美國水務 (AWK) 2009 Q3 法說會逐字稿

Good morning and welcome to American Water's 2009 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 11:00 AM Eastern time today by dialing 303-590-3030 for United States and international callers. Passcode for replay participants is 4173835. The call replay is scheduled to be available until November 16, 2009 and the online webcast is scheduled to be archived through December 8, 2009, by accessing the investor relations page on 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 questions and answers.

I would now like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Ed Vallejo, you may now begin.

Thank you. Good morning, everyone, and welcome to American Water's third-quarter earnings conference call. With me in Vorhees 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 early this morning. 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.

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

Thank you, Ed, and good morning, everyone, and thanks for joining us as we discussed our performance during the third quarter. If you've had a chance to read our earnings release, you know that weather had an impact on our revenues for the quarter. Both Ellen and I will be discussing that in detail. But just as I led off our last earnings call, I would like to start by talking about RWE's further reduction in ownership of American Water stock.

For the third time in just over a year we announced the completion of a secondary public offering. Due to the higher investor demand, the regional transaction was upsized and 40.5 million shares of our common stock were ultimately sold to investors on August 18 at a price of $19.25 per share. All the shares are sold by RWE and with all of the proceeds going to RWE. Their ownership of American Water is now reduced to 23.5%. We were pleased at the success of this offering and in the expressed interest in American Water's stock as an investment.

Moving to the financials, we simply can't talk about the quarter without discussing the weather. 11 out of the 20 of our regulated states experienced either above average rainfall, cooler temperatures or both. The Northeast region had its eighth wettest summer on record with New Jersey experiencing its fifth wettest summer on record. July 2009 was also officially the coldest July on record in six of our states, according to the national climatic data Center, including Iowa, Illinois, Indiana, Ohio, West Virginia and Pennsylvania. That weather pattern has continued into the fall.

In past calls we've spoken about how the geographic diversity of our footprint lessens the impact of the weather. And in fact, a few of our states did actually have more typical summers. But when a majority of our larger states in terms of revenue had the kind of wet or cool weather we saw the summer, there's going to be some impact on revenues, net income and EPS. And that's what we saw this quarter.

All that being said and despite the weather, our revenues for the quarter ending September 30 increased by $7.8 million while net income increased in the third quarter to $91.6 million from $88.2 million in the third quarter of 2008. Our earnings per share for the third quarter 2009 totaled $0.52 per share compared to $0.55 per share for the third quarter of 2008. As we noted in the second quarter, our focus on delivering our core strategies helped us lessen the impact of the wet weather. We also continued to focus on cost containment, and I do want to commend all of our operations across the business for their commitment to managing these costs.

Also offsetting the wet weather's impact was recognition of our prudent infrastructure investment through rates. For the quarter we received authorizations for additional annualized revenues from general rate increases of approximately $16.8 million. As of September 30, 2009, we've filed general rate cases in 10 states and 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 applicable regulatory agencies will vary.

During the quarter we also issued $53.2 million in new tax exempt bonds which we used towards our capital investments as well. To date, we've invested approximately $593 million in capital investment projects this year.

During the quarter we also had some good growth news. In September we announced two more contracts with the military, bringing our total number of military contracts to 10. Our military services group was awarded contracts for operation and maintenance of the water and wastewater systems at Ft. Belvoir, Virginia and Ft. Meade in Maryland. Our growing portfolio clearly demonstrates our commitment to providing military bases with solutions to best manage their systems and delivering reliable water and wastewater services.

Pennsylvania -- we announced during the month of October that our subsidiary acquired four water systems from municipal authorities in North, Central and Western Pennsylvania. The combined purchase price of the newly acquired systems, which serve a total of nearly 4200 people, is approximately $7 million. We also acquired a system in Indiana in October, adding another 500 residents to our customer base there.

And to update you on our agreement with the City of Trenton, we had a hearing before the Superior Court in New Jersey in October, and we are still waiting to hear a decision.

These types of acquisitions deliver increased economies of scale through regionalization, which capitalizes also on the technical expertise and resources that we can bring to communities across the country. And being able to offer a variety of solutions to communities is a key part of our growth strategy. Currently, we are having discussions with approximately 75 different municipalities across the country which serve several hundred thousand people combined, looking for different solutions to their water challenges.

Whether these solutions end up being in bulk sale contracts, operating and maintenance agreements, some forms of public-private partnerships or an acquisition, it really comes down to what the customer wants as -- to solve their water issues.

We have ongoing projects that demonstrate our ability to provide water solutions as well. In fact, we've made great progress in our largest capital project currently underway. In Kentucky, our approximately $162 million project to build a 20 million gallon a day water treatment plant and install 31 miles of mains is more than 70% complete. We are slightly ahead of schedule on the project and on budget, and that really is a reflection of the team we have in Kentucky along with the expertise we have across the business and their commitment to delivering a solution that will ensure a sustainable supply of water for central Kentucky for many generations.

Another project I like to mention is in West Virginia. This quarter we broke ground for a water line extension project in Boone County. The bulk of the funding for the $2.2 million project came from a small cities block grant, which was provided by the US Department of Housing and Urban Development. This public-private partnership will extend water service to about 150 homes. Residents in this area have been working to get treated water service for some time because of concerns that local wells have been tainted by coal slurry from old underground mines. So again, these are two great projects, one resolving a supply issue, the other a quality issue, that demonstrate our continued commitment to working with communities to provide water solutions.

In other Company news, we were pleased to announce American Water's 2009 environmental grant program awards. A total of 29 projects will be supported by grants totaling more than $139,000. This program offers funds for innovative community-based environmental projects that improve, restore or protect watersheds. These grants reflect American Water's commitment to ensuring water quality through consumer education and community protection programs.

Because I talked about the commitment we have across the business to manage costs, I do want to mention quickly an award our Arizona operations earned. They earned the Water Reuse Small Project of the Year Award at the annual Arizona Water Reuse Conference. The ward was earned because a team invented a way to use a water filter at a wastewater treatment facility for internal industrial use. So, rather than using potable water, they are using reclaimed water. The entire cost of the project was only $5000, but they have reduced water consumption and cut water costs at the facility by more than 50% annually. The facility is now able to keep roughly 1 million gallons of water per month or 12 million gallons a year in local aquifers -- a great example of the type of people we have working for the Company and how innovation can deliver cost savings.

Finally, on October 30 we announced our sixth consecutive dividend declaration since going public in 2008 and the second payment of $0.21 per share since our Board increased the dividend by 5% in July. We are pleased to deliver this payment to our investors.

With that, I'll turn the call over to Ellen Wolf to discuss the third quarter financial results.

Thank you very much, Don, and good morning, everyone. As I've mentioned on previous calls, our financial results continue to be driven by a focus on our core strategies of prudently investing in our infrastructure, applying for and receiving appropriate rates of return on that investment and focusing on cost containment while also making continuous improvements to the service provided to our customers as well as the processes and procedures utilized to provide those services.

While we continue to execute our strategies, the impact of the economic slowdown and wetter than normal weather throughout the country have tempered our financial results for the quarter. For the third quarter of 2008 to the third quarter of 2009, we experienced an increase in revenue and net income despite the negative impact of the economy and weather. However, earnings per share, which was also impacted by the June 2009 equity offering, decreased over the same period. For the quarter ended September 30, 2009 American Water reported net income of $91.6 million or $0.52 per common share compared to net income of $88.2 million or $0.55 per common share for the same quarter in 2008.

Throughout this call I will be discussing in more detail the main drivers of the changes in the results from the quarter ended September 30, '08 to September 30, 2009. A more detailed discussion of our results for the quarter will be provided in our Form 10-Q, which we anticipate filing today.

I did want to take a moment, however, to point out that, notwithstanding the impact of weather, our revenues, net income and earnings per share have increased for the nine months ended September 30, 2009, over 2008. Again, this is a result of our commitment to delivering on our core strategies.

For the quarter American Water reported revenues of $680 million, a $7.8 million increase, or 1.2% over the $672 million reported for the third quarter of 2008. Revenues from our regulated business increased by $17.6 million or 2.9% from September 30, 2008 to 2009. During the same period, our non-regulated businesses revenues declined by $8.6 million.

Regulated revenues increased primarily due to rate awards and various surcharges granted by regulators related to our continued investment in infrastructure since the prior comparable period. Regulated revenues also increased slightly due to organic growth and tuck-in acquisitions. Offsetting these increases was a significant decline in water sales volume that I will discuss in more detail shortly. Revenues in the non-regulated businesses declined mainly in the contract operations group as we continue to be selective in seeking out and bidding on appropriate O&M contracts as well as the completion in 2008 of the design-build portion of one of our long-term design-build-operate contracts.

This next slide does include a lot of detailed information, but it is the information that we are routinely asked for. And not only do we provide it during our earnings calls, but you can find it on our web site as well. Regarding rate awards since the beginning of 2008 through the end of September 2009, we have received $259.3 million in annualized rate authorizations, assuming normalized sales volumes, relating to our continued investment in our infrastructure and service quality, the impact of which would be reflected in our third quarter results.

During the most recent quarter we were authorized general rate increases of $16.8 million and were authorized increases of $6.9 million related to infrastructure charges. The average authorized return on equity in these cases was 10.5%.

Subsequent to the quarter's end we settled our rate case in Pennsylvania, which grants an approximately $31 million in annual revenue in addition to the approximately $23 million previously received through infrastructure surcharges. Also in October we received authorizations for an additional $4.6 million of annual revenues in various other states related to infrastructure charges.

We have several rate filings pending with regulatory commissions. At the end of the third quarter of '09 we are awaiting the final orders in 10 states, including the recently settled Pennsylvania case, requesting additional annualized revenues of $258 million. At September 30, 2009, two orders outstanding that represent $2.2 million in annualized revenues have implemented [in earned] rates. Subsequent to the end of the third quarter, we did file an additional rate case in Missouri for a total of $48.7 million. There is no assurance that the filed amount or any portion thereof of any requested increase will be granted.

As we have mentioned throughout this call, due primarily to wetter than normal weather conditions as well as the economy, total Company sales volume decreased from the quarter ended September 30, '08 to '09 by 9.1 billion gallons or 7.4%. This decline was experienced in all customer classes as residential, commercial and industrial sales volumes decreased by 7%, 5.3% and 14.6%, respectively, with the economy being the driver of the decrease in usage by both commercial and industrial customers. As a reminder, our industrial revenues are approximately 5% of our total revenues.

In addition, we continue to see a trend of reduced per-customer consumption. As a result of these factors we have seen a reduced overall demand of 7.4% for the quarter and 5.7% for the year-to-date. The resulting loss in volume of water sold offsets revenue increases due to our rate awards by approximately $42 million for the quarter and $68.9 million for the year-to-date. We continued to see a decline in usage through October, again mainly due to the wet weather.

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. Operating expenses increased by approximately $5 million, primarily due to increased pension and post-retirement benefit costs. Despite the weather's impact on our results, the ratio of gross margin to revenue remained consistent at 31.5% for the quarter ended September 30, '08 to September 30, 2009. Without the impact of the whether we would have seen an improvement in this margin, as we have seen in prior quarters.

We remain committed to cost containment and long-term margin improvement. However, I should note that expenses related to our continued enhancement of customer service, pension, fuel and chemical costs continue to fluctuate.

Operating expenses of our regulated business increased by $17.8 million or 4.5% for the quarter of 2009 to $417.6 million. The increase was primarily driven by higher pension, post-retirement benefit and depreciation expenses. Our non-regulated businesses saw a decrease in operating expenses of $8 million directly related to the decrease in revenue as well as our focus on expense control. Overall, employee-related expenses for the quarter ended September 30, 2009 increased $12 million or 9.6% compared to the prior year.

Employee-related expenses consist of salaries and wages, pensions, group insurance and other benefit costs. The main drivers of the net increase of in the expenses are salaries and wages, pensions and post-retirement benefit expenses. Salaries and wages increased by approximately 4%, whereas pension and post-retirement increased by approximately $6.4 million or approximately 30% over the third quarter of 2008.

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 '08 and its impact on our benefit plan and asset returns. We continue to discuss with our regulators 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, we have authorization to recover or defer $11 million of this annual increase. We have requested permission to recover or defer as a regulatory asset until the next rate case [has] concluded an additional $7.5 million of this increase in 2009. We are discussing with regulators other ways in which to defer the costs until further rate cases are filed.

During this quarter compared to the third quarter of last year, we experienced an increase in our production costs of approximately $2.6 million or 3.1%. 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 $3.7 million or 25% even though our water volumes sold decreased by 7.4%.

Consistent with the prior quarter, our other production cost increases were more modest with some costs actually declining. Operating supplies and services decreased $11.9 million or 16.5% for the quarter compared to the same quarter in 2008. The majority of the decrease is due to the reduction in contract operations related to the design-build activity.

Expenses related to SOX costs remained relatively flat over the prior quarter. We continue our efforts to be compliant with Sarbanes-Oxley by the end of '09, the first date we are required to be in accordance with SEC regulations. The material weakness noted in contract administration is expected to be fully remediated at December 31, 2009.

Customer billing and accounting expenses decreased by approximately $800,000 or 5.6% for the quarter ended September 30, '09, as compared to '08. This decrease was substantially due to a decrease in uncollectible accounts expense, a result of practices we have instituted to manage delinquent accounts.

Our consolidated provision for income taxes decreased $7.4 million from the third quarter '08 to the third quarter '09, due primarily to state tax law changes at one of our subsidiaries as well as other discrete items. Our effective tax rate for the quarter was 35.4% and is expected to be approximately 39% 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 reliable service, we expect to invest approximately $800 million of capital during 2009. In the first three quarters of 2009 we invested $593 million, less than the $714.6 million we invested during the same period last year.

To fund our ongoing capital program, we issued common equity for $245 million, incurred incremental debt and used our cash flow from operations. Cash flow from operations for the nine months totaled $472 million. This represents an almost $80 million or 20% increase over the nine months ended September 30, 2008. Our increases in cash flow, long-term debt offerings and equity offerings enhanced our liquidity and increased our funds available under our credit facility. As of September 30 and October 30, we had no borrowings outstanding under our $850 million credit facility.

Commercial paper outstanding at September 30 and October 30 was $214 million and $42 million, respectively. Also during this quarter we successfully completed new long-term debt issuances of $53 million through public and private placements. Our interest expense for the quarter was $1.4 million higher than the similar quarter last year.

Separately, during 2009 we filed applications totaling $289 million with the state revolving loan fund agencies for either American Recovery and Reinvestment Act or other governmental subsidized funds. To date we have been awarded $2.4 million. As of November 30, 2009 we have outstanding applications amounting to $33 million that could still be funded through one of these programs.

And finally, as Don mentioned, we have declared three quarterly dividends to date this year, paid on March 2, June 1 and September 1. The fourth just recently declared will be paid on September 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 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. And with that I'd like to turn the call now back to Don.

Thank you, Ellen, and thank you again, everyone, for joining us. I did want to take a moment to thank you all for the feedback we've received from many of you regarding the transparency of the Company's information. It's the kind of feedback you truly want to hear from your investors, and it's a credit to the team we have here, who worked so hard to get that information to all of you.

I also wanted to remind everyone that we will be holding our first analyst day in New York City on December 7. You can have access to the presentations for the day through our IR section on the website. I do encourage all of you to take a look at it.

And we are happy now to take any questions you may have.

(Operator instructions) Ryan Connors, Boenning & Scattergood.

Just on the capital expenditure outlook, certainly you mentioned that the year-to-date numbers -- they're certainly big numbers in absolute terms, but they are down year-over-year. So I wonder if you could talk about the factors underlying the lower CapEx this year versus 2008. And then also, just give us any preliminary color that you are able to about your CapEx plans for 2010.

Let me start on that, and thank you for the question. We have regularly said that our capital program we estimate to be between $800 million and $1 billion a year. We ramped that up over the last three or four years, and last year, 2008, was the first time in our history that we actually did spend $1 billion. We had a number of things that we were doing last year, including the Kentucky project that I mentioned that we were ramping up last year and continuing this year. And that, combined with some water treatment facilities that we were doing last year that we finished, we felt that we would be at the lower end this year, and indeed we are still on target to be at the roughly $800 million level.

So yes, in absolute terms it's less than last year. We had some projects that all kind of got bunched into 2008. But we believe that the $800 million that we are on target for this year is consistent with what we've said and what we see as the appropriate capital program level for a Company our size at this time.

And so I'd guess that implies that next year you continue to believe that that $800 million to $1 billion level will be -- is an appropriate level for investors to think about for next year?

Yes. We're still finalizing our plans for next year, but there's nothing that we are doing internally, nothing that we are seeing externally, that makes us think that that general kind of range isn't still appropriate for our Company.

I'd also like to [remind you], if you remember, about a hopefully faded memory for all of us. At the end of last year there was a lot of concern about liquidity in the market. And at that time we did take a very hard look at our capital program, and that's why we had it down at the $800 million range versus closer to the $1 billion, in recognition of what was happening in the market.

I had a bigger-picture question on the non-regulated side. Don, you know, you mentioned that you are talking to I guess 75 municipalities about potentially becoming a part of their water operations. And I wondered -- the Company has traditionally gone towards the military type contracts and been very successful there. But, like many of your peers, there has been a hesitance to get too much involved and tilt the portfolio too much toward O&M contracts as opposed to core regulated operations. And I wonder whether that's still your focus or whether you might -- why not focus more on the O&M contracts? It seems that, given all the pressure on municipalities and so forth, this could be a once-in-a-lifetime opportunity for the private sector to get more involved in water services in the US. But at the same time, it seems like most municipalities favor the O&M model, if for nothing else, just for political purposes, than a straight outright asset sale. So is there any chance that you might get more active on the O&M side? And if not, why not?

Let me answer it this way, just as I did in my comments. What we are getting more active in is promoting American Water as the water solutions provider. That's what we think differentiates us from where we have been in the past and perhaps where some of our competitors are. We are very comfortable with the regulated model. We've been doing it for a century and a quarter. We'd like to think that our success for 2.5 years of trying to bring the Trenton deal to a conclusion is a good example of that. We're taking something from the public sector to the private sector, and we know that it's a model that works.

But to your point, it's not necessarily what all municipalities are inclined to do out of the gates, when they've been running their systems for perhaps 50 years or more in their fashion. And in the final analysis, it's not our call. It is what the customer wants, it's what the municipality wants. We are prepared and we have a track record of providing O&M contracts. We have a record of providing broader-scale public-private partnerships that are beyond the classic O&M contracts that may only go three to five years. We have some examples of municipalities that we've worked with where we've been providing service for more than a decade under some kind of contractual arrangement. And if that's what the customer wants, if that's what the municipality wants to solve their water issues, whether they be technical, water supply or financial, that's a model that we are prepared to work with.

But I don't think it's strictly a question of promoting O&M contracts. That is historically something that our industry did because there were a lot of impediments to doing sales in the past or doing some of the acquisitions. There were also impediments to doing longer-term agreements. Some were legal, some were structural, some were process related and we've seen a lessening of some of those over the years. So we don't necessarily promote short-term O&M contracts, but if that's what it is that a customer or a municipality wants, that's something that we are certainly prepared to do.

Debra Coy, Janney Montgomery Scott LLC.

I wanted to just follow up on the huge impact that whether or maybe some combination of weather and the economy has had. You broke it out on an EPS impact for the quarter, $0.14. Can you give us a number like that year to date? Obviously, given the marginal impact of those revenues, it's a much bigger number on the bottom line than it is on the top line.

Debra, I don't have that with me, but I think last quarter we reviewed and disclosed what we thought the second quarter impact was. (multiple speakers) and you would just take that impact and add to it the $0.14 that we see here, but we will get back to you with those two combined.

I remember the revenue number from the second quarter, but I didn't remember the EPS number. And even for the first quarter this year, it seemed like there was, as I recollect, an unusual number of main breaks in operating expense. My point is that it appears that, with October also impacting the fourth quarter, that we're going to see a rather major impact on the bottom line related to weather and reduced usage this year. And what I'm wondering about is, if we can assume -- obviously we can't predict -- but if we can assume that weather normalizes next year and the economy stabilizes, can you give us some sense of how that would impact on a rebound? My back of the envelope is that it's something on the order of $0.20, $0.25, perhaps, for EPS impact year-to-date and perhaps a little more in fourth quarter. Would we expect, if weather was normal, to get back that back next year, or would we not?

There are three things that impact usage, and I guess I can't predict what we will get back or not get back. As we mentioned, the three things were clearly weather followed by the economy and then the normal decline in usage that we see anywhere from the 0.5% to 1.5% that we've talked about historically as the trend. The economy has clearly impacted, as I said, the industrial and commercial usage. And we see that flattening out but not necessarily recovering, based on every economic report that we've seen. And then the weather -- hopefully, we do expect it to come back to a more normal.

So I think you need to break it out into the three components as we analyze it.

And then to follow up on what you mentioned earlier, as we build these lower numbers into future rate cases, as rate cases come through with your current filings, are they predicated on lower usage numbers going forward?

To the extent that we can update our filings for -- and as we update our filings for the lower usage, they do. For those states like Illinois or California which are future test years, they would have the predictive lower usage or trend going down.

So it takes a little while to get the lower usage numbers built in across your whole portfolio?

Yes; it could again. It just depends. For example, Missouri, which we just filed, would have the lower trend in usage and would give us the opportunity to update. But there is the normal regulatory lag; that's correct.

My other question is regarding the non-regulated business. It was down a fair amount in the quarter. You talked about DBO contract. Was that a one large DBO contract, or was that several?

Well, that was one large DB oh contract. And there's more detail that you will see in the Q when it's filed.

Okay. What I'm trying to understand before I see the Q, then, is if we back out that contract and the details that we'll look at, what is the underlying trend in that business?

The underlying trend as it relates to O&M, which is really its strength, continues along the appropriate path. But, as we said, we are very careful about what contracts we take and don't take, remembering all the lessons of others for the first half of this decade.

But is the appropriate path still a -- are we looking at a revenue -- backing out that one contract, are we looking at revenue growth there? Or are you saying that there's other contracts that you are looking at letting go that are unattractive? Is the trend still growth in that segment or not really?

We would see that segment starting to grow. And I think, although they are called military contracts, they are, in essence, O&M type contracts, and winning those as well.

And on the bottom line, you took out more costs than you had revenues down in this quarter. So is the margin improving even though the top line isn't doing much?

Our margin continues to be very solid on the O&M with positive EBIT.

Maria Karahalis, Goldman Sachs.

Could you please recap for us how many tuck-ins have been announced or completed so far in '09 with the ones that have been added in the third quarter? I just wanted to make sure that we are tracking that correctly. And can you speak a little bit to how we should think about the revenue that these tuck-ins are expected to generate?

The second question I have is on the non-reg contracts, the new ones, how should we think about when they will begin to impact revenue? And are there any unusual items like the DBO that occurred with the different contract in these that we should be considering also?

And finally, on the recent election in New Jersey, would be interested in your views on whether we should anticipate any impact on the regulatory environment.

With regard to the tuck-ins, let us not speculate here. We've reported on what happened this quarter. And if we don't already have that on the website, we'll try to get back to you, to give you the actual count of what they are. I don't want to give any misleading information about the total number. I want to say it's close to a dozen, but we'll give you that information.

Your second question was on the non-reg, I think?

Yes, on the non-reg, the two new contracts that have been announced, how should we think about when they begin to impact revenue? And are there any distortions like the DBO which impacted the different contract that we should consider here?

The DBO -- we had a large contract in California that we were working on, and that one ended the design-build phase, and that one pretty much rolled off this year with the bulk of it having occurred last year. There's nothing else of consequence that's in the Q with regard to DBO's that would be an anomaly.

So I think, with regard to the military contracts, I think you can start to see them becoming a part of our recurring revenues really next year, that we are in transition on those right now. That's been our history on them. When we get awarded a contract, as was the case last year, the end of the third quarter, our third quarter was the end of the fiscal year for the federal government. Although we do have some revenues that we recognize during the transition period, I think it's fair to just look at them becoming part of our regular revenue stream in the beginning of the new year.

Starting January of 2010, essentially?

Correct. And your third question was with regard to?

The recent elections in New Jersey and whether there might be any change to the regulatory environment.

It's a little early to really predict any kind of change in the regulatory environment. I think it's pretty clear, based upon what was noted during the campaign as well as what was -- what announcements have been made since, that the state of New Jersey faces some fairly strong economic and financial challenges. There is a budget deficit that's looming. There is a pretty strong backlash toward local taxes and the level of taxation in the state. And I could see that those things will certainly continue to plague many of the municipalities across the state at a time when they are having to base some of the same infrastructure investment challenges that we deal with on a regular basis.

So I wouldn't necessarily see, based upon anything that I've read or heard so far, that there's a silver bullet solution to some of the financial or infrastructure challenges in the state of New Jersey and that, likewise, that would mean that there will continue to be some opportunities for us. Beyond that, I'm not sure I could say much else, either in New Jersey or elsewhere.

Related to that, is there any movement on the discussions in New Jersey?

There's nothing new to report on that. It's a matter that has been pending for several months. Our petition is in, briefs and the like have been filed, and it's a matter of something that is before the board, to the PUC, the BPU, to decide in New Jersey. But there's no news on that.

(Operator instructions) Ryan Connors, Boenning & Scattergood.

I wondered if you could comment -- I know the major industry event took place in the intervening period between this conference call and the last. I wondered if you could just comment on the mood of the regulatory commissions there in terms of ROEs and the appetite for rate increases, etc. in, I guess, what remains a pretty challenging environment for rate payers economically. I wonder if you could just give us any color that came out of that event?

Well, I think, as you might expect, most regulators would be very guarded about saying anything about where they specifically stand on returns on equity for us or for any industry at a conference like that, given the legal constraints that they have and the requirement to deal with the records that are before them as opposed to any kind of general statement. Clearly, there is a strong recognition that our economy still is struggling. There's a strong recognition that the customers' ability to pay in these times is a bit more challenged than it might have been a year ago.

But again, they put that in the context of all the utility bills and would readily acknowledge that the water bills are, as we have often said, the smallest of all of the utility bills. So I think we still will get the benefit of the doubt in some of our cases.

I don't think there was any kind of general comment about interest rates and the like and whatever impact that may have on allowed returns on equity. I certainly couldn't report on anything like that. There's clearly a recognition of the need for all of us in this industry to have a sound financial profile. There's a recognition of the need to access the capital markets because of the capital-intensive nature of our business, and that was certainly reaffirmed in all of the discussions, in the panel discussions that we had. I think that there was an increasing recognition that the [DISC] type mechanisms is one way to deal with that, both from our perspective as well as theirs, that a modest 3% to 5% increase on an annual basis to deal with recurring needed infrastructure investments versus a big increase every two or three years is something that is not only better for us in terms of our access to capital but better for them in terms of backlash that they might get.

And I guess, if there was one other theme, it's a continued recognition that we've got to continue to have an open dialogue with all of our customers and all of our constituents about the value proposition of water and the need for continued investment in our infrastructure.

Interesting. And just to follow up on it, Don, one of the data points that we track very closely because we follow both the investor-owned water side of the industry as well as the equipment side of the industry, the infrastructure piece, is water pricing by the municipalities themselves, which is actually a component of the CPI. And what's interesting is that municipalities have been accelerating the rate at which they are increasing water prices, at least according to that data. So I guess the cynic's view would be that that's a backdoor tax increase in some of those cases and so forth.

But to us, that seems to be good news for the investor-owned utilities because, if you can cite rising prices on the side of the municipal utilities, that puts you in a good position to say that you need to get your own rate relief as well. Is that a case that you make, and is that something that the regulators are cognizant of, that the municipalities are raising prices more aggressively?

One of the panel discussions that was held at the conference was a review of the report that was issued earlier this year by the Aspen Institute. I had the privilege of participating in that, but it was about a year and a half study and a dialogue now as the Aspen dialogue on sustainable water infrastructure. And it was pretty clear, amongst other things, from that report and that panel discussion that there has been a lack of full-cost pricing of water across the country and disproportionately in the public sector, that the restraints that many elected officials or appointed officials who were overseeing the water operations -- they were loathe to make the investments because they were loathe to necessarily charge the cost that needed to be charged to reflect the full cost of the service that was being provided.

So I don't think that there was a surprise to anyone that that has occurred. And, to the extent that we begin to narrow the gap between this apparent low-cost service provided by municipalities when in fact it's not the full cost of the service and it's not reflective of all of the maintenance and capital investment that's been deferred, I think certainly that does bode well for our industry because it's a recognition of the value proposition that we bring to the table.

Barry Klein, Citigroup.

With regard to volumes, you guys talked about I think it was a $0.14 impact in the quarter year on year. How much of that relates to conservation that you might not get back versus weather?

When you look at the -- we did mention it earlier. But I have no problem going through it again just to quickly remind people. It is difficult for us to distinguish exactly what gallon is related to conservation versus weather, related to the economy. But the three drivers that we see in sales volume this year -- I think, clearly, weather has had the most impact, as mentioned by Don earlier, particularly it being one of the wettest summers and coldest summers across the nation. The second impact would be the economy, particularly in the areas of industrial and commercial sales. And then we have the normal decline in consumption that historically has been between 0.5% to 1.5%, depending upon what state you're in and your reason for water consumption. And those are the three drivers at this point.

How much of that is going to impact you in rates? I guess, how much of your rates do you depend on volumes of water being at a certain level? And will this require you to go in and get additional rates on top of what you would already have needed?

The way that rates are set -- and they are set on -- if it's a historic state, they generally look at the usage in the historic test year. So whatever the usage is, and then for future test year states, it looks, again, at historic and some projection of usage into the future. Because -- where it's weather-related, it generally bounces back the next year, assuming you have normal weather. But where it is something related to the economy or a decrease in consumption that is deemed to be more permanent and not necessarily bouncing back, we would be in requesting as part of the normal rate case an increase.

So in this situation, what would you do? You would pretty much -- you would wait or try to guesstimate on that how much was related to weather? Or would you try to wait it out and see how much of it returns?

What really drives our filing for rate increases is the capital investments that we make. And that's what would drive generally -- that's a bigger piece, actually, the largest piece. And that's what drives when we put in for a rate increase.

This does conclude the question and answer portion of the call. I would now like to turn the call back over to Don Correll for closing comments.

Thank you. This does conclude today's call, and I want to thank all of you for joining us today and for your continued interest in American Water. So if you have any more questions, please feel free to contact our investor relations team directly. Thank you once again.

Thank you. This does conclude today's conference call and webcast. You may now disconnect your lines at this time.