美國水務 (AWK) 2009 Q4 法說會逐字稿

Good morning and welcome to American Water's 2009 fourth-quarter and year-end earnings conference call. As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation to the Company's website www.amwater.com. That is 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 303-590-3030 for US and international callers. The passcode for replay participants is 4204123. The call replay is scheduled to be available until March 8, 2010, and the online webcast is scheduled to be archived through March 31, 2010, 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 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. Vallejo, you may begin.

Thank you. Good morning, everyone, and welcome to American Water's fourth-quarter and year-end earnings conference call. With me today are Don Correll, our President and Chief Executive Officer, and Ellen Wolf, our Senior Vice President and Chief Financial Officer.

This call is currently being webcast live over the Internet. It can be accessed on the Investor Relations section of our website at amwater.com where you will also find our public filing and the PowerPoint slides used in this call. A replay of the webcast will also be archived on our site.

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, both in our prepared remarks and answers to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimate.

However, since 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. Good morning, everyone. Thanks again for joining us as we recap another successful year for our business and speak briefly today on our performance during the fourth quarter.

While 2008 was the year of the IPO for us, in 2009 completing the divestiture was equally significant. I will touch on the divestiture in a moment but two other external influences that impacted our results and ones we have discussed on previous calls were the weather and the continuation of a challenged economy from 2008 into 2009.

I say external influences because, clearly while we could not control the weather and economy, implementing our core strategies allowed us to meet those challenges successfully and deliver a solid year of results. As we will detail, we grew our revenues while we continued to invest in our infrastructure, strengthened our corporate governance, provided solutions to water quality and quantity-challenged communities, and enhanced the water and wastewater services we provide to more than 16 million people.

As I said earlier, RWE completed the divestiture -- completing the divestiture was clearly a highlight for both the quarter and the year. From the time of the IPO and with each subsequent offering Ellen, Ed, and I often feel the 'when will it be complete' question.

The answer to that question came in November of 2009 when RWE sold its remaining shares and American Water marked another significant milestone in its long history.

Taking into consideration the divestiture of our stock through multiple, large public offerings in the last two years as well as our primary equity offering in June of 2009 and the state of the financial markets, American Water stock remained steady. Since the IPO in April of 2008 our stock outperformed the S&P 500, the Dow Jones Industrial Average, and our water peers. That performance has continued since we completed the divestiture.

I do want to take a moment here to thank the many individuals who devoted countless hours and tremendous energy into those four offerings and, ultimately, a successful divestiture.

Moving to the financials, I know I spoke in some detail about the cool, very wet summer on our last call but the weather did continue into the fall. And I think it's worth noting that according to the National Climatic Data Center the US experienced the wettest October on record. For the year we had record cool temperatures in July in six of our states and it was the second wettest summer on record in the Northeast.

The weather did impact our bottom line last year but, as I stated earlier, much like the weakened economy's impact we were able to still deliver improved financial results. Again, we attribute that to the focus on our core strategies and a disciplined approach to managing our costs.

For the year the Company reported operating revenues of $2.4 billion, a 4.4% increase over 2008 revenues of $2.3 billion. And excluding goodwill impairment charges, net income for 2009 was $209.9 million or $1.25 per basic and diluted common share compared with $176.1 million or $1.10 per basic and diluted share in 2008. This is a 13.6% year-over-year increase in earnings per share.

Contributing to the results were the recognition of our prudent infrastructure investment through rates. For the year the Company completed rate cases in 11 states generating $80.9 million in additional annualized revenues. As of December 31, 2009, the Company had general rate cases awaiting final order in nine states, which if approved as filed would provide $218.9 million of additional revenues. The extent to which these rate increase requests will be granted will vary.

Clearly, our ability to earn an appropriate return is linked to our ability to make the necessary investment in our systems to ensure reliable service. Our state teams understand the critical nature of communicating the many steps we take to deliver that reliable service to the commissioners, our public officials, and our customers. This communication has become even more important during a weakened economy.

We are equally committed to the prudency of our investments as we are explaining their necessity to those they benefit. 2009 started off with reports from both the American Society of Civil Engineers and the EPA describing the trillion-dollar water and wastewater infrastructure challenge this country faces further illustrating the need to invest.

2009 also brought with it a stimulus package which assisted us in making -- almost $180 million in new tax-exempt bond financing. These dollars will be used towards our capital investments and for the year, we invested almost $800 million in capital projects.

Investing in our water and wastewater systems is part of our greater effort to provide water solutions to water quantity- and quality-challenged communities and other entities. I have spoken about our ability to tailor solutions based on need and think that flexibility can be seen in our growth news for the year.

Most recently we acquired Environmental Management Corporation. EMC has solid experience in the development of sustainable and innovative solutions to meet water and wastewater needs, as well as a portfolio of more than 50 contracts that is very complementary to American Water's existing business.

This acquisition brings a new element to our business as well with the addition of EMC's large base of industrial customers.

The US Department of Defense also continued to recognize American Water as a powerful solutions provider by awarding the Company military base water and wastewater contracts. After earning several major contracts over the last two years the Company now serves approximately 400,000 servicemen and women, their families, and support staff on bases throughout the US.

We also acquired multiple systems located in Pennsylvania, Indiana, and West Virginia. With a combined purchase price of approximately $7.8 million the newly acquired systems serve a total of nearly 5,000 people. And we continue to evaluate acquisitions that will enhance and complement our business.

Also in 2009, our applied water management team renewed the largest O&M contract in Warren Township, New Jersey, and our homeowner services group launched its service line protection programs into a 16th state.

Regarding the acquisition of certain Trenton waterworks assets located in outside townships, the superior court unanimously ruled in favor of the city in 2009. However, a notice of petition for certification was recently granted by the New Jersey Supreme Court, and we await further action. As always, we will keep you posted on any developments.

Again, the variety of our growth reflects our capacity to offer multiple solutions as does the many projects we have across the country. Throughout 2009, I spoke frequently about our largest capital project currently underway in Kentucky. That project includes the installation of 31 miles of main over some very challenging landscape, but our team has remained absolutely committed to protecting the environment and the natural habitat. They are achieving that goal.

The 31 miles of main will connect to a new 20 million gallon a day water treatment plant, which is more than 80% complete. This approximately $162 million project will ensure a sustainable supply of water for Central Kentucky for many generations.

Last Friday we filed for a new rate increase in Kentucky, primarily related to this significant infrastructure investment. However, even with the proposed new rates, our customers in Kentucky will still pay less than $0.01 per gallon for that service.

2009 we also completed the construction portion of a significant design build to operate project, a $42.5 million, zero discharge, wastewater treatment facility in Fillmore, California. This plant is a great example of a public-private partnership and a design build to operate model. Through this partnership American Water helped the city achieve millions of dollars in savings.

The facility treats up to 2.4 million gallons of water daily and the high-tech filtration yields water 10 times cleaner than the old plant it replaced. Treated water is used to irrigate schools, landscapes, city parks, and green areas throughout Fillmore. While both these projects are among our largest, they are representative of just some of the solutions we are able to deliver to communities.

Of course we could not offer these solutions without the expertise of our employees. And since we are in the water business I think it's worth noting that our professionals across our company are dedicated to ensuring that our water meets or surpasses state and federal drinking water standards. American Water scores greater than 99% compliance for both water and wastewater standards. Over the past three years the American Water has averaged 27 times better than industry averages as reported by the EPA for drinking water quality compliance and 270 times better in meeting monitoring and reporting standards. That is a commitment.

This year American Water also set a goal to reduce our greenhouse gas emissions by more than 15% in less than 10 years. We estimate that 90% of our greenhouse gas emissions are a result of the energy required to pump water. So through a combination of increased pump efficiencies, purchasing cleaner generated energy sources, reducing our fleet, and increasing the use of alternative energy producing methods we believe this goal is achievable.

We set the goal as part of our commitment to the EPA's Climate Leaders program and we are proud to be the first water and wastewater company in the country to establish a goal like this on a widescale basis.

We were honored to earn several awards in 2009. We were named Water Company of the Year by Global Water Intelligence, we received the 2009 Excellence in Public/Private Partnerships for the US Conference of Mayors, and were recognized by the Arizona Water Reuse Association and the Environmental Business Journal for our water reclamation efforts. These awards are always a good reflection of the type of employees we have here at American Water.

In other company news, we now have a new Senior Vice President, General Counsel, and Secretary. Kellye Walker began in January 2010 with the retirement of George Patrick. Kellye has extensive knowledge in regulatory and enterprise compliance, corporate governance, and many other legal matters, and is an excellent fit for our company.

Our Board of Directors also took steps this January that reflect our commitment to the highest standards of corporate governance. Our Board adopted a majority voting standard which will commence with the Company's 2011 annual meeting of shareholders. The decision to wait until 2011 is related to the recent changes we had on our Board.

Julie Dobson and Stephen Adik join our Board in the summer of 2009 and three members representing RWE resigned upon the completion of the divestiture. Our Board now consists of eight members, seven of whom are independent.

In other Board action in January, we declared our seventh consecutive quarterly dividend since going public. You may recall our Board increased our dividend in 2009 from $0.20 to $0.21 per share. We were pleased to start 2010 in the same manner we did in 2009, with a declaration of a dividend to our shareholders on January 29.

Before I turn the call over to Ellen to speak more on our performance in 2009, as you may have read this morning in our press release, American Water will now be offering earnings guidance for the year. I would like to share with everyone our philosophy around earnings guidance so that you can put current quarterly performance in perspective.

We expect the range for 2010 to be approximately $1.30 to $1.40 per share. Our 2010 actual performance will depend upon numerous factors such as weather conditions, current economic conditions, and no significant changes in prevailing regulatory policies.

In addition to our EPS guidance, we are reiterating our previously stated long-term objectives which include investing between $800 million to $1 billion annually in our ongoing capital program, a 50% to 70% dividend payout ratio, a 45% to 50% equity to total capitalization long-term goal, and a 7% to 10% long-term earnings per share growth target. We believe offering guidance will enhance the information we already provide you as a publicly traded company, as well as reiterate our commitment to transparency.

And with that, I will turn the call over to Ellen to discuss our financial results in greater detail.

Thank you very much, Don, and good morning, everyone. As both Don and I have mentioned on this call and on previous calls, our 2009 financial results were driven by our continued 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 these 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 year.

First, I would like to just briefly mention our results for the fourth quarter of 2009, but the remainder of my comments will be focused on our financial results for the full year.

For the fourth quarter of 2009 our revenue grew by 5.2% from $568.6 million to $598 million quarter over quarter. Our net income remained flat at $36.4 million, while our earnings per share decreased to $0.21 per share as compared to $0.23 per common share for the same period in 2008. This decline in our earnings per common share during the fourth quarter of 2009 was due to our equity offering in June 2009 resulting in additional shares outstanding quarter over quarter.

Now I would like to turn our focus to our full year of 2009. Despite the unfavorable impact of weather, the economy, and general customer conservation trends, for the year 2009 we experienced an increase in revenues and an increase in both net income and earnings per share excluding goodwill impairment charges as compared to 2008.

For 2009 American Water reported a net loss of $233.1 million or $1.39 per common share compared to a net loss of $562.4 million or $3.52 per common share for 2008. After adjusting for goodwill impairment charges in both 2008 and 2009, net income increased from $176.1 million or $1.10 per share in 2008 to $209.9 million or $1.25 per common share for 2009. This represents a year-over-year increase of 19.2% in net income and 13.6% in earnings per share.

Throughout this call I will be discussing the main drivers behind the changes in our results from 2008 to 2009. A more detailed discussion of our results for the year we will be provided in our Form 10-K, which we anticipate filing today.

For 2009 American Water reported revenues of $2.441 billion, a $104 million increase or 4.4% over the $2.337 billion reported for 2008. Revenues from our regulated business increased by $124.6 million or 6% from 2008 to 2009. During the same period, our non-regulated businesses' revenues declined by $14.5 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. Offsetting these increases was a significant decline in water sales volume that I will discuss shortly.

Revenues in the non-regulated business declined mainly in the contract operations group as the design build portion of one of our long-term design build operate contracts was completed in the first quarter of 2009, as well as we continued to be selective in seeking out and bidding on appropriate O&M contracts.

As I said, our regulated revenues are primarily driven by regulatory recognition of our infrastructure investments. Since the beginning of 2008 through the end of 2009 we have received $268.6 million in annualized rate authorizations assuming normalized sales volumes. The impact of which is reflected in our 2009 results.

During 2009, we were authorized rate increases of $81 million with an additional $26.6 million related to infrastructure surcharges. The authorized return on equity in these cases range from 9.9% to 10.8%.

We have several rate case filings pending with regulatory commissions. At the end of 2009, we were awaiting final orders in eight states requesting additional annualized revenues of approximately $219 million. Of the outstanding filings at the end of 2009, for one order representing $1.3 million in annualized revenue, we have implemented interim rates which are in effect until the final order is issued. There is no assurance that the filed amount or any portion thereof or any request increases will be granted.

As we have mentioned throughout this call, primarily due to wetter-than-normal weather conditions as well as the economy total company sales volume decreased from 2008 to 2009 by 23.5 billion gallons or 5.8%. This decline was experienced in all customer classes as residential, commercial, and industrial sales volumes decreased by 4.8%, 4.9%, and 13.8%, respectively, with the economy being a primary driver of the decrease in usage by both commercial and industrial customers.

For 2009, our industrial revenues were approximately 4% of our total revenues. In addition, we continue to see a trend of reduced per customer consumption. As in the past, I should again note 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 a few minutes to give an overview of our operating expenses. Operating expenses, excluding goodwill impairment charges, increased by approximately $43 million or 2.4% from 2008 to 2009, primarily due to costs related to increased chemical, pension, and post-retirement benefits. These cost increases were partially offset by lower contracted service costs for the same period.

Excluding divestiture costs, SOX costs, and impairment charges operating expenses during 2009 grew at a rate of 3.5% from 2008, approximately 50% slower than in the previous year due to a combination of our focus on cost containment and the deferral of certain costs in recognition of the negative impact on revenue of both the weather and the economy. The ratio of operating income, excluding goodwill impairment charges, to revenue increased from 24.1% to 25.6% from 2008 to 2009.

We would have seen greater improvement in this ratio had it not been for the weather and the economy impacting system delivery. We remain committed to cost containment and the long-term margin improvement. However, I should note that expenses related to our continued enhancement of customer service, employee-related costs, and production costs will continue to fluctuate due to external factors.

Operating expenses for our regulated businesses increased by $63 million or 4.1% for 2009 to $1.618 billion. The increase was primarily driven by higher chemical costs, pension, post-retirement benefit, and depreciation expense. Our non-regulated businesses saw a decrease in operating expenses of $10.4 million directly related to a decrease in revenue, as well as our continued focus on expense control.

Overall employee-related expenses for 2009 increased $34.7 million or 6.9% compared to the prior year. The main drivers of the net increase in the expenses are salaries and wages, pension, and post-retirement benefit expenses. Salary and wages increased by approximately 3%, whereas pension and post-retirement increased by approximately $21 million or approximately 41% over 2008.

As I mentioned during the year, 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 plan assets and returns. To date we have authorization to recover or defer approximately $11 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 $6.5 million of this increase in 2009.

We experienced an increase in our production costs of approximately $14.7 million or 5.1% from 2008 to 2009. 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 $12.5 million or 24.5% even though our water volume sold decreased by 5.8%. Our other production cost increases were more modest with some costs actually declining.

Operating supplies and services decreased $34.7 million or 12.3% for 2009 as compared to 2008. The majority of the decrease is due to the reduction in contract operations related to the design build activity.

Costs related to Sarbanes-Oxley compliance decreased by $9.4 million from 2008 to 2009 and as of December 31, 2009, I have the pleasure to announce that we have fully remediated all material weaknesses.

Customer billing and accounting expenses increased by approximately $3.8 million or 8.5% for 2009. This increase was substantially due to an increase in uncollectible account expense and collection fees in the regulated business that we saw mainly in the first quarter of 2009 and included a significant amount of commercial and industrial bankruptcies.

Our consolidated provision for income tax increased $9.6 million from 2008 to 2009 due primarily to the increase in our net income after goodwill impairment charges. Our effective tax rate was 39.3% for 2009 and 39.8% for 2008. The decrease in the effective tax rate is primarily due to state tax law changes at one of our subsidiaries, deductibility of certain costs associated with RWE's divestiture as well as other discrete items.

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 invested in our systems net capital expenditures of $785 million during 2009. This is a $223 million, 22% decrease than the $1 billion that we invested last year. The decrease was related to a decision to limit our 2009 investment in regulated utility plant projects due to the credit market disruptions experienced in 2008.

During 2009 to fund our ongoing capital program, to reduce our 2008 short-term debt, and to provide shareholders value through the payment of dividends, we received net proceeds of $242 million from our common equity issuance, incurred $723 million of incremental debt, and used our cash flow from operations.

Cash flow from operations for 2009 was $596.2 million, a $44 million or an 8% increase over 2008. I should note, however, that we received a $35 million federal income tax refund check in the fourth quarter of 2008. Excluding the effect of this refund, 2009 cash flows from operating activities increased $79 million or 15% over 2008.

Our increase in cash flow, long-term debt offerings, and equity offerings enhanced our liquidity and increased our funds available under our credit facility. As of December 31, 2009, and February 24, 2010, we had no borrowings outstanding under our $850 million credit facility. Commercial paper outstanding at December 31 and February 24, 2010 were $85 million and $59 million, respectively.

During 2009 we successfully completed new long-term debt issuances of $723 million through both public and private placements.

Our interest expense for the year was $11.4 million higher than last year.

Separately during 2009, we filed applications totaling $288 million with state revolving loan fund agencies for either American Recovery and Reinvestment Act or other governmental subsidized funds. To date we have been awarded $31.1 million and as of February 26, 2010, we have outstanding applications amounting to $23.4 million that could still be funded through one of these programs.

As Don mentioned, we have declared four quarterly dividends relating to 2009, one of which will be paid tomorrow. The other three were paid on June 1, September 1, and December 1. Our policy, subject our Board of Directors, is to declare and pay a dividend on a quarterly basis and in the long-term expect to maintain a payout ratio in the 50% to 70% range of net income.

For 2009 our dividend payout ratio was 65% based on net income excluding goodwill impairment charges. Again, this highlighted our commitment to creating value for our shareholders and therefore our customers and our employees.

That concludes our prepared statements on American Water's quarterly and year-end financial results. And with that, I will turn the call back to Don.

Thank you, Ellen. Thanks, everyone, for joining us. We are pleased to relay another solid year of results to you.

To echo my first comments, we grew our revenues while we continued to invest in our infrastructure, strengthen our corporate governance, provided solutions to water quality- and quantity-challenged communities, and enhanced the water and wastewater services we provide to more than 16 million people. I want to thank all of our employees for achieving these results.

We are happy to now take any questions you may have. Thank you.

(Operator Instructions) Maria Karahalis, Goldman Sachs.

Good morning, everyone. Two quick questions, please. Can you talk a little bit more about the EMC acquisition and what it means for American Water? I believe in the press release you disclosed $50 million in revenue. But can you talk to us about how that fits in with your non-regulated business and how we should be thinking about the profitability for that business relative to your non-regulated business?

Secondly, Ellen, I know you talked about the operating expense items in 2009 that were fluctuating. Can you give us an update on your outlook for operating expenses going into 2010, particularly as it relates to some of the more volatile items like chemicals, pensions, and post-retirement benefits now that you have closed the year for 2009? Thanks.

Thank you, Maria. I will respond to the first one regarding EMC and give Ellen a chance to put her thoughts together regarding your second question.

EMC is one of -- it was one of several stand-alone contract operators that American Water had looked at. We see it as fitting very nicely into our portfolio of our non-regulated and complementing our contract services business. It allows us to strengthen the positioning that they had, particularly in the Midwestern part of the country where we already had some -- clearly had some utility operations and a presence, but not as much contract operations as we had in other parts of the Northeast and the Southeast.

It adds significantly to the staff that we had. It adds to our business development capabilities in that part of the country. And I have to say as well, just by expanding our ability to have a marketing and business development presence our view on business development and growth is that we are the water solutions provider.

And while EMC is predominantly a non-regulated contract operating provider historically, having their team be part of the American Water team, having them in communities as well as with businesses in different communities where we may not have had the presence we think adds to our ability to provide growth opportunities that will not only be in the non-regulated side but could also bolster our presence to bring along some regulated opportunities as well.

So we are excited about their having joined the Company just several months ago. We see it as, if nothing else, helping us to position ourselves more significantly in the Midwest.

Maria, to the rest of your questions, I will defer answering the pension and OPEB one. Our 10-K will be filed today and I think as you look at both the footnote disclosure, which is footnote 15, as well as the liquidity section, you will see a write-up that will address all of your concerns around that and how the stock market has performed and its impact on our pension plan.

As for our other operating expenses, as you may be aware most of our labor expenses, about half of them are fixed through union contracts and contracts that we have agreed to. And then, as we have mentioned before, we try to as much as possible put long-term or longer-term contracts in place as it relates to things like chemicals, power, and fuel. Unless there is a major disruption in the market, those costs usually come within our contracted amount, so we try and smooth out any significant increases there.

If I can go back just briefly to EMC, should we assume that that business is as profitable as your non-regulated business as we think about 2010 and folding that in?

Yes.

Okay, so comparable profitability. Great. Thank you very much.

Heike Doerr, Janney Montgomery Scott.

Good morning. I wanted to follow-up on Maria's question first and talk about efficiency ratio, O&M over revenue. I know that some of this is based on the volumetric declines we have seen on the revenue side, but do you have a longer-term efficiency ratio goal that you are working towards?

Heike, we are always looking to better that ratio. When we look at it, though, we have to look at it state-by-state and what is happening within each of those states. As we have mentioned, in states like California where you have a lot of purchased water your efficiency ratio would not be as good as a state like Pennsylvania where you don't have very much purchased water which is generally just a pass-through on cost.

We are very focused on cost containment and have put in place a business transformation process to start looking at each and every one of the areas where we can continue to lower our costs, either through better processes or better technology.

So there is no metric for us to track that on a company-wide basis you are aiming to get below 45% or something like that?

No, we believe, Heike, that that is really not appropriate to look at it from what would essentially be 50,000 feet. We, as Ellen said, look at it very carefully at every one of our business units whether it be on the state, whether it be on the regulated, whether it be on the non-regulated. And for the reasons that Ellen cited it is different between all of our geographic locations as well as our business units, whether they be reg or non-reg.

One can look at it and we measure it and certainly we make the calculation. But that is not the way we try to manage the business to come up with a consolidated view. That is one of the differences that we have from others in the sector because we do have the geographic diversity that others may not have in the industry.

Okay. And I am hoping we can spend some time on the parameters that surround your guidance range of $1.30 to a $1.40. We would think that just netting out some of the weather impact that we saw in the uncooperative months of this summer that the $1.30 should be pretty attainable given just a normalized weather period.

Can you talk, Don, about what is baked into the $1.30 and what you would need to have happen to reach the $1.40 end of the guidance range?

We have provided this guidance so that we can give a bit more clarity, as much as we are allowed to give, to all of the factors that go into evaluating our business prospectively. We are aware that there are other estimates that are out there, but we did not want to move forward into the new year given our size and our positioning in the industry without giving some sense from the management of the Company as to how we saw the future.

We built on the long-term objectives that we have all been talking about for the last several years, the 7% to 10% growth and the possibility of low double digits in our, quote, recovery period that started several years ago. But weighing all of those factors, looking at the weather, looking at the economy, looking at the rate cases pending, looking at opportunities for customer growth, we were comfortable that this was an appropriate range to give to all of you as to what the management felt our earnings potential could be for the new year.

Obviously as the year unfolds we will update this as appropriate, as circumstances change, or as circumstances unfold during the year. We can't predict at this point that we won't necessarily have another weather year like we had this past year or two out of the last three, but we are taking all of these things into account as we come up with this range of $1.30 to $1.40.

Can we drill down perhaps on some of the individual items that have been baked into this and what the difference would be between what the low end is and what the high end is? For example, does the low end assume continued decline in consumption? Does the $1.40 assume a return to normal?

What we are saying about our guidance is that the range of $1.30 to $1.40 takes management's estimates of all of those things into account. One can assume that on the low end it obviously assumes some lower level of revenues and on the higher end a higher estimate of some revenues. Whether it's weather, rate cases, or a variety of factors, we are not providing any more than the guidance that we have given.

And does this include assumptions as far as what kind of debt and equity offerings you will need to do throughout the course of the year as well?

It includes all of the factors that the management team has taken into account as a reasonable estimate, includes our capital program for the year as well. So it takes all of those into account and gives a pretty wide berth of what we think is a reasonable range for our earnings.

Okay. And the final housekeeping item, what should we be thinking about as an implied tax rate for 2010?

I would assume about 39%, in line with what you saw for 2008 and 2009.

Okay. Thanks, Ellen. Thank you, Don.

Jim Lykins, Hilliard Lyons.

Good morning, everyone. A couple of questions if I may. First, can you -- in addition to the pending rate case can you give us any more on what you anticipate filing for in 2010? And also if there are -- I know you are looking to get the surcharge mechanism in New Jersey, but if there may be some other states out there where you may be looking to get the surcharge mechanism or any other rate-making mechanism such as decoupling?

In terms of 2010, we have had a couple things. As you know, we filed -- Don mentioned we filed the Kentucky rate case on Friday and that rate case is to cover the new plant, the water supply treatment plant that we have put in place in Kentucky.

In terms of announcing any other filings that we are going to do, we do not set forth in advance the filings until we have actually done that. But I can say our philosophy and our strategy has been to put in the infrastructure and file on a timely basis for recovery of that infrastructure in rates. So we will continue to have a cycle of applying for rates in all of those cases where we continue to invest.

Okay. Any other states for potential surcharges other than New Jersey?

New Jersey and we also have -- West Virginia is looking at a surcharge and we did announce that we have a discussion and a filing with the commission on that as well.

Okay. Can we also get the EPS impact this quarter from weather? Have you broken that out?

We have not broken it out for the quarter. Generally, when we break it out it's not just weather; it is weather, the economy, and just general decline in consumption because it's hard to determine which piece is actually related just to weather. So we look at all three of those items.

The second is we don't want to take that into account without also looking at the impact of the expenses that were either deferred or not incurred because we didn't sell the water. So we have not given that number out for the quarter.

Okay. Thanks, Ellen.

Annie Tsao, AllianceBernstein.

All my questions have been answered. Thank you.

Walt Liptak, Barrington Research.

Good morning, everyone. I wonder for the quarter numbers did you give the actual numbers of what chemicals costs were in millions of dollars or dollar in wages?

No, we have just talked about them in terms of the full year. When you get the K there will be a footnote in the financials that lists the fourth-quarter numbers that will have them there as well. It will also have the detail of the yearly numbers for chemicals and all of those items which we can help you compare to the third-quarter Q that was issued.

Okay. On the expense side, outside of chemicals and fuels, the raw material, was there anything in the salary and wages line that would have been a true open accrual or something like that for the quarter?

What we would have as we pass throughout the year is the continued impact of pension and other post-employment benefits. So that impact would have still been in the fourth quarter as it had been in the first three quarters of the year when comparing 2008 to 2009.

I would also, just as a reminder, in 2008 we did have a charge related to reclassifying certain employees from exempt to nonexempt, and that charge was back in 2008.

And the tax rate was a little bit higher than I was expecting. Was there anything that you could call out that was one-time in nature?

There were a couple of one-time items, although technically we don't use the word one time. There were a couple of discrete items that were in the fourth quarter, some relating to the divestiture, the final divestiture of RWE from American Water, so that would be in there.

And again, I apologize and do not mean to sound evasive, but I would ask that you -- there is a very, very detailed footnote in the 10-K which goes into all of this, and more than willing once we've filed the 10-K and gone through that to have a discussion with you about any other questions you have as it relates to that.

Okay, we can take a look at it and follow up offline. Okay, thank you.

(Operator Instructions) Carlos Santalesa, Citigroup.

This is actually Barry Klein. Guidance, just going back real quick just for clarification, you mentioned that it includes rate cases and rate relief. Are you assuming full relief, no relief, or something in the middle based on your calculations of what you think you will get at?

We are assuming the level of relief that is based upon management's judgment and experience of what we would typically see from the various jurisdictions where we will have rate cases filed. There is no one answer to that in multiple states.

Sometimes we do get close to what we ask for; sometimes it's less; sometimes it's based upon adjustments throughout the case. But it's based upon a range of management's judgments based upon our extensive experience in dealing with the various regulatory jurisdictions in multiple states.

Okay, great. With regard to the contract operations, you mentioned that one of the causes for -- it was a little bit of a falloff because of one of your big contracts was completed in the first quarter. What is the average contract life remaining on these contracts and has the poor economy significantly impacted recontracting of these items?

Let me clarify. When we talk about a contract folding off, that relates to a design-build-operate contract. The operate contract is still in effect -- portion of that contract is still in effect and we generally try for long-term lives on those of 20 to 30 years if we can.

The piece that rolled off is the design-build piece. As we finish the design and the build of that facility, the revenues that is connected with it runs through our income statement as well as the expense. So when we talk about a contract rolling off, it was the design piece of that which was completed in the first quarter of 2009, and then thereafter we began the operating piece.

How about from contracting new contracts? Has the poor economy significantly impacted the contracting of new projects?

We are seeing much more interest and activity in talking with communities. Again, I differentiate between the different types that Ellen just alluded to. While we are seeing some increased interest in design-build, we are seeing far more interest from communities looking to tighten their own budgets and to look at ways to recover some of the capital that they need for other investments right now in looking at outsourcing their water or wastewater.

So we are seeing far more interest in that and have seen a significant ramping up in some of our business development opportunities.

Okay. Thanks for the time, guys.

Maria Karahalis, Goldman Sachs.

I just had one follow-up question to the earnings guidance. And I appreciate it's based on management's estimates for a variety of different things. But philosophically if we talk about the 7% to 10% broad guidance on a go-forward basis, can you talk a little bit about how much of it you would expect will come from revenue growth versus margin improvement?

Maybe that is another way to frame it that is not asking you for all your underlying assumptions, but just bigger picture how do you think about the growth profile for American Water going forward?

I think just to -- I will give a little historical view on that and certainly talk about how we have characterized that over the last two or three years. Certainly, the last two or three after we were starting the divestiture approval process, the recovery, if you will, and what became known as our catch-up period, clearly a larger part of our earnings growth was coming from the catch-up from the revenues that had been foregone by RWE and [TEMs] to earn the appropriate rate of return on the investments that we had historically made and were continuing to be making.

There is probably more of a balance going forward between managing costs as well as the revenue increases. But in this business and the way management looks at it, in this business as you are investing $800 million to $1 billion a year and you are having all of the carrying charges, whether it be the equity component or whether it be the debt associated with those rate base additions, a sizable piece is going to come from the revenue growth to cover those.

So I think that is one way to look at it. But we have not tried to disaggregate or differentiate between how much of the 7% to 10% or how much in our earnings is coming from just revenues versus efficiencies.

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

Thank you all once again for your time and your interest. This does conclude today's call. I want to thank all of you for joining us and for your interest in American Water.

If you do have more questions, please feel free to contact our Investor Relations team directly. Thank you and have a great day.

Thank you. This does conclude today's conference call and webcast.