美國水務 (AWK) 2009 Q2 法說會逐字稿

Good morning and welcome to the American Water's 2009 second 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 archive of the call will be available through August 13, 2009 by dialing 800-406-7325 from the US and 303-590-3030 for international callers. The access code for replay is 412-0496. The online archive of the webcast will be available through September 3, 2009 by accessing the investor relations page of the Company's website located at www.amwater.com.

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 Water's second-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. As usual, we will keep our call to about an hour. At the end of our prepared remarks, we will have time for questions and answers.

Before we begin, I would like to remind everyone that 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. Such 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. Thanks for joining us today. Today we are going to be commenting on our second-quarter results but before we discuss the financial results, I did want to spend a moment talking about American Water's successful offering of its common stock. I know this was a subject on our last call during the question-and-answer portion so I am pleased that the offering is complete for this call.

We announced the completion of the public offering of almost 30 million shares of our common stock priced at $17.25 a share on June 10. American Water sold 14.5 million shares of common stock and RWE sold 15.4 million shares including shares sold under the over allotment option. RWE now owns approximately 46.6% of American Water's outstanding shares of common stock. American Water used the proceeds from its portion of the offering to reduce our short-term debt.

In terms of the performance of our stock since the June equity offering, it has outperformed the S&P 500, the Dow Jones industrial average and the Dow Jones US utility total return index.

Moving now to our financials, our revenues for the quarter ending June 30 rose 4% to $612.7 million. Earnings per share for the second quarter 2009 totaled $0.32 per share compared to $0.28 per share for the second quarter of 2008, an increase of 14.3% from a year ago. The increase occurred even though we had experienced very wet weather in the Northeast. Ellen will go into the weather's impact in greater detail but as you may be aware, two of our largest operations are in the Northeast in New Jersey and Pennsylvania.

In New Jersey this past June, the state had measurable rain every day except one and the average temperature was less than 68 degrees, 2 degrees below normal. The rain continued in July and in the last 90 days in the central and northern parts of the state of New Jersey, rainfall averaged between 3.5 to 4.5 inches above normal in Monmouth, Mars, Middlesex and Somerset counties. That being said, the fact that we saw an increase in our consolidated revenues and EPS for the quarter in part reflects the advantages of our geographic diversity across the United States as well as our success in cost containment for the quarter.

The increase in revenues also reflects the strength of our core business strategies including the continued efforts in our regulatory filings and our commitment to continued investment in infrastructure. We have projects across the country, large and small, to maintain and/or improve our service from a meter replacement program in California to foster conservation, an investment that will total approximately $58 million once complete to a new $51 million water treatment plant in Illinois to the ongoing work we're doing in Kentucky to construct a major pipeline and treatment plant.

American Water continues to make prudent infrastructure investments. To date this year we have invested approximately $400 million and we still plan to invest approximately $800 million in our infrastructure in 2009.

We also continued our efforts to communicate the nation's need to invest in its water and wastewater infrastructure to a variety of audiences. In June, we presented the US Congressional Water Caucus on this topic. This was the first of a series of proposed forums to discuss the critical issues surrounding the nation's aging water and wastewater infrastructure. As the industry leader, we understand the important role we must play in these types of conversations not only presenting the challenges but the solutions, the potential opportunities and the benefits infrastructure investment can bring to the US economy.

In terms of funding American Water's capital projects, this quarter we raised approximately $125.4 million in tax-exempt financing. Typical of public companies, we filed a universal shelf registration statement in May which enabled us to offer to sell from time to time various securities all subject to market conditions. In June, we took advantage of that universal shelf registration when we conducted our equity offering.

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 $12.5 million. As of July 31, 2009, we have filed general rate cases in 10 states that would provide approximately $258 million of additional revenues if approved as filed. Obviously the extent to which these rate increase requests will be granted by the various regulatory agencies will vary.

During the quarter, we also had some growth news. We continued to make progress in the acquisition of certain assets within the Trenton Waterworks service area and look forward to being able to bring our high quality service to four more communities in New Jersey. Also in that state, we completed a pipeline in June that will bring up to 210,000 gallons of water a day to be Pine Hill Municipal Utilities Authority. The mayor of that community said that the additional water will help Pine Hill support residential and commercial development and have a positive impact on its local economy.

Our applied water management was awarded a contract renewal to manage the wastewater operations of New Jersey's Warren Township Sewage Authority which includes the management of the wastewater operations for three treatment plants, 17 pumps stations for a population of more than 14,000 in Warren Township. And AW was also awarded a contract for engineering services in the operation of a 50,000 gallon per day desalination pilot plant in Laredo, Texas. The project is designed to provide additional fresh water for residents of Laredo which has an estimated population of 215,000.

I think the variety of our growth is another example of how American Water is able to provide multiple water solutions to the varying circumstances communities face across the country.

In terms of recent corporate governance news, in June we announced the appointment of two new members of American Water's Board of Directors Julie Dobson, Stephen Adik. Both have strong utility backgrounds and their experiences as well as this addition of two more independent members will further strengthen our Board. These appointments also continue our steps of transitioning from our prior ownership and governance.

In other Company news for the quarter as I mentioned on our last call, in late April, American Water was named Water Company of the Year by Global Water Intelligence which was quite an honor for us because we were competing against water companies from around the globe and we were elected as the winner by our industry peers. Other awards during the quarter included recognition from the Pennsylvania Rural Water Association and an interactive media award for our interactive annual report. We also had our first annual meeting during the quarter and we were very pleased to have the turnout that we did and we want to thank all of our investors for their continued interest and support of our Company.

Finally, last week we announced that we had increased our quarterly cash dividend by 5%. The decision to raise the dividend reflects our confidence in American Water's financial performance and our prospects. We were also pleased that this was our fifth consecutive declaration and first increase since going public more than a year ago. We recognize the importance of meeting our shareholders' expectations.

With that, I will turn the call over to Ellen Wolf to discuss the second-quarter financial results.

Thank you very much, Don, and good morning, everyone. Our results for the quarter ended June 30, 2009 continue 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 and cost containment while also making continuous improvements to the services provided to our customers as well as the processes and procedures utilized to provide those services. To a disciplined approach to executing our strategies, we achieved solid earnings growth compared to the same quarter last year while addressing the impacts of the economic slowdown and wetter than normal weather in the eastern part of the country.

While the state of the economy and weather continues to have an impact on our water sales, customer growth and other aspects of our business, we are continuing to see growth in revenues, 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 June 30, '08 had $6.7 million of additional net expenses necessary to enable our transition to a public Company.

For the quarter ended June 30, 2009, American Water reported net income of $52 million or $0.32 per share compared to net income of $45.5 million or $0.28 per share for the same quarter in 2008, a growth rate of 14.3%. On the following slides, I will be discussing in more detail the main drivers of the growth from the quarter ended June 30, '08 to June 30, '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 $612.7 million, a $23.3 million increase or 4% over the $589 million reported for the second quarter of '08. Revenues for our regulated business increased by $28.7 million or 5.5% from June 30, '08 to '09. During the same period, our nonregulated businesses' revenues declined by $2.8 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. Revenues in the nonregulated business declined mainly in the contract operations group as we continued to be selective in seeking out and bidding on appropriate O&M contracts.

Regarding rate awards since the beginning of 2008 through June 30, 2009, we have received $202 million in annualized rate authorizations assuming normalized sales volumes, the impact of which is reflected in our second quarter results. During the most recent quarter, we were authorized general rate increases of $12.5 million in New Mexico, New Jersey, California and Kentucky and we were authorized increases of $7.5 million related to infrastructure charges. The average authorized ROE in the cases was 10.3%.

We have several rate filings pending with regulatory commissions. At the end of the quarter, we were awaiting the final orders in 11 states, one of which is Hawaii, where interim rates are currently in effect. In the 10 other states, we are awaiting final orders for general rate cases filed requesting additional annualized revenues of approximately $280 million. After the end of the second quarter, we filed an additional rate case in Arizona for a total of $20.6 million. In July, we also received authorizations for an additional $5.1 million of annual revenues related to infrastructure charges and general rate orders were received in California authorizing additional annual revenues of $16 million relating to cases filed in 2008. And interim rates were put into effect in Iowa for $6.8 million. There is no assurance that the filed amount or any portion thereof of any requested increase will be granted.

Due primarily to wetter than normal weather conditions as well as to some extent the state of the economy, total Company sales volume decreased from the quarter ended June 30, '08 2009 by 5.4 billion gallons or 5.5%. This decline was experienced in all customer classes as residential, commercial, and industrial sales volumes decreased by 4.8%, 4.9% and 16.8% respectively. While our total customer count continued to increase, both commercial and industrial customers decreased due to the economic environment.

As a reminder, our industrial revenues are approximately 5% of our total revenues. In addition, we continued to see a trend of reduced per customer consumption. Reduced overall demand from weather and reduced per customer consumption offset revenue increases from rate awards by approximately $24 million. It should be noted that like operating expense increases, declines in water sales volume generally only impact our results during a period of regulatory lag as future rate proceedings consider these factors.

I would like to take just a few seconds to discuss our operating expenses. Adjusting out the net expenses related to our transition to a public company and SOx in 2008, our operating expenses increased by approximately $15.5 million. Overall however, operating expenses increased by $8.8 million or only 2%. The ratio of gross margin to revenue increased by 24.2% for the quarter ended June 30, '08 to 25.7% for the quarter ended June 30, 2009. This improvement reflects our commitment to cost containment. It is a focus we will continue.

However, I should note that expenses related to our continued enhancement of customer service as well as fuel and chemical costs continue to fluctuate.

Operating expenses of our regulated businesses increased by $15.5 million or 4% from $392 million for the second quarter last year to $407.5 million for the same quarter this year. Our nonregulated businesses saw a decrease in operating expenses of $4.4 million directly related to the decrease in revenue as well as our focus on expense control. Overall, employee related expenses for the quarter ended June 30,' 09 increased $1.7 million or 1.3% compared to the prior year. Employee related expenses consists of salary and wages, pensions, group insurance and other benefits costs.

The main driver of the increase in the expense is our pension expense which increased by approximately $3.2 million or 30% over the second quarter of 2008 due to an increase in the amortization of actuarial losses attributed to lower than expected return on [plant] assets in 2008 as a result of the decline in the stock market. These market conditions are also the primary reason for the rise of other post-employment benefit costs that are included in the group insurance costs. The increase in pension and post-employment benefit expenses was somewhat offset by a decrease in salary and wages of $2.2 million or a 2.2% decrease.

As I mentioned last quarter, our pension and post-retirement benefit costs increased from prior years related to the performance of the stock market in 2008 and its impact on our benefit plans and assets and their returns. We as well as other utilities continue to have discussions with our regulators about the appropriate treatment for these incremental costs in order to minimize regulatory lag between the incurring of this expense and any recovery of the expense. To date we have authorization to recover or defer $7.1 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 $7.5 million of this increase in 2009. We continue discussions with regulators on other ways in which to defer the cost until future rate cases are filed and we will continue to update you quarterly as to our progress in this area.

During this quarter compared to the second quarter of last year, we experienced an increase in our production cost of approximately $4.6 million or 6.3%. This includes fuel and power costs, chemical costs, waste removal and purchased water. Escalating chemical prices continue to be the primary driver of this increase despite a decline in system delivery. Chemical costs increased by $3.9 million or 31.1%. Consistent with the prior quarter, our other production cost increases were more modest and some costs actually declined. Operating supplies and services decreased $8.1 million or 12.2% for the year compared to the same period in 2008. The majority of the decrease is due to the previously mentioned nonrecurring $6.7 million of expenses incurred in the quarter ended June 30, '08 associated with our transition to a public company. In addition, contract service expense in our contract operations group declined by $2.1 million associated with lower design build operate project activities.

Since I've just mentioned SOx costs, we are continuing in our efforts to be compliant with Section 404 of the Sarbanes-Oxley Act by the end of 2009 as required by SEC regulations. We continue to have a material weakness noted in contract administration. We have put a number of policies and procedures in place to cure that weakness and we will continue to test this area to ensure full compliance.

Customer billing and accounting expenses increased by $1.3 million or 10.5% for the quarter ended June 30, '09 as compared '08. This increase was substantially due to an increase in uncollectible accounts expense, a result of increases in overall write-off percentages and specific provisions made for certain receivables due to the current economic environment which has resulted in a higher level of industrial customer bankruptcies.

Our consolidated provision for income tax increased consistent with the increase in our pretax income. Our effective tax rate was 39.6% for the quarter ended June 30,' 09 and is expected to be around 39.4% for the 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. For the first six months ended June 30, we incurred expenditures of around $400 million less than the $426 million incurred during the same period last year. To fund our ongoing capital program, we used our cash flow from operations, issued common equity and incurred incremental debt.

Cash flow from operations for the six months totaled $229 million. This represents an $87 million or 62% increase over the six months ended June 30, 2008. In June 2009, as Don mentioned, we issued 14.5 million common shares in a very successful secondary offering and received net proceeds of $242.3 million. Simultaneous with our offering, RWE reduced its ownership stake in American Water to a level below 50% by selling an additional 15.4 million of its shares.

As of June 30,' 09, American Water had approximately $568.5 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 debt offerings of $360 million through both public and private placements. Our interest expense for the quarter was $3.6 million higher than the similar quarter last year.

Separately during 2009, we filed applications totaling $288 million with state revolving loan fund agencies from either American Recovery and Reinvestment Act or other governmental subsidized funds. To date we have been awarded $21.7 million. As of August 3, 2009, we have outstanding applications amounting to approximately $98 million that can still be funded through one of these programs.

And finally again as Don mentioned, we have declared three quarterly dividends to date this year. Two dividend amounts were paid on March 2 and June 1; the third just recently declared; and an increase from the $0.20 to the $0.21 per share will be paid on September 1. As mentioned on our last call, our policy again subject to approval by our Board of Directors, is to declare and pay a dividend on a quarterly basis and in the long run, we 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 and I would now like to turn the call back to Don.

Thank you and thanks again everyone for joining us and I want to reiterate how pleased we are to present solid results for yet another quarter despite what has been a very rainy summer here in the Northeast. We are pleased to talk about a success we are achieving and delivering on our core strategies. And we would now be happy to take any questions that you have.

(Operator Instructions) Maria Karahalis, Goldman Sachs.

Good morning, Don and Ellen. I have a few questions this morning. Can you give us a strategic update for the nonregulated business and talk a little bit more about how we should be thinking about revenue in light of the decline in the first half of the year? Secondly, can you give us please, an update on Trenton? Thanks.

Yes, Trenton, let me take that one first. I guess one of the things that you all have learned and certainly we recognize is that patience is a virtue in this business and that perseverence is also a requirement. We have been at this for 2.5 years. We have received all of the necessary regulatory approval. We have had them in place since the beginning of this year. There was an action taken by some citizens in the town requesting that there be a hearing protesting that the city needed to get some further authorizations or perhaps needed to put it to a referendum. That had been dealt with before but they took it to the courts. They lost that. They asked for reconsideration. They lost that and they have now appealed to yet another court and that appeal was just filed within the last week to 10 days.

We are still at the ready to proceed with this. We believe the city wants to proceed with it. As I mentioned, the regulatory approvals are in place. We are eager and anxious to add these customers to our base some 100,000 new population that we will serve in New Jersey in four communities. But at this juncture, it has to continue to grind its way through an approval process or some additional appeals and I can't really predict the outcome of that.

I think it is fair to say that it is just to go through the normal process of a hearing and briefing and the like, it is not likely to happen in the next 45 to 60 days. So at best, we are looking at something that probably won't happen until the fourth quarter of this year. But as I said, we are ready to go. The appeals have absolutely nothing to do with anything that American Water has proposed. It just has to do with some of the legal aspects of what steps they allege that the city should have taken in their approval.

As far as the nonregulated broadly, I think if we define the nonreg to include our regulated like type services that we continue to provide to municipalities and government entities, I think it is fair to say we have a fair number of things in the queue, in the pipeline. And I think it is also fair to say that we have far more inquiries from coast to coast right now with a multitude of municipalities who are sadly having to deal with the financial realities of this economic downturn whether it is their own tax revenues declining, their economic base suffering from unemployment occasioned by industries that have been affected by the auto industry turn down.

But from coast to coast, we are having a much more positive reception with a host of municipalities looking at the possibility of outsourcing in some fashion or selling either or both their water and/or wastewater systems. I have to add a cautionary note though since you asked how does it reflect on 2009, that one only needs to look as far as what it has taken us to do Trenton to not necessarily look for quarterly blips. Any and all kinds of opportunities which we will be sharing with you as they evolve, most of them take the better part of a year to bring to fruition if not longer.

But I am encouraged that the revenue decline that we may have shown for the quarter that Ellen alluded to in terms of a nonregulated really had nothing to do with any fundamentals. It had to do more with the timing issues, some revenues that we got on some prior design build contracts and the like and we are still very optimistic about what our prospects are.

So, Don, to be clear then it is not contracts that are rolling off and not being renewed? It might be one-time revenue driven by development that we are not seeing repeated this year?

No, we are not seeing contracts roll off, Maria. What it is is there was a large -- semi-large DBO contract and the DB part has been completed. The way we account for that is while we are just the general contractor, the revenues come in and then go out on the expense line. So we are continuing to see very strong results in the operations side of our contract operations.

Thank you, Ellen.

Ryan Connors, Boenning & Scattergood.

Good morning, Don and Ellen. I had a couple of bigger picture questions. And first, Don, you mentioned in your prepared remarks that your efforts to use your platform as one of the largest water utilities in the nation to deliver the industry's message to Capitol Hill and to regulators and it seems to me that an argument can be made that even a modest increase in awarded returns on equity would be stimulative in that it would incentivize you and your peers to invest more aggressively in your systems thereby creating jobs, etc., etc. Is that one of the arguments you are making as you do those things? And if so, what is the receptiveness and response to that?

It is fair to say that we, American Water, not just me but everyone here who is in regular contact with our various PUCs and regulatory indices as well as others in the industry are always promoting what we think is the appropriate return on equity and the risk profile and the risk reward requirements etc. for investments in the water industry. That is part of what we do. That is probably one of the largest topics discussed and debated in any regulatory proceeding is what is the appropriate overall rate of return.

So we are always talking about what we think is the appropriate level and particularly pointing out what is happening in the financial markets with the risks that we have all had to deal with in the last year as the economy turned and as interest rates were up and down all over the place and what the impact was on what we thought our cost of money would be. But it is not just the return on equity. While that is a big part of it, it is the dealing with, as Ellen and I have mentioned before, you know the term regulatory lag shortening up the time frame from when we are investing in infrastructure or incurring cost increases to meet regulatory mandates or whatever and not having to wait for a year or three to get the recovery of those.

We have been as an industry and certainly our Company has been at the forefront as well as promoting the disc type mechanisms since we are so infrastructure heavy, we are so capital intensive, getting a return on our infrastructure investments without having to go through a full-blown rate proceeding and dealing with the regulatory lag associated with that and things like quip and rate base for large multiyear projects. Those are all the kinds of things that we look at to promote our ability to make sure that we have the financial profile, our achieved return on equity but as well as our debt ratings and the like to make sure that we have the access to capital.

So yes, we are using that platform with the regulators but what we were also doing and what I alluded to with the water caucus in Washington was to go beyond just the individual state regulators and talk with the congressional leaders, those who are dealing with policy in Washington and various funding mechanisms and looking to promote amongst other things greater access to level the playing field to a broad variety of tax-exempt financing or lower cost debt instruments as well that frankly we had been at a disadvantage with the many municipal systems to be able to access. Or to also allow us to be available for grants if such are included in things like the state revolving funds.

So those are all the kinds of things that we are doing not only at the state level but in Washington to promote our access to capital and our ability to maintain and improve our financial profile.

Okay, that is great perspective. Thanks for that. I have a second kind of big picture question I just want to take a second to frame it. One of the things that we have seen from you and your peers during this recession is that the regulated business model does have the benefit during an economic downturn of being somewhat what I will call resilient. But of course the flip side of that is that now the focus is starting to shift toward an economic recovery and there are those investors who will say why do I want to own something like a water utility? Now I want something that is cyclical, something that is volatile over the course of the economic cycle because now is the point where we get the upside benefit of that.

And so that kind of leads me to two questions. Number one, just generally speaking, what would be your response to something like that? Number two, more specifically recessions are obviously not good for your business so what are some of the subtle ways that an economic recovery benefits American Water?

Well, there has been a fair number of studies and analyses that not only that we subscribe to but that the conference of mayors, Chamber of Commerce, others have put out showing the benefit of infrastructure investment and the relationship to economic recovery. Data that supports that when you are putting pipe in the ground you are creating jobs, you are creating jobs to manufacture the pipe but also for people to put the pipe in the ground and that adds to economic recovery. It is not terribly different than talking about investing in roads and highways and bridges to stimulate economic recovery. And given the massive needs that we as a country have for water and wastewater infrastructure investment, certainly investing on our behalf as well as in other municipalities in some form of public/private partnerships can be stimulative to the recovery that the country could participate in.

As it relates to counter-cyclical hedging and what you look at in terms of maybe this is not the right time for the water business versus some other sector, this is a long-term business. We have been around since 1886. If an investor is looking at us on a cyclical three-month's or six-month basis, they are probably investing in the wrong business. This is a long-term investment always has been, always will be. That is the nature of our business. We put pipe in the ground that is going to last 80 years. We have franchises that are perpetual.

If an investor is looking at American Water to see whether or not it is a good investment between now and November, they probably should be looking at other things because this is a long-term business. So that may be a bit direct but I think that is the way they should look at the business.

Okay, that is helpful. Thanks, Don.

Annie Tsao, AllianceBernstein.

Good morning. I just have one question. In terms of your uncollectable, you said on the call you saw the trend is increasing because of some of the industrial [customer] bankruptcy. Now how should we think about that going forward? Is that going to be a lag in terms of (inaudible) recovery or you are trying to cut costs to mitigate that? How should we think about that?

I would put it in several categories. In terms of the bad debt expense, that is a regulatory lag issue and as we go in for our next rate case, we will recover. But I also want to say not just for that but for many reasons we are being very focused on cost and cost containment as we move forward in recognition of what of the economy and our ratepayers. So again, we are very focused on cost containment.

And in terms of the industrial bankruptcy note, I said we reserved for them. We did not write them off. We will be applying for recovery of them through the bankruptcy court for those industries but for now, we have taken a complete reserve against those accounts. So it is a regulatory lag issue and we are still focused though on cost containment.

Besides bankruptcy, do you have like a time period where people don't pay? Can you shut them off?

We do. Every state is different. The timeframe is determined by the regulatory environment within that state. We are stepping up our efforts in terms of collections and timing of those collections. We are also stepping up our efforts to make sure that we do. Unfortunately when we have to shut someone off, that we do it as quickly as we can.

Thank you.

Angie Storozynski, Macquarie Research.

Thank you. A couple of questions. First of all, Ellen, you mentioned $24 million impact on revenues from lower volumes. Could you tell me how much of it was weather related?

We are not able to distinguish between what is weather related necessarily and what is consumption related. I can tell you that most of that weather was in the Northeast. Clearly New Jersey is a large percentage, as Don mentioned. I can also say that we have found historically that consumption decrease is anywhere from 0.5% to 1.5%. So clearly, if that trend has continued, the majority of that $24 million is really related to weather.

Your ability to control O&Ms, we heard from another water company yesterday and it seems like they were able to trim or at least control some of their expenses or at least going forward, they believe that they can actually cut costs among others and chemicals. Is that a trend that you also anticipate?

We are seeing a decline in chemical costs from the beginning of the year to now but they are still up, as I mentioned earlier, substantially from last year. So year-over-year, we will continue to see I believe that increase but quarter-to-quarter, we are starting to see a decrease in the cost of chemicals within 2009.

We are also extremely focused on cost containment and are working very hard in that area throughout the Company. The message is very clear in this environment that every dollar we spend is reviewed and looked at and questioned as to whether we really do need to spend it. But our first and foremost concern is making sure that the customer service is delivered and the quality of the water meets all requirements.

Okay. One last question. Also a takeaway from yesterday's conference call from another utility, we are not seeing any pickup in your in depreciation or accelerated depreciation which could be implied from the stimulus package that could actually help your cash flows. Aren't you using or aren't you investing any money based on the stimulus package? And why aren't we seeing any pickup in depreciation?

We are absolutely gearing dollars toward those assets that require and [gap] the accelerated depreciation. As a reminder, that also existed in 2008. So we were as focused on those assets in 2008 as we are in 2009. So year-over-year, the benefits should be very similar because again, we are very focused in on '08 and we are focused on it in '09. I should note our cash flow is up substantially year-over-year and that is a result of rate as well as taking advantage of accelerated depreciation with our assets.

So again, we used that in '08. The government extended it into '09 so year-over-year, we are utilizing it to its fullest capacity.

Thank you.

Heike Doerr, Janney Montgomery Scott.

Good morning. There was a news release out last week from the New Jersey Public Advocate office recommending an audit. I know that audits aren't an uncommon event for water utilities. Can you explain what the process and timing of such an audit is and how or if it impacts the [BISC] approval that is currently pending in New Jersey?

First off, there is no connection between the DISC approval and the management audit that the commission has requested be done for New Jersey American. As you said, Heike, it is very common to have management audits done. One was done in Pennsylvania a couple of years ago. There was one that is being done in a number of our other states. So it is quite common for them to ask for a management audit. New Jersey tends to do it on a rotating policy I believe it is every three years or so they ask for that management audit. And the RFP I believe will go out shortly on this.

So we do not see any connection between that and the DISC. Again, this is just the normal cyclical management audit and they come in and will audit various aspects of the business.

And how long does an audit typically take in a state the size of your assets in New Jersey to complete?

It has taken anywhere from three to six months. It depends on how much detail they would like to see.

Okay. Final question, can you give us an indication of what states we would expect you to issue new rate cases between now and the end of the year?

I like your question a lot. I think you will see on the chart we have issued in a number of states so far and as soon as we file in the other states, we will let you know.

Okay. Is there any way you can give us an amount of what we could expect if you don't share on a state-by-state basis, is there an aggregate amount that we should be expecting you to file between now and the end of the year?

No, Heike, generally we don't disclose that amount prior to disclosing it to our regulators.

Okay. Thank you.

(Operator Instructions) Management, at this time we have no additional questions in the queue. I would like to turn the conference back over to the management team for any closing remarks.

Okay. Thank you. That doesn't conclude today's call and I want to thank all of you for joining us and for your questions and your interest. And on behalf of everyone at American Water, I want to thank you for that and we will look forward to keeping you posted as to future developments. And if you have any additional questions, please don't hesitate to contact our investor relations department directly. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's conference. You may now disconnect and please have a pleasant day.