnings conference call. With me in 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. If you did not receive a copy of the earnings press release, you can find it by visiting our website at www.amwater.com. Also, as a reminder, American Water will be hosting its annual stockholders meeting this Friday at 10 in the morning Eastern daylight time. That meeting will also be webcast. You can find more information about the meeting on the Investor Relations pages on our website.

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

Before we begin, I would like to remind everyone about forward-looking statements. During the course of this conference call, the Company will make certain forward-looking statements. Because these statements deal with future events, they 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. The risk factors are set forth in the Company's SEC filings.

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

Thank you, Ed, and good morning, everyone, and thanks for joining us. Today, we will be commenting on our first-quarter results. And as Ed mentioned, later on this week, we will be hosting holding our first shareholders meeting since going public over a year ago.

Hopefully by now, all of you have had a chance to also check out our online annual report. Taking this approach is part of our commitment to being responsible environmental stewards. We also believe it is a much more engaging way to communicate with our shareholders and really brings our Company to life.

Since the site launched at the end of March, we've had almost 34,000 pages viewed by the site's visitors, which is a great response. And because we are able to track what information appears to be of most interest to our investors, we will be able to make this report better each year.

Having the first-quarter earnings call and the annual meeting is yet another milestone for our Company since going public just over a year ago. Our results during the first quarter are a continuation of what we were able to accomplish in 2008. By staying focused on our strategic direction, including prudent investment in our infrastructure and earning an appropriate rate of return, we continued to increase our revenues and improve our operating metrics quarter-over-quarter.

Revenues for the quarter ended March 31, 2009 rose 8.6%. Excluding a goodwill impairment charge, earnings per share for the first quarter 2009 totaled $0.19 per share compared to $0.04 per share for the first quarter of 2008, a substantial increase. This increase, as was the case in 2008, was in large part due to our continued progress in our regulatory filings, as well as our commitment to our continued investment in infrastructure.

Ellen will discuss the impairment charge in further detail, but I do want to comment here that the economic fundamentals of the Company continue to improve. We have grown revenues, increased cash flow and, excluding the impairment charge, improved our operating income and grew net income and earnings per share. We are pleased by the results we achieved this quarter.

That being said, accounting principles require us to recognize an impairment charge, primarily due to the weakness of the market, which has driven our stock price down even with our continued excellent results. This non-cash impairment charge has not affected our cash balances, liquidity or operating cash flows, nor does it affect our business operations. We have recognized this charge, and we continue to move forward in executing the strategies that have delivered the solid results I just described.

I'm going to spend a moment talking about the infrastructure needs of our industry. I do plan to cover this further at our annual meeting, but two reports came out this quarter which really highlight the challenges this country is facing. The first report came from the American Society of Civil Engineers in the form of their 2009 Infrastructure Report Card. In terms of the state of the nation's water and wastewater infrastructure, the needle did not move since the 2005 report, and both received a D-.

The AFCE report was followed by the US Environmental Protection Agency's Infrastructure Needs Assessment. This survey found that almost $335 billion is needed in water infrastructure investments over the next 20 years for thousands of miles of pipe, treatment plants, storage tanks and other key assets to ensure the public health and economic well-being of cities, towns and communities. This figure is up from approximately $277 billion in the 2005 study and approximately $154 billion in the '02 study.

There's a clear trend here that unlike the American Water story, where we have been continuously investing in our systems, the country as a whole has been neglecting the growing need when it comes to repairing and maintaining water and wastewater infrastructure.

There is also a clear opportunity here for the public and the private sectors to come together and address these challenges, and the water industry as a whole must be communicating both the challenges and the possible resolutions on a national scale. We are currently arranging a meeting to address the Congressional Water Caucus on these issues. American Water is also active with the US Conference of Mayors Business and Water Councils and the US Chamber of Commerce. We've also been reaching out to the media on a national scale to inform them.

This is all part of a much-needed proactive approach water providers need to take to raise awareness of the current state of the nation's water and wastewater infrastructure, and also how these challenges can begin to be solved.

American Water has solid successes to point to when it comes to working with the public sector to resolve water challenges, and in fact, as you may have read or heard, we've made further progress in completing our deal with the city of Trenton, New Jersey. In April, the New Jersey Board of Public Utilities gave us formal approval to our purchase of Trenton Suburban Water Systems.

Trenton was faced with a tightening budget and competing priorities, and looked to find an innovative, responsible way to address the city's needs, while ensuring a positive benefit for other external stakeholders. In the end, an agreement resulted between the city and New Jersey American Water that will allow Trenton to address issues within the city, as well as make needed investment in its own water system, while residents in four surrounding communities become part of a system that delivers high-quality, reliable water service.

Once this agreement is complete, I believe it will serve as a model of how partnerships can be forged and creative solutions can be generated.

Public-private opportunities, coupled with other opportunities provided by the American Recovery and Reinvestment Act, or also known as the 2009 Stimulus Act, signed into law this past of February, including tax-exempt financing, an increase in the state revolving funds and the lifting of the Private Activity Bond cap present a chance for the country to start and catch up in ensuring the quality and reliability of our water systems for generations to come.

American Water's regulated states have applied for access to these funds, and through the year, we expect to hear more on our participation in the infrastructure investment supported or spurred by the stimulus package. Also, when you consider American Water's size, our national footprint and the success we have had in the past helping communities, this is a relevant time for American Water to offer our expertise and experience to municipalities facing huge financial and infrastructure challenges.

In terms of the continuing funding of our own capital projects, in February, American Water closed on the issuance of $75 million in bonds, and our Pennsylvania subsidiary subsequently raised $80 million in tax-exempt bonds this past April. Subject to market conditions, we also expect to issue approximately $300 million in tax-exempt financing over the next few months. The proceeds from these long-term bond offerings will be used to fund capital investments, as well as reduce our short-term debt.

We are on track to invest approximately $800 million in our infrastructure this year. We will make well-informed decisions on which infrastructure projects to pursue. Those most critical to ensure the health and safety of our customers and to meet regulatory requirements are at the top of the list.

Another key to staying on track with our capital plan is regulatory recognition of our investment. For the quarter, we received authorizations for additional annualized revenues from general rate increases of approximately $5.2 million. As of April 30, we have filed general rate cases in 10 states that would provide approximately $237.1 million of additional revenues if approved as filed. Obviously, the extent to which these rate increase requests will be granted by the applicable regulatory agencies will vary.

American Water continues to look for opportunities to grow our business, as well. As I mentioned on our year-end call, Bill Patterson joined us as our Senior Vice President of Corporate and Business Development. He'll lead the Company's efforts to bring water solutions to communities in American Water's existing markets, as well as pursue other opportunities, including public-private partnerships, O&M contracts, military contracts and services.

Recently, on the nonregulated side of the business, Applied Water Management was awarded a contract renewal to manage the wastewater opportunities for New Jersey's Warren Township Sewage Authority. This is AWM's largest wastewater operations and maintenance contract. Under the renewed Contract, Applied Water Management will continue to manage the wastewater operations with the three treatment plants and 17 pump stations for a population of more than 14,000 in Warren Township.

Also, our Homeowner Services Group launched its Service Line Protection Programs into a 16th state, and is now offering services in New Mexico.

We also started the year with more recognition of our industry expertise, earning the outstanding award for public-private partnerships from the US Conference of Mayors for our Lake Pleasant operations, the achievement award from the Environmental Business Journal for the design build of the Solaire in Battery Park, New York City, and the awards earned for our new approach to communicating with our customers now total more than 50.

Also, we were very proud to learn late in April that American Water was named Water Company of the Year by Global Water Intelligence. GWI recognized American Water for being a leader in the water industry and its commitment to delivering water solutions. GWI also recognized the reestablishment of the financial strength and operational excellence in our regulated businesses, as well as our success in signing two 50-year military contracts in Texas and Louisiana with a total of $677 million, and our continued management of the largest seawater desalination plant in the US. Essentially, we were recognized for delivering our core strategies, a trend we will continue in 2009.

Finally, in the first quarter, American Water declared and paid its third dividend payment of $0.20 per share since going public last April. The Board also declared its fourth consecutive dividend just last week. We were pleased to make this declaration, knowing the importance of meeting shareholders' expectations for consistent quarterly dividends, particularly in this economic environment.

With that, I will turn the call over to Ellen Wolf to discuss the first-quarter financial results. And I also look forward to our annual meeting later this week and hope you can all join us via the webcast for that meeting, as well.

Thank you very much, Don, and good morning, everyone. I would also like to echo Don's comments regarding the strength of the economic fundamentals of our business, as demonstrated not only by our strong performance in 2008, but the continuation of that strong performance into the first quarter of 2009.

As Don mentioned, our results for the quarter ended March 31, '09 continued to be driven by our focus on 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 have achieved solid earnings growth compared to the same quarter last year, while addressing the impacts of the economic slowdown.

While the state of the economy has had some impact on our water sales, customer growth and other aspects of our business, we continue to see growth in revenues, operating cash flow, net income and earnings per share through continued focus on the rate recovery aspects of our strategy, while also focusing on expense control.

As we discuss our results, please note for comparability purposes, our results for the quarter ended March 31, 2009 and 2008 both reflect goodwill impairment charges. And the quarter ended March 31, 2008 had approximately $9 million of additional expenses necessary to enable our transition to a public company.

For the quarter ended March 31, 2009, American Water reported a net loss of $413 million, or $2.58 per common share, compared to a net loss of $732.5 million, or $4.58 loss per common share, for the same quarter in 2008. Included in the quarter ended March 31, 2009 and March 31, 2008 were goodwill impairment charges, net of tax, of $443 million and $738.5 million, respectively.

Adjusting for goodwill, the resulting net income for the first quarter of '09 and '08 would be $29.9 million and $6 million, respectively, with earnings per share of $0.19 and $0.04, respectively. Therefore, on a non-GAAP comparable basis, we achieved growth in net income and earnings per share well exceeding 300% quarter-over-quarter.

As a reminder, the goodwill on the American Water books represents the premium RWE paid for American Water in 2003 at the time it purchased the Company. Accounting principles require that the Company continue to review the balance of this goodwill to determine, from both a Company perspective and a stock market perspective, whether the value of that goodwill has changed.

From the Company's perspective, the fundamentals of American Water remain strong, as demonstrated by our growth in revenue, operating cash flow and net income prior to any impairment charges. However, from the perspective of the stock market and the impact its sustained weakness has had on our stock, it became appropriate to take an impairment to that goodwill at this time.

Again, under accounting principles, once it was determined to take the goodwill impairment, it became a function of two items, the stock price and the effect of the change in interest rates on the value of our debt. This resulted in the first-quarter 2009 non-cash pretax impairment charge of $450 million. Don and I will be answering any questions you have on this at the end of the call.

However, in anticipation of one question that you may have regarding the impact of the impairment on our equity requirements, let me address that now. The impairment does not alter our plans and amounts of equity issuances in 2009. Timing will be driven by equity capital needs and market conditions. Our long-term goal remains to have equity in the 45% to 50% range of total capital. This will be achieved through continued growth of net income and careful monitoring of our capital program. In these economic times, it is prudent for us to balance our capital program with our liquidity needs and customer impact.

I would now like to discuss our results for the quarter, which show considerable growth from the prior year, and is a reflection of the effective execution of our strategy and our dedication to our shareholders, customers and employees. On the following slides, I will be discussing in more detail the main drivers of the growth from the quarter ended March 31 '08 to March 31 '09. A more detailed discussion of our results for the quarter will be provided in our Form 10-Q, which we anticipate filing today.

For the quarter, American Water reported revenues of $550 million, a $43.4 million increase, or 8.6%, over the $506.8 million reported for the first quarter of '08. Revenues from our Regulated Business increased by $47.8 million, or 10.6%, from March 31 '08 to '09. During the same period, our Non-regulated Business's revenues declined by $3.6 million.

Regulated revenues increased primarily due to rate awards and various surcharges granted by regulators since the prior comparable period. Regulated revenues also increased slightly due to organic growth and tuck-in acquisitions. Offsetting these increases was a decline in water sales volume that I will discuss in more detail shortly.

Regarding our Non-regulated Business, revenues declined mainly in the Contract Operations Group, as we continue to be selective in seeking out and bidding on appropriate O&M contracts.

Regarding our rate awards since the beginning of 2008 through the end of March 31, 2009, we have received $218 million in annualized rate authorizations, the impact of which is reflected in our first-quarter results. During the most recent quarter, we were authorized annualized general rate increase of $5.2 million in West Virginia and were authorized increases in infrastructure and other surcharges of $6.6 million. The authorized return on equity in the West Virginia case was 10%.

We have several rate cases filing pending with regulatory commissions. At the end of the quarter, we are awaiting the final orders in six states, one of which is Hawaii, which put in interim rates. In the five other states, we are awaiting final orders for general rate cases filed requesting additional annualized revenues of $120.6 million. Subsequent to the end of our first quarter, we had filed rate cases in four states, for a total of $115 million. There is no assurance that the filed amount or any portion thereof any requested increase will be granted.

As was mentioned earlier, we are seeing some effect of the economic slowdown on our industrial revenues, which are approximately 5% of our total revenues. The effect has been offset by rate increases granted in the prior year. For the Company as a whole, sales volume decreased for the quarter ended March 31 '09 to '08 by 3 billion gallons, or 3.5%.

We experienced a decline in water sales volume in all customer classes. Our residential, commercial and industrial sales volumes decreased by 1.5%, 3.6% and 12.9%, respectively. And while our total customer count continued to increase, we had a decline in both commercial and industrial customers.

To a lesser extent, we continued to see a trend of reduced per-customer consumption. As a result, reduced overall demand offset revenue increases from rate awards by $2 million. I should note that, like operating expense increases, declines in water sales volumes generally only impact our results during a period of regulatory lag, as future rate proceedings consider these factors.

I'd like to take a few minutes to discuss our operating expenses. Adjusting for goodwill impairment charges in '09 and '08, operating expenses increased by approximately $8.3 million, or 1.9%. The first quarter of '08 also included nonrecurring expenses related to our transition to a public company and Sarbanes-Oxley. Excluding these expenses, our operating expenses increased by $17 million, or 4%.

The ratio of gross margin to revenue improved from 16% to 21%. This improvement reflects our commitment to cost containment. It is a focus we will continue. However, we may not be able to maintain this level of improvement over the course of the year as expenses occur related to our continued enhancement of customer service and fuel and chemical costs continue to fluctuate.

Operating expenses of our Regulated Business increased by $12 million, or 3%, from $378 million for the first quarter last year to $390 million for the same quarter this year. Our Non-regulated Businesses saw decrease in operating expenses of $3.6 million, directly related to the decrease in revenue, as well as a focus on expense control.

Overall, employee-related expenses for the quarter ended March 31, 2009 increased $5.8 million, or 4.6%, compared to the prior year. Employee-related expenses consist of salaries and wages, pensions, group insurance and other benefits. The main driver of the increases in the expenses is our pension and post-retirement benefit expense, which increased by approximately $6 million, or 20%, over the first quarter of '08 due to an increase in the amortization of actuarial losses attributed to lower-than-expected returns on plan assets in '08 as a result of the decline in the economic environment. These current market conditions are also the primary reason for the rise of other post-employment benefits and their costs.

As was mentioned in our 2008 10-K, we estimate for 2009 our pension and post-retirement benefit costs to increase approximately $32 million from 2008 levels, related to the performance of the stock market in 2008 and its impact on our benefit plan assets and returns. We, as well as other utilities, have begun discussions with our regulators about the appropriate treatment for these incremental costs in order to minimize regulatory lag between the incurring of the expense and any recovery of the expense. To date for 2009, we have authorization to defer $5.8 million of this annual increase.

We have requested permission to recover or defer as a regulatory asset until the next rate case is concluded an additional $7 million of this increase in 2009. Until we receive permission from the regulators to defer these costs, we will continue to expense them. We are also discussing with regulators other ways in which to defer the costs until future rate cases are filed. We will update you quarterly as to our progress in this area.

During this quarter, compared to the first quarter of last year, we experienced an increase in our production costs of approximately $5 million, or 7.5%. This includes fuel and power costs, chemical costs, waste removal and purchased water. Escalating chemical prices were the primary driver of this increase, despite a decline in system delivery.

Chemical costs increased by $3.6 million, or 31.6%. 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 our waste disposal cost actually slightly declined.

Operating supplies and services decreased $12.7 million, or 18%, for the year compared to the same period in '08. The majority of the decrease is due to lower expenses incurred to ensure our compliance with Sarbanes-Oxley and remediation of any material weaknesses. For the quarter, these costs decreased $6 million. Expenses associated with our transition to a public company decreased by $2.9 million. In addition, contract service expense in our Contract Operations Group declined by $3 million.

Since I have mentioned Sarbanes-Oxley costs, we are continuing in our efforts to be compliant with Sarbanes-Oxley by the end of 2009, the first date we are required to be in accordance with SEC regulations. While we continue to have a material weakness noted in contract administration, we do feel we have cured that weakness, but will continue to test it to ensure full compliance. This is reflective of our commitment to effective and efficient internal controls and our dedication to providing high-quality financial statements.

Customer billing and accounting expenses increased by $3.4 million, or 46%, for the quarter. This increase was substantially due to an increase in uncollectible accounts expense in our Regulated Business. This increase is due to the unusually low balance in 2008 due to a concerted collection effort of previously written-off accounts in that first quarter. Uncollectibles in this first quarter were more in line with what we reported in the fourth quarter of 2008.

Our consolidated provision for income taxes increased consistent with our increase in pretax income, adjusted for the impairment, and includes some discrete items. Excluding the impact of the goodwill impairment, our effective tax rate was 36.9% for the quarter ended March 31 '09, and is expected to be 39.5% for the full year.

To meet our continued commitment to providing water resource solutions to communities in need and our commitment to our customers to continue to deliver a reliable service, we expect to incur capital expenditures of approximately $800 million during 2009.

In the first quarter of '09, we incurred expenditures of $196 million, relatively consistent with the $188 million incurred during the same period last year. Included in the increase is approximately $23 million associated with the ongoing construction of a water supply project in Kentucky.

To fund our ongoing capital program, we incurred incremental debt and used our operating cash flow. Cash flow from operations for the quarter totaled $142.5 million. This represents a $57 million increase, or 67% increase, over the quarter ended March 31, 2008.

As of March 31 '09, American Water had approximately $179 million available short-term borrowings under its $850 million credit facility, after consideration of its outstanding commercial paper. Also during this quarter, we successfully completed a debt offering of $75 million, aggregate principal amount of 8.25%, Senior monthly notes due 2038, and our Pennsylvania subsidiary closed an offering to issue $80 million in tax-exempt water facility revenue bonds through the Pennsylvania Economic Development Financing Authority. Our interest expense for the quarter was $2 million higher than the similar quarter last year.

In addition to the $300 million that Don mentioned, we also have applications totaling $98.6 million filed with state PUCs to access state revolving loan funds. Due to the demand for such funds, the likelihood of receiving significant funding from these loans is low.

Finally, as Don mentioned, we have declared two quarterly dividends to date this year. The first was paid on March 2. The second, just recently declared, will be paid on June 1. As mentioned in our last call, 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 common share, and in the long-run, expect to have a payout ratio in the 50% to 70% range of net income.

That concludes our prepared statements on American Water's quarterly financial results. To echo Don, the solid results of this quarter reflects the Company's commitment to delivering its strategies, as well as our commitment to prudent infrastructure investment and reliable service.

Thank you again, and with that, I will turn the call back to the operator for questions.

(Operator Instructions) Ryan Connors, Boenning & Scattergood.

Good morning, and congratulations to you and your employees on an excellent quarter.

I wanted to discuss the regulatory environment, if we could -- in the context of last week, there was an interesting sort of under-the-radar rate filing by one of your smaller peers, in which they actually asked for a temporary rate reduction. And it was ostensibly to provide relief to ratepayers due to the economic times. And obviously there are unique circumstances there which are much different from your own. But taken in the context of the fact that one of the fears out there among investors is that regulators will be more stringent in rate proceedings in this kind of an environment, it's an interesting data point.

And I wondered if you could just comment on two things. First, just on whether and/or how that situation could impact the regulatory environment in which you do deal in terms of a precedent or what have you. And then secondly, just in general give us an update on your thoughts in terms of what impact, if any, the recession has on the regulatory environment.

Thank you, Ryan, and thank you for the congratulations, and we appreciate your interest. Let me talk first about the situation you are referring to in Connecticut.

I don't think one can necessarily ascribe any kind of a trend or any other kind of theme to what was done. It was unique. I'm not familiar enough with the specific circumstances to what occasioned that. We recognized it. We follow it. We continue to talk with -- and I'd also say we do not have any operations in that jurisdiction. So I'm not sure that is -- whether it is relevant or not.

We continue to have discussions with the regulators, not only in the 20 states where we do have operations, not including that one, but in others where we are interests. And we monitor it very closely, what is going on in the -- in terms of the economies in those states and their continued support for infrastructure investment.

I think as you and most of our investors know, our results, our need for regulatory relief -- and we describe it in our comments here as support for our infrastructure investment -- is driven by the continued investment we make in pipe, in treatment facilities and all sorts of things to improve, maintain the services that we provide. If we find that in these economic times that the support for that is somewhat tempered and that there is a shift in the regulatory outlook in that they may not be as supportive in the short run or during this recession, then we have to adjust our capital plans accordingly. But we monitor that closely, not only here in the corporate stack. We have a dialogue that we maintain at each individual state with the regulators, and we have to adapt our operations accordingly.

We have, as both Ellen and I noted, somewhat tempered our capital plans. Last year was a high water point, no pun intended. We spent over $1 billion in capital improvements last year. Our plan this year is closer to the $800 million level. So I think just that modification shows our recognition that we can't always do it at the level that we think might be most appropriate to have a sustainable infrastructure across the country.

Okay. Thanks, Don. That is helpful perspective. And then I wanted to talk also a little bit about the acquisition environment in the context of the news on Trenton. Can you update us on the acquisition market, in particular on the municipal side? I know there was a school of thought entering the downturn that fiscal duress could lead some of these municipalities to explore the option of monetizing these types of assets, helping them to balance their budget. Can you update us on whether your people are seeing that in the marketplace, and if so, in what magnitude?

Well, I can't really -- it would be premature to quantify in terms of any kind of a macro kind of pipeline that we have of activities. And I would remind you, as well as others who are listening, that while we are very excited about bringing the Trenton acquisition to conclusion, we started it over two years ago. So things that we are working on today and things that we've been working on for the last year that may even become public in the next quarter or two aren't likely to close until 2010 or '11, and it's a delayed impact on our financial results.

But having said that, we are seeing increased activity by a host of communities across our footprint, in the vast majority of the 20 states that we have regulated operations, several others where we don't have regulated operations. This recession and its impact on the municipal governments is real, and it is deep, and we will be talking more about that at our shareholder meeting on Friday. And we don't see it changing in the immediate future.

We believe that the stimulus package that was recently passed in February is helping to plug the gap for many of the state governments and municipalities for this year. But the structural deficits that many of these communities and states are suffering aren't going to be cured in a year's time. Tax revenues are down. Real estate values are down. It is having its impact on a lot of communities. And there is a far greater openness to have a dialogue now about some form of public-private partnership like we've done in Trenton.

So we are seeing that there is increased activity, but I would caution that these things take time. But we are working on those things today to, perhaps, provide some contribution next year and the year after.

Okay, that's great. Thanks for your time this morning.

You're welcome. Thanks for the questions.

Maria Karahalis, Goldman Sachs.

Thank you. Good morning. I have two questions, please. My first question is, you've demonstrated some notable improvement in cash flow from operations, roughly the $57 million that you mentioned, Ellen. Of course, part of it is explained by the net income improvement, but there is still probably another $30 million or so. I was wondering if you could comment on what other improvements you saw, since we haven't had a chance to see your cash flow statement yet. And the second question I have is -- which I know is coming in your 10-Q -- and the second question --

I got the point.

No, no, it wasn't meant to be that. I know we will see it, but I'm sure you have some color to add. And the second point is, related to the impairments, just so we understand the process on a go-forward basis, should we understand that a stock price movement alone can be considered a triggering event going forward?

Okay. On the cash flow, which you will see today, there will be a detailed analysis for you. The drivers are clearly net income; depreciation is up as well. So that is a driver in and of itself. It is less of a cash drain on the Company. So you would be adding that back in. And then also a little bit on the timing of our capital and nature of capital expenditures in taking advantage of the bonus depreciation that has been offered in 2009. Those are probably the key drivers here, as well. And then, again, keeping our collections up and our payables down.

Okay. Thank you.

In terms of the stock price being an impairment trigger, there are two ways one begins to look at whether or not you'd have an impairment. And as I mentioned earlier, one is the Company's own assessment of its value. And that is sort of trigger one, if we see anything that impacts our own assessment. And clearly we've not seen anything along those lines, as evidenced by the strong results for the quarter.

The second is the stock price, and how it relates to the book equity value of the Company. And any sustained movement in that stock price is what we would have to look at. And in this case, we had a sustained movement and that is why we looked at it for this quarter.

Debra Coy, Janney Montgomery Scott.

Thanks. Good morning. To follow up on your discussion of infrastructure investment needs, Don, which you laid out very clearly and are making the case, certainly, across your markets, I guess what I am wondering is how this elephant in the room of the parent company that still owns 60% of your shares, that clearly to meet your strategic plan, you will need to raise equity at some point. You said the plan -- the timing hasn't changed, but there is this chicken and egg issue of when the parent company will sell additional shares, as well as you issuing your primary equity.

Can you just give us an update, for those of us frustrated on the shareholder and the analyst side, in terms of the view of the parent company in terms of the need for CapEx for your longer-term plan? And related to that, if there is still no movement on their front to sell shares, whether you would consider selling equity on your own later this year, or whether you would go back to tempering the CapEx plan.

And then I guess finally, what kind of timing? I think you certainly still have room on that. Within another, call it, three to six months, you kind of have to make a decision. How are you thinking about that; how is your parent company thinking about that?

Thank you for all eight of those questions, Debra.

They were all one question wrapped into eight (multiple speakers) questions.

With eight sub parts.

Let me first just clarify, and maybe it is a subtle distinction, but I think it is worth noting on this call, with many others listening.

RWE was our parent company. RWE does still own 60% of the Company. But as a listed Company now, with a very well-defined separation agreement and corporate governance and complying with all of the New York Stock Exchange listing and other things, we don't necessarily think of them specifically as our parent company any longer. I am not disputing the fact that they own 60%.

But their intention is to depart. The way we are governed, the way we are looking at not only our capital needs, but also our growth objectives, is something that we do in concert, clearly with RWE, as -- represented on our Board of Directors. But we are looking at the future of American Water, not solely the past in the rearview mirror.

I would also say that their support for our capital program is unwavering, just as it was when they were our parent company. While we may not have invested as much in 2003 to 2005 as we did in our peak year last year, there was substantial investment that we continued to make into our infrastructure, $500 million or more per year, during those periods. So they have never really skimped on any of the support for the infrastructure, and that continues to this day. So they are supportive of it.

As it relates to our growth and the need to finance things like the Trenton acquisition, these are things that are fully vetted with not only RW E, but our Board. And there is an absolute commitment to the strategy that we've outlined to all of the investors at the time of our roadshow and as we continued to report most recently in our annual report, as well. Many of these things -- well, one more. And we've continued to do tuck-in acquisitions and ramp that up over the last several years while we were preparing for the IPO.

So there is an understanding of our growth. There is an understanding of the emerging opportunities, and support for growing through appropriate acquisitions and public-private partnerships that make financial sense for all shareholders. We are not looking to grow just for the sake of growing, or buying infrastructure just to bail someone out. It has to make sense for all constituents.

But to the extent that some of these will cause some need for capital, we know that what we are working on today isn't likely to be something that we will necessarily need to be funding in the next year or the next two years, because painfully these processes do take a long time until we get through not only regulatory approvals, but all of the necessary local government initiatives, referendum and anything else that they need to do.

But I can say broadly that there is support and understanding for those, and as the opportunities emerge, if they require some funding, we will be prepared to figure out how we will go about doing that.

If I can just be direct, you've just had to take a very large goodwill impairment charge because of the stock price. And the stock price is trading at a very large discount to your peers because of the overhang issue, primarily. Is that clear to your not parent company, but primary shareholder?

I think it's painfully obvious to all of our shareholders, not just RWE, but to even those who became investors at the time of the IPO. It is a function, in some measure, as you well know, to the overhang and the expectations that there is 60% of our shares to come on the market at some point in the future, and there is no doubt that that is having a not insignificant impact on our trading range.

So they are aware of it. Our Board is aware of that. And we are continuing to monitor our trading, and we are looking for ways to continue to finance our operations going forward and to work with RWE on the appropriate exit strategy for them to be able to sell down their investment.

All right. Thanks, Don. I just couldn't help voicing some frustration.

On an entirely separate topic, I know it is hard to give a sense at this point of the future. But the usage in the quarter was down a little bit more than we would have expected, even given the economic weakness. And I think what you had talked about in your prior call was in a recession that we might expect organic usage to be down about 1%. It sounds like we might be trending a little bit below that, or perhaps there are some other factors that were conservation and the like.

Can you just kind of speak to how you expect usage trends to look for the remainder of the year as best you can, given your current crystal ball?

My current crystal ball changes daily, Debra. The usage decline of 1% is what we expect as a normal decline, based on the patterns we've seen over the past several years. And then during a recession, we might see something a little bit more than that.

Where we've seen -- it is clear in our numbers -- the largest decline has been in the industrial. And what we are seeing there are businesses closing one day a week or one week a month or things like that. So we are seeing some impact. And some of our industrials are going out of business. So we have seen that decrease in the industrials. But again, they are only 5% of our revenue.

The other decrease we are seeing slightly in customers, overall, our customers actually are up slightly, with industrials down. And a lot of that is due -- the usage is due to the economic environment somewhat, plus, believe it or not, sort of a fairly mild winter.

All right. That's helpful. Thanks.

[William Apicelli], Citi Investment Research.

Good morning. Just to echo one of Debra's point, I guess it sounded like in your response to some of her comments that you would be comfortable if need be to manage kind of the CapEx and maybe some of your costs over the next year or so in order to delay or defer any equity issuance maybe so that it could coincide with the RWE divestiture. Is that an appropriate inference from what you guys have said?

I'm not sure that it is different from what we've necessarily said in the past in terms of managing our CapEx. We always look to manage our capital expenditures, to look at what states that we are investing in, to look at what the needs are. That is why we've used this broad range that we've talked about in terms of $800 million to $1 billion. We talk about $4 billion to $4.5 billion over five years. That's a 20% range in terms of what we think is the appropriate level of investment to ensure long-term sustainability of our infrastructure.

Clearly, having been at the $400 million to $500 million range was below what we think is long-term appropriate. And we have taken some actions to manage it so that we are below $800 million this year, down from the $1 billion.

But just to clarify, if I spoke about it too quickly before, we do have the right under our separation agreement with RWE that although we had an S-1 filed in the beginning of the year that demonstrated that we might be filing and issuing some of their equity, as well as some new equity for American Water jointly, we are not joined at the hip that we absolutely have to do that in all cases. We have the right as a publicly traded Company and as proved by RWE and part of our separation that if we believe the timing is appropriate and necessary to issue equity, we can do it on our own without them.

And with our S-3 filing just last week, we now have the flexibility to do something even more quickly than what we had the ability to do before. That is not to say that there is anything immediately planned. But I just want to make sure that you, as well as others, understand that we do have that right. We are not obliged to do it jointly with RWE. And likewise, they are not obliged to necessarily do it at the time we are doing an offer either.

Okay. Thank you for that clarification. I think from our point of view, it is just making sure you had that flexibility to do it sooner if you needed to, but also to possibly delay and defer for a period of time, at least through the end of the year or into next. And it sounds like you have that option. So thank you.

Ladies and gentlemen, at this time we have time for one more question. It comes from the line of Richard Verdi, Sturdivant & Company.

Good morning and thank you for taking my call this morning. Most of my questions have been answered. But Don, I just had one quick question. Can you discuss your drought restriction outlook and consumption outlook for New Jersey and Pennsylvania for the summer?

Well, I wasn't necessarily prepared to give a weather report this morning. And talking drought here in the Northeast after the weather that we have just experienced -- for those of you who aren't in the northeast, over the last four or five days, when it seemed like we were in the midst of a monsoon -- I think I might be getting ahead of myself in terms of giving any kind of drought predictions.

I know that despite the weather that we just had the last week, that stream flows and the like were low throughout the winter and in the early spring. But I'm not aware that we are necessarily close to doing something, and I would be glad to follow up with you afterwards if we have any more information.

Okay. All right. Thank you very much, and congratulations on a great quarter.

Ladies and gentlemen, this does conclude the question-and-answer portion of the call. I would now like to turn the call over to Don Correll for any closing remarks.

Thank you, and this does conclude today's call, and I want to thank all of you for joining us today and for your interest in American. And if you do have more questions, please contact our investor relations team directly.

I also want to remind everyone that our shareholder meeting is this Friday, and we look forward to that event as well. And I will now turn the call back to our operator. Thank you.

Thank you. And ladies and gentlemen, this does conclude today's conference call and webcast. You may now disconnect.