美國水務 (AWK) 2010 Q2 法說會逐字稿

Good morning and welcome to American Water's second quarter 2010 earnings conference call. On the call with me today are Don Correll, President and Chief Executive Officer; Ellen Wolf, Senior Vice President and Chief Financial Officer; and Edward Vallejo, Vice President of Investor Relations.

As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation through the Company's website www.AMwater.com. Following the earnings conference call, an audio archive of the call will be available through August 12, 2010 by dialing 303-590-3030 for US and international callers. The access code for replay is 4328757. The online archive of the webcast will be available through September 7, 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). 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. As usual we'll keep our call to about one 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 estimates. 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.

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

Thank you and good morning everyone and thanks for joining us today. We're pleased to report our very solid quarter results to you, and unlike last summer, I'm not going to spend any time talking about rainy, cold weather. In fact it has been very hot and dry in many areas recently. But rather than give a weather report, I want to move right into the highlights of this quarter.

If you had a chance to go through earnings press release which we issued yesterday, you saw that American Water had increases in revenues, cash flow, net income and earnings per share. You also read that we adjusted our earnings guidance, increased our dividend as well as the news that we do not anticipate an imminent need for an equity offering. Both Ellen and I will speak to these matters shortly.

For the quarter the Company reported revenues of $671.2 million, approximately 10% increase [from] the same period in 2009. Net income was $72.8 million or $0.42 per share compared to $52 million or $0.32 per share in the second quarter of 2009. This is an increase of approximately 40% and 31% respectively from one year ago.

This net income growth in the quarter and able to us to improve the difference between our earned and the average allowed ROE by almost 50 basis points. This really was a strong quarter for us and it's a reflection of our ability to deliver on our plan. We're pleased with the improvement we see in our quarter -- in our operations quarter over quarter and particularly our success in driving efficiencies and effective expense control.

We also remain committed to executing the other fundamentals of our business. We're investing in our pipes, our plants, our technologies to ensure the reliable service we provide our customers. And we continue to offer solutions to the many water and wastewater challenges that exist across the US.

Before I move to the other highlights of the quarter I wanted to speak to a few trends impacting results in terms of our revenues and our costs. According to government statistics, production growth in the manufacturing sector has been on a firming trend since the second quarter of 2009. Positive gains can be seen starting in the first quarter of this year.

Compared to the same six months ended in 2009, manufacturing production rose 3.3% in the first quarter of 2010 and 7.8% for the second quarter of this year. Producer prices have also risen, but the recent increases have been more subdued than what we saw two years ago. So, while the PPI rose in Q1 and Q2, the cost levels are below their peak in third quarter of 2008.

I give you this information because I think it will give you some context when Ellen reports on our expenses and consumption a little later.

Moving to our capital investments, we invested approximately $330 million in capital projects for the six months ended June 30, including almost $185 million invested during the second quarter. In June we began a rather significant project in Pittsburgh, Pennsylvania. We're upgrading two water treatment plants, a pumping station and a booster station. The total investment is approximately $100 million in the improvements will benefit about 0.5 million people.

I should also mention that the investment is being partially funded through the Pennsylvania Economic Development Financing Authority's tax exempt program. And by taking advantage of this funding we're able to reduce our cost of capital for these important infrastructure upgrades.

We're also able to use tax-exempt financing in our Kentucky project which is now nearly complete. We have spoken about this project on several of our calls in the past and it's one of our largest investments at approximately $162 million. During the quarter we successfully closed an offering of $26 million in tax-exempt water facility revenue bonds in Kentucky and those proceeds will be used to repay short-term debt related to the construction of the new treatment plant and water main.

Two other projects of note are in New Jersey and Indiana. In New Jersey we're replacing a 1920s era water treatment plant in Milburn Township. It's an approximately $70 million investment. And in Indiana where investing another $24 million; a new water treatment plant in the city of Warsaw. These are just some examples of the investments that we are making to continue to ensure the reliability of our service.

In terms of seeking a return on American Water's investments during the quarter, rate cases authorizing additional annualized revenues of $118.6 million were approved. As of July 31, the Company was awaiting final orders for general rate cases in eight states requesting $223.9 million in total additional annual revenues. Seeking an appropriate rate of return on our investments is a core strategy for us.

It is also consistent with the principles espoused by the EPA, which has been actively promoting the idea of full cost pricing for water. According to the EPA, the US consumer continues to pay less for water and wastewater services than many other developed countries. The EPA continues to state that drinking water and wastewater utilities must be able to price water to reflect the full cost of treatment and delivery.

I think that [backs] really at the core of our rate requests and I believe the timeliness of rate decisions reflects that the commissions across the country and their staff do understand the necessity of this investment.

American Water has also continued to provide water solutions to other communities in need. We acquired water systems in Pennsylvania, Indiana and Missouri and will bring our expertise and resources to an additional 1400 people. Our [applied] water management team was also recently awarded a $3.4 million contract to build a new wastewater treatment plant in New York.

And while we're on the subject of providing solutions, I do want to take a moment here to speak about Trenton. As many of you will recall, several years ago officials in Trenton facing steep budgetary challenges proposed selling the suburban water system that they owned as a solution that would produce immediate revenue for the city. We were selected as the acquirer after a procurement process and the proposal was approved by the City Council of Trenton and later the New Jersey Board of Public Utilities.

But that sale was challenged by a small group of citizens and it ultimately led to a referendum vote this past June. The residents of Trenton voted for the city to retain these assets that lie outside the city. I think there were many contributing factors to this result, including a change in city leadership occurring at the same time as the referendum vote.

I think the news that occurred within 24 hours of the vote really did highlight the impact of what that vote really means for Trenton residents. In particular, a story by Bloomberg relying that the city's spending plan for next year calls for dismissing more than 200 police officers and fire personnel. These are the choices that many communities are being forced to make and I still firmly believe that collaboration between the private and public sectors can and will occur.

But moving on to some other highlights for the quarter, a big part of American Water's ability to offer solutions lies in the expertise of our employees. This quarter American Water received 24 Director's Awards of recognition from the Partnership for Safe Water. The Partnership is a voluntary initiative developed by the EPA and other water organizations to recognize water suppliers that consistently achieve water treatment standards that surpass regulatory requirements. I congratulate all of our employees on that tremendous effort.

And another honor we received during the quarter was being named Computerworld's 2010 Best Places to Work in information technology. This honor is of particular significance at this time because, as we relayed in previous quarters, American Water is currently undergoing a business transformation process to update and modernize our business processes and technology. This critical effort will enable us to optimize our workflow, our operations and to enhance our customer service capabilities.

Rounding out the quarter, American Water issued its first installment of our Corporate Responsibility Report. This installment is a prelude to our first full report which will be issued in 2011. American Water is the first US water/wastewater company to report on environmental, social and governance performance against global reporting index guidelines. We're proud to issue this report to our current and future investors.

So, once again, it was a very solid quarter with increases in our revenues, our net income, our cash flow and our EPS. As a result of that and other items we reported on, our board increased the dividend by 5% and declared a quarterly cash dividend of $0.22 per common share on July 30 this year. This is the ninth consecutive dividend declared since we went public in April 2008 and it's also the second increase. We had a previous increase of 5% in 2009.

Now that I have spoken to our most recent and our past performance I want to touch briefly on the outlook for the remainder of this year. Regarding the adjustment to our earnings guidance, we base this decision on several factors. As I previously mentioned, our teams have done an even better than expected job of driving operational efficiencies and managing expenses, which has contributed to our financial performance for the quarter and the year-to-date.

There has also been timely recognition of our needed investments to ensure reliable service. And as the quarter ended, we began to see more hot and dry weather than we've seen in the last two years in some of our larger customer base states. Based on these factors we have adjusted the range of our 2010 earnings guidance to $1.42 to $1.52.

And also based on our results to date this year, and given our strengthening cash flow combined with the impact of lower interest rates, lower interest expense and our current share price we do not see an imminent need for an equity offering. As always, our 2010 actual performance will depend on numerous factors such as weather conditions, current economic conditions and no significant changes in prevailing regulatory policies.

And with that, I will now turn the call over to Ellen.

Thank you very much Don and good morning everyone. Since we filed our 10-Q last evening, which includes a significant amount of information relating to our financial results, my prepared comments will be limited to expand the time available for questions and answers.

As Don indicated we experienced strong financial results for the second quarter of 2010 with increases in revenue, operating income, net income and earnings per share. We also continue to see significant improvement in our operating cash flow.

Our financial results are driven by the American Water team's focus on our core strategies to make the necessary prudent investments in our infrastructure, applying for and receiving the appropriate rates of return on that investment, focusing on our cost structure while also making continuous improvements to the services provided to our customers as well as the processes and procedures utilized to provide these services.

Positively impacting our results is the stabilization of residential usage quarter over quarter, mainly due to the weather in certain states. I will discuss usage trends in more detail shortly. For the quarter ended June 30, 2010 we reported revenues of $671 million, a $58.5 million or 9.5% increase over the $612.7 million reported for the second quarter of 2009.

Revenues from our Regulated Businesses increased by $47.3 million or 8.5% from June 30, 2009 to 2010. During the same period our Non-regulated Businesses' revenues increased by $11.1 million or 17.2%. Regulated revenues increase primarily due to rate awards and various surcharges granted by regulators related to our continued investment in infrastructure since the prior comparable period. Supplementing these awards was a slight increase in total water sales volumes.

Revenues in the Non-regulated Businesses increased primarily as a result of our entry into the industrial market through an acquisition that closed in December of 2009.

The next two slides include a lot of detailed information relating to our rates. You can also find this information on our website.

During the quarter we received $118.6 million in annualized rate authorizations assuming normalized sales volume. We began to see the impact of these authorized increases as well as those authorized in the second half of 2009 reflected in our second-quarter results. Also, during the most recent quarter we were authorized increases of $2 million related to them infrastructure investments. And subsequent to the quarter's end, we were authorized increases of $3.3 million related to infrastructure investments.

During the quarter we made rate filings of $168.7 million. As of August 3, 2010 the Company was awaiting final orders for general rate cases in eight states requesting $223.9 million in total additional annual revenues. There is no assurance that the filed amount or any portion thereof of any requested increases will be granted.

Total Company sales volumes increased from the quarter ended June 30, 2009 to 2010 by 1 billion gallons or 1%. In the commercial and industrial customer classes we experienced increased sales volumes 1.5% and 12.8% respectively, which we believe as Don mentioned earlier may be related to early signs of an economic recovery.

In the quarter we saw only a slight decrease in residential sales volumes of 0.8%, which is a slower decrease than we saw in the first quarter of 2010 compared to the first quarter of 2009. As we have mentioned in the past, it is difficult to determine the reason for the change in this decrease as it may be driven by weather, the economy or our customers' general conservation efforts. We continuously assess and analyze this trend to determine its impact on our rate cases, rate case testimony and other actions necessary to meet shareholder expectations.

As a reminder, declines in water sales volumes generally only impact our results during a period of regulatory lag.

I would like to take just a few minutes to discuss our operating expenses. Total operating expenses increased by approximately $19.7 million. Operating expenses of our Regulated Businessesremained relatively flat for the second quarter of 2010 at $413 million. Our focus on cost controls can be seen in all expense categories where there have been minimal increases and even decreases from prior years. In particular, we did not see an increase in fuel, power or chemical costs.

Our Non-regulated Businesses' operating expenses increased by $13.4 million. This increase continues to be primarily related to our entry into the industrial market through an acquisition that was completed in December of 2009 as well as increases in operating expenses for our Homeowners Services Group.

The ratio of gross margin to revenue increased to 29.2% for the quarter ended June 30, 2010 as compared to 25.7% for the quarter ended June 30, 2009. We continue to see improvement on this margin quarter-over-quarter, again reflecting our commitment to cost containment and longtime margin improvement.

Interest expense totaled $78.7 million, an increase of $5 million primarily due to refinancing of short-term debt with long-term debt as well as increased borrowings associated with our capital expenditures.

Our consolidated provision for income tax increased $14.7 million as a result of our increase in operating income. The effective tax rate was 40.2%.

To meet our continued commitment to providing water resource solutions to communities we serve and to deliver reliable service to our customers, as Don mentioned earlier we incurred capital expenditures of $184.6 million during the second quarter of 2010. This is slightly lower than the $204 million incurred during the same period last year and based on current projections we believe will be at the lower end of our $800 million to $1 billion annual capital investment range for 2010.

To fund our ongoing capital program we primarily used our cash flow from operations. As we look back over the past four years, our cash flow continues to increase as a result of rate case awards, expense containment and tax planning, increasing at a compounded annual growth rate of around 20%. Continuing this trend, cash flow from operations for the three months ended June 30, 2010 totaled approximately $121.5 million. This represents a $35 million or 41% increase over the three months ended June 30, 2009.

Based upon our strong cash flow, we have no imminent need to raise equity and will continue to assess market conditions for the appropriate time to raise capital in a way that creates value for our shareholders.

As we have mentioned previously, we continue to work on tightening the gap between our earned ROE which has now risen to 5.75% this quarter, to our allowed ROE which generally ranges between 10% and 10.5%. Our area of focus is to lower the impact of the interest -- one area that we are focused on is to lower the impact of the interest expense of the parent company debt. As such, subsequent to the quarter -- to this second quarter, we initiated a program to begin swapping portions of the parent company debt from fixed to variable rates.

As a reminder, when RWE purchased American Water approximately $1.2 billion of debt was placed on the parent company books. None of this debt was used to finance any capital needs of our regulated subsidiary. In July we swapped out $100 million of fixed debt that was at a rate of approximately 6% to a variable rate of the six month LIBOR plus 3.4%. We will continue to look at opportunities to swap from fixed to variable other portions of the $1.2 billion of debt at the parent company.

In addition to continuing our focus on providing cost-effective water and wastewater service to our customers, in July we refunded and refinanced $150 million of tax-exempt long-term debt at New Jersey American Water which should result in a lowering of interest expense by around 80 basis points. We will be updating our New Jersey rate case file filing for this information.

And finally as Don mentioned earlier, we are raising our earnings guidance. As noted throughout this call, the decision to raise our guidance is based upon a number of factors. Our ongoing success in the area of cost containment; weather in certain states; early signs of economic recovery, particularly in the industrial and commercial areas; margin improvement; lowering of interest rates; and the enhanced cash flow which results in a stronger balance sheet, and again, no imminent need for an equity offering. We are committed to creating value for our customers, our employees and our shareholders and our results for the second quarter and guidance for the year show that commitment.

This concludes our prepared statements on American Water's second quarter financial results and with that I will turn the call back to Don.

Thank you again everyone for joining us and we're pleased to relay another solid quarter of results to you. I want to thank all of our employees for achieving these results. At this time we're happy to now take any questions that you may have.

(Operator Instructions) Maria Karahalis, Goldman Sachs.

I have two questions. The first relates to the residential water volume. Given that last year as I recall the weather was actually framed as being pretty poor, can you talk a little bit about why the volume on the residential side didn't demonstrate an increase? And maybe there is some regional color that would be helpful there in terms of what you saw across the country given how many states you operate in.

Sure. There are a couple things. I think as we've talked about we have seen an increase particularly on the East Coast in this quarter, in June, related to the weather. Living here you know it has been very hot, humid and no rain. And again last year we did see wetter than normal around this time.

That is why we're not sure. We have seen an increase over last year -- a slight decrease over last year, but not nearly as much as we would have expected when we looked at the first quarter. So, again, part of it is weather for the increase, but I'm sure we still have some impact from the economy and we probably have just continued impact from conservation.

Okay. The second question I have relates to your financing strategy on a go forward basis. I was hoping you could talk a little bit more about the swap and the decision to go from fixed to variable. And perhaps if you could address, was it not possible to go from higher cost fixed rate debt to lower rate fixed debt in terms of just refinancing it to a lower fixed cost rate?

We did look at a couple of things; one, refinancing. And as you know, we are at a fairly good rate right now around 6% for the Company, and there are no overall call provisions within the debt. So it would've cost us more to call the debt.

Second, if you look at our balance sheet we have minimal variable debt on our balance sheet. It's almost all fixed debt and we took a hard look at what is the right way to structure your balance sheet, your debt between fixed and variable and had an opportunity with this parent company debt, which again I reiterate was not incurred for any acquisitions or capital down at the regulated side to take some of that and put it into variable debt.

So we have done that. We've done that with about $100 million at this point. And as I said, it was at LIBOR plus 3.4% and gives us about, at the time we did it, really does save on interest expense for us.

So just to clarify the comment that the debt at the holding -- at the parent company isn't to fund investment at the subsidiaries, how should we think about that debt? Why have it at the parent company? And again appreciating it is there and you inherited it, in a way; I don't know how else to frame it. How should we think about that going forward?

You are right. It is there. When RWE purchased the Company, the way they financed part of it was by taking out debt at American Water and then dividending the money up to RWE. That is debt that is on our books and it was really used to pay for the acquisition of American Water by RWE.

All right, that is very helpful.

Walter Liptak, Barrington Research.

Thanks. Good morning. I wanted to ask first about the -- I didn't see an ROE number. Maybe I just missed it, but I wonder if you could provide that to us.

It is in the appendix to the presentation. So I think if you go another slide or two you will see the ROE chart. It is on page 23 or slide 23.

Okay, that helps. I wonder if you could provide us with some guidance on when you expect to get to your target rate of return.

We have stated since we went public in 2008, and I know some are probably tired of hearing it, that it took five years to dig the hole and it's going to take that long or give or take a little bit to get out of it. I think this quarter is illustrative of that. This is a reflection of constantly working at our business plan to earn the right rate of return and it takes time.

It takes a continued, constant effort to file our rate cases, to watch our expenses. It doesn't happen at one specific time. But this quarter a lot of things came together.

So, we said it would take five years. We're in the midst of that. We're probably three to four years into it now. And that is still our plan that we hope to get close to those authorized returns in that kind of a timeframe.

The question is, because of the good quarter is there something that would accelerate that time period getting to the target ROE?

I should also remind you that if you look at that chart, a couple of things. While we will reduce the impact on ROE of the interest expense at the parent company, we will not eliminate that. That is one that prevents us from getting to, on a corporate wide basis, the full 10 to 10.5.

And regulatory lag we will always strive to close that, but it is part of the nature of the business. I think the second quarter results show that we are on target to dig ourselves out of this hole and really to continue to be focused on those elements that help us get there.

Very good. If I can ask one more, a couple of the expense line numbers, pension expense and group insurance were little bit -- they were down sequentially and lower than what I was looking for. Is that a sustainable level that we are at now and was there an effort made or an action made during the quarter to reduce that?

Pension, I think expense is lower this year than last year, one, because if you remember 2009 was a much better return year for pension assets. As for how the return will go for 2010, you get different answers depending on the day or the quarter. As you remember, the market had great returns for the first quarter this year, not as great returns for the second quarter of the year. And so, I don't really think we can predict at this point what is going to happen in the second half of the year and that is what will impact next year.

Got it. And what about the group insurance?

Group insurance we're looking at. And again, can't really comment because I just -- we're trying to size up the impact of the healthcare bill on us. And we'll know more of that as more rules and regulations come out around what its actual impact will be on us in the future.

Fair enough, great quarter guys.

Angie Storozynski, Macquarie.

I wanted to talk about the cost containment. How should we think about it going forward? Is there a lower level of cost that we should assume the business can operate at? And is there any impact from some costs that were deferred in 2009 and we should expect them to reappear some time later this year or in future years, or is it simply your business getting more efficient?

Great questions, thank you for asking them. In terms of our business being more efficient, that is one of our goals. I think having achieved what we did in the second quarter shows our commitment to those goals.

We did take some expenses in the second quarter. For example tank painting, which I had mentioned, last year we deferred something like that into 2010. We are starting to pick up on the tank paintings and did some in the second quarter. I think you will note that in our MDNA and we will continue to pick up on those in the third and fourth quarter.

We continue to be very focused. And I think if you look at the different components of each of our cost structure you will see that that didn't happen by itself. And we will be very focused on each of those components going into the future as well.

Do you have any growth rate in mind or any efficiency ratio that we should model going forward?

In the future, as I said, our goal is to get that margin better and in the long run to be the industry leader. And that is one of the reasons, again, as we mentioned earlier we are going through a business transformation as well, making sure we have the right systems and processes in place to get us there.

Okay, one more question. Maybe some more thoughts about acquisitions; you commented on Trenton. How about -- but you also mentioned that you have done some acquisitions, if I recall correctly, in Pennsylvania and I think Missouri. Any thoughts as to the investment -- well, the approach to acquisitions? Is there openness from those smaller water systems to actually be acquired? Or is there any opposition?

We continue with our business development strategy that we outlined in the past. We reported last year that we had somewhere in the neighborhood of 75 different opportunities that we considered more than casual, that we were having some discussions. That number is still reasonably firm.

Some have dropped out, like Trenton. Others have been added. We still see a receptivity, but I think the Trenton experience is one that one has to keep in mind. These do not happen overnight. They can become political. They take a great deal of effort and they are multiyear projects, sadly.

The very tiny ones like those that we closed this year, the tuck-ins as we refer to them, they may not take as long. But they likewise don't happen in six weeks' time.

We have closed four or five this year. We're on target to have upwards to about one dozen this year. I think we are comfortable with that as kind of framing it. These are not large transactions like Trenton. But these are ones that there are a number of things in the queue that could be large, but none that are anticipated this year.

My last question. The 7% to 10% long-term growth rate, does it assume any large-scale acquisitions?

Never has.

James Likins, Hilliard & Lyons.

Good morning everyone and congrats on the quarter. First thing I wanted to ask is, is it possible for you guys to, on a per share basis, say how much of the improvement this quarter can be attributed to the weather and how much of that is new rates?

We've tried. We've taken a look at that in the past. And where we collectively believe that it is probably more misleading if we try to give that kind of information, so we -- as Ellen has done in her slides, we have broken it down in terms of the revenues and we have broken it down in terms of the expenses. And I think one has to look at the revenues as some kind of a guidance as to what those impacts are.

I think if you look back at the slide that Ellen included on the revenues, you can see that the biggest part of the increase this year is continuing to get the recognition of the investments we're making, whether it be through general rate cases or infrastructure surcharges, that we are continuing to prosecute the rate proceedings and get recognition of our investments and that a very small piece of it was related to customer usage. Whether that is just using more because of the weather or whether it's using more because of economic activity.

Is it possible at all for you to just give us some kind of feel for what you mean when you say small piece? Is it single digits, a quarter, a half? Any comment you could make related to the word small.

If you go to slide -- I will let Ellen answer.

If you go to slide 12, you will note that when we try to breakout the variables between rate increases and increased customer demand, increased customer demand is a fraction or about one-fifth of what the rate increases are. And again, if you get a chance, in our Q we have a lot of these numbers that you can take a look at broken down further.

Okay, that's helpful. What about -- even though it is a small piece thus far into Q3, how would you characterize what you are seeing with the weather right now compared to what you saw at the end of Q2?

I think if you look at some of the thoughts we had behind increasing our earnings guidance that was also around what were seeing in terms of the weather.

Okay. All right, and I'm also curious how you would define the word imminent.

Webster would define imminent as something that is pending or shortly to happen.

How about this way, would imminent include the rest of 2010?

At this stage when you look at how strong our cash flow has been, when you look at our balance sheet in terms of the debt to equity ratio and it has stayed constant due to the increase in our net income, and where you look at our stock price has been, we don't see a need right now.

Fair enough. Thanks.

Michael Gaugler, Brean Murray, Carret & Co.

Thanks for taking the question. This is probably more geared to Ellen. As I look back over the last couple of quarters your tax rate has moved around pretty appreciably. And my thoughts are, as we go into what should be the seasonally strongest quarter for you, depending on where you peg the tax rate across the range that we have seen in the last four quarters, you can change that bottom-line number pretty appreciably in terms of forecasting.

I'm wondering if you could give us any guidance on what you're looking for in the tax rate in 3Q.

For the rest of the year we're looking at a yearly rate of around 40% or little bit above 40%. Part of the -- as you call it sort of the change in that from prior years is we had some discrete items in prior years that we don't have this year. And we also had some goodwill impairment in prior years where there was a piece of that which was debatable for tax purposes which you we don't have in this year, I'm happy to say.

All right. Most of the rest of my questions were answered. Again congratulations on the quarter.

Steve Fleishman, Bank of America.

Thank you. I guess a couple things. First, the 7% to 10% growth rate which you consistently espouse, I think going back that was off of a base of several years ago. Would you -- the way it reads on the slide it almost reads as if that is a growth rate off of your guidance for 2010. Is that fair or is it more kind of a general statement?

I think to the extent that our earnings for this year are within the guidance range, I think it's not inconsistent to say that wherever we come out this year that it's still our long-term goal to continue to grow at 7% to 10% from what our most recent year's results were. We've always said 7% to 10% from the time we went public and even before we went public. That was our goal stated.

We consistently have done that. We said at the time it would be 7% to 10% and perhaps low double digits, and we have been able to do low double digits every year. So, it is still our long-term goal and I think it should be viewed as our goal from wherever we come out this year.

Okay. And then secondly on this issue with the equity issuance and the commentary there, the past commentary had been expect us to be in the market every 12 to 18 months. So, that gave you kind of until the end of this year, so obviously it sounds like you're changing that to say look, we don't necessarily need to do something by the end of this year.

But -- A, is that the correct read? And I think that is what I read from one of your answers but I just want to confirm. Secondly, as we think going forward after this year is the kind of 12 to 18 months back on the table in terms of how to think about equity issuance?

I think based upon our stronger cash flow and what we are seeing that we will do equity offering if needed, but I think as one of the slides showed that 20% growth in our cash flow from 2006 on really has helped meet a lot of our cash needs. And therefore we don't want to be now, or don't need to be now in a position of predicting when we are going to come out for equity offerings.

We're going to work with our cash flow, continue to improve it and again we're going to watch and see what the stock price does and take advantage if there is a change in the stock price to a point where we can create value for the shareholders.

Okay and equity ratio targets for the Company still --

It is still, in the long run, 45% to 50%. But net income and growing net income is a part of getting to that 45% ratio.

Heike Doerr, Janney Montgomery Scott.

Thank you so much for getting the Q and the material out yesterday. It made a big difference.

I wondered if you could give us any additional color on the trends you're seeing with the commercial and industrial usage. Are there some states where you're seeing that recovery compared to -- more so than in other states?

Most of our industrial usage is in the Midwest when you look at it as a percentage of usage in our various states. And that's where were starting to see some of the uptick is in the Midwest in terms of industrial usage.

And commercial is all around. Commercial includes apartments an apartment buildings and I think recent information that has come out and is talking about how actually apartment occupancy rates have gone way up. And so we're seeing that as well in our commercial numbers.

Does some of your commercial include a weather impact but the industrial is solely economic?

Generally the industrial is economic and weather; some weather in industrial and commercial tends to be more on the economic side.

Can you give us any visibility in regards to which states we would expect to see rate cases? I know you can't disclose how much you will be filing for, but what states should we be looking towards between now and the end of the year for new rate filings?

We generally don't talk about where we're going to be filing. We continuously look at where we have put our investments in and what our need would be to then file. We will do that throughout the second half of this year as well.

Okay. That's all I had. Thanks.

Jonathan Reider, Wells Fargo Securities.

Good morning. Great quarter and thanks for the increased disclosures. They were very helpful. I was wondering if you guys had a better grip on the DRIP plan and what that might bring to the table on an annual equity basis, either per share or just annual contribution.

The DRIP plan, which we introduced -- I guess it's now been a little less than three months or four months ago; it was right before our dividend, not this quarter but the quarter before, has been slow on the takeoff. I think it has a lot to do with our institutional holders. But those who are aware of it have been reinvesting and we would expect to see that number continue to increase over time, but again a slow start and slowly picking up.

Any idea how many shares you might expect or is it still too early?

I think it is too early in this program at this stage to predict that.

There is no fundamental reason to expect that we can't move over the medium term to kind of the participation that we used to have when American Water -- before it was sold or that others in the industry experience. But we have to keep in mind that we have just floated the entire Company in the last two years. Our shareholder base is still stabilizing and we did just introduce it this quarter.

We certainly would have liked to have seen more participation in the first quarter, but I think we have learned that we shouldn't be disappointed by just one quarter's results and we will keep working at it.

Sure. And on the participation level for kind of modeling purposes, Don, do you know kind of what that pre-RWE level kind of was and what that would equate to?

I [don't have it] off the top of my head. I know we had a much higher retail investor base back then. But that is something that we can try to get some information on.

Great. Do you have a target (multiple speakers)

Jonathan I would also -- you can get more information about the program in the Quarter filing when you look at the Statement of Changes in Stockholders' Equity.

Right, yes; I saw participation look somewhat low, but like you said it is just ramping up. And then, Ellen do you have a target kind of year or date for that to get to at least the bottom 45% range for common equity?

No. It really is a long-term goal and we continuously work with rating agencies on things. But what is more important for us is really the cash flow. I should also mention that S&P just reaffirmed its rating for us and cited some of the very positive things we've talked about on this call.

Last question I have, the 2010, the guidance range, does that rough like July weather which has been positive thus far?

It does, yes.

(Operator Instructions) Faisel Khan, Citigroup.

Good morning. I know you guys talked about your operating cash flow improvements. Specifically as I look at operating cash flow and CapEx so far year-to-date, it is matched up with CapEx. Going forward it looks like the second half of the year should be stronger in terms of operating cash flow compared to the first half of the year. Is that the right way to read it, so that your operating cash flow should exceed your CapEx this year?

I'm not sure I would predict that our operating cash flow will exceed our CapEx. The third quarter, as noted in the MDNA, is traditionally our highest cash flow quarter because it covers the summer months, cash inflow from operations. But as was mentioned throughout the call, we have a couple of major projects that will be going on in the second half of the year. And so we will be spending more on CapEx in the second half of the year than we did in the first.

Okay, got you. And just one question on the Missouri rate decision that was effective on July 1. Was that case always expected around the middle of the summer or was that supposed to take a little bit longer?

It has ranged in time over the years. It's taken anywhere from half a year to one year. This is more on the shorter end of it. Again, Missouri has had different time frames. Every rate case has seems to have taken a different amount of time.

Fair enough, thank you.

Ladies and gentlemen, this concludes the question and answer portion of the call. I will now turn the call back over to Don Correll for any closing remarks. Go ahead sir.

Thank you again for joining us today. This is -- it has been a terrific quarter. I want to commend again everyone from American Water for their contribution to this. I want to thank all of you who have called in and listened for your continued interest.

This does conclude our call. If you have any more questions, please don't hesitate to contact our investor relations team. Thank you. Have a good day.

Ladies and gentlemen this does conclude this morning's conference call. You may now disconnect.