美國水務 (AWK) 2010 Q3 法說會逐字稿

Good morning and welcome to American Water's third-quarter 2010 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, www.AMwater.com.

Following the earnings conference call, an audio archive of the call will be available through November 11, 2010 by dialing 303-590-3030 for US and international callers. The access code for the replay is 437-1260. The online archive of the webcast will be available through December 6, 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 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 or 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 third-quarter earnings conference call. 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 estimates 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 American Water's President and CEO, Jeff Sterba. Jeff joined American Water in August, and it is my pleasure to introduce him on his first earnings call with the Company.

Thanks, Ed. Good morning and thanks to all of you for joining us today. Ellen Wolf, our [CEO], will join me in making the presentation, and let me just apologize in advance for how both she and I may sound. We both have head colds, as probably some of you do. But we will get through it.

Additionally, let me say that in the room, we've got Walter Lynch, our President and Chief Operating Officer of Regulated Operations; Kelly Walker, our Chief Administrative Officer and General Counsel; and Bill Rogers, who many of you know, that I'm real pleased to have join our Company as our new Treasurer.

As you saw in our release, we had a strong quarter of performance driven by increased sales partially due to weather, cost management, and constructive rate decisions. With double-digit percent increases in revenue, cash flow, and net income, earnings per share were up 37% over the same quarter last year to $0.71 per share. We now expect to be at the upper end of our guidance range of $1.42 to $1.52 per share with the potential to exceed the range depending on some factors that Ellen will discuss.

Before going into the details, though, let me make a few general comments. Over the past 80 days, I've had the pleasure of speaking with many of you and looking forward to meeting with those of you that I haven't. I've spent most of my time so far listening to customers, our employees, regulators, analysts, and other key constituencies while reviewing our strategy, talent, challenges, and opportunities.

Based on this, I do not envision any radical change to our overall strategy, rather, a more focused execution of a slightly refined strategy. We will talk more about this at our February analyst day, but let me just note that some rationalization of our regulated properties and a sharper focus on our competitive operations remains part of this ongoing refinement.

More critically, we are very focused on driving operational excellence. In my time here the last 80 days, I've found great people at the Company who are first-class operators and technologists in water and wastewater treatment and delivery. Our internal processes, though, can be improved.

Through our business transformation effort, we are evaluating the six key processes that drive what we do every day to make them more efficient, and putting the right technology in place to serve our customers with high service and low overhead. Now while some of these changes can be made in the short term, as we have previously discussed, the overall effort will be completed in about four years at a cost of around $280 million. As this effort is all about lowering our long-run costs to serve regulated customers, we believe these costs can be recoverable through rates.

Now as we move forward, our regulatory efforts will continue to be focused on earning an appropriate return, but we will explore more ways other than through traditional rate cases to achieve this. And we will talk more about that in February, along with our refined growth strategy, all of this geared to improve the long-term value of your investment in American Water.

So if you go to slide 5, with what I've said, on slide 5 you can see a summary of our quarterly results compared to the same quarter last year. Operating revenues were up 16%. Operating income is up almost 28%. And earnings per share is up 37%.

For those of you that look at the O&M efficiency ratio, while I have to say I've got some difficulty in how I have seen this generally calculated, the trend is in the right direction with about a 2 percentage point reduction over last year. And let me just mention a couple of the items that I think -- that we are addressing to help make sure that kind of a ratio can be meaningful to you.

In some states, we have high purchased water content. And so consequently, that will throw it off balance. We also include a non-cash item in our O&M that's usually not included in others, which is net negative salvage, and that really ought to be pulled out so we compare apples to apples. And then as you know also, our competitive side operations are included in there, and not as capital intensive; they're more operating intensive. So we will talk more about that as we go forward.

So these quarterly results reflect that the Company continues to drive its core strategies. As I said, there's more to be done to drive further cost efficiencies. But recent performance shows progress in this regard.

Moving to slide 6, reliable service is a key component of our value equation for customers, and it drives our investment strategy. Significant projects are ongoing in a number of our states, as shown on this slide. I would note that our new Kentucky water treatment plant went into service in September after a short two-year construction period. This was $164 million investment approved by the Kentucky Commission with the support of the Attorney General's office.

Our customers have already started benefiting from this facility as the region entered into a late summer drought. Being in Kentucky twice in the last couple of months, I have never seen it so brown, and I certainly hope that it returns to the blue grass that at least I enjoy in Kentucky.

And with this water supply solution in place, the region's economic [totality] is safeguarded. Businesses no longer have to worry if water use will be restricted, as we can now ensure that the central Kentucky's existing and future water needs can be met.

Moving on to slide 7, we continue to [offer] water solutions both to our current customers, as well as to communities that are faced with water challenges. For example, we expanded services in West Virginia recently to bring a reliable water supply to several hundred people. We are also offering to extend water service at the request of the Pennsylvania Department of Environmental Protection to the community of Dimock, where residents are dealing with a somewhat high-profile well contamination situation.

We have also increased our book of future regulated-like business primarily in the wastewater side, by over $35 million in this past quarter.

Another successful solution we are delivering in California was recently recognized by the National Council of Public and Private Partnerships, who awarded American Water and the City of Fillmore their infrastructure award for our zero discharge wastewater recycling facility. We operated in partnership with the city, and it produces 1 million gallons a day of filtered, disinfected water with approximately 200,000 of those gallons being used to irritate public schoolyards, parks, and a new greenbelt in the downtown Fillmore area.

When you consider the water source challenges that exist not just in California, but increasingly elsewhere in the United States, these are the types of sustainable solutions that just make sense.

So, again, it was a very solid quarter, and I want to thank all of our employees for their hard work and commitment. As a result, our Board declared a quarterly cash dividend of $0.22 per common share on October 29.

Regarding dividends, let me just make a side comment that, as you would hopefully expect, we are part of a national effort to retain the current dividend tax rate. As you know, the 2003 tax law which lowered the federal tax rate on dividends in order to encourage investment is set to expire at the end of the year, and if Congress doesn't do anything, the dividends would again be taxed as ordinary income.

We have launched a new section on our website called Defend My Dividend, where our owners, our employees, customers, retirees, can get more information on the issue as well as how to contact their local representatives and urge them to take action and retain the current dividend tax rate. I'm also spending time on the Hill before and now after, now that we go into the lame-duck session, to push on this with all of our gas and water colleagues.

This industry needs patient capital to make the investment needs of water and wastewater systems. And now, quite frankly, is not the time to penalize that patient capital. I hope you join me in that and do your part in helping encourage appropriate and prompt action.

Before I turn the call over to Ellen, I want to remind everyone that our investor conference is now set for February 15. We believe coordinating that conference with preliminary 2010 year-end results, providing 2011 guidance, and a deeper dive into our strategy, will give you a more substantive and integrated picture of our business. You can get more details about that on our website or by calling Ed or Muriel, and I look forward to meeting many of you in person at that conference. With that, I turn the call over to Ellen to speak into more detail on the earnings.

Thank you very much, Jeff, and good morning, everyone. Last evening, we did file our 10-Q, which does include a significant amount of information relating to our financial results. And, therefore, my prepared comments will be limited to allow sufficient time for your questions during this call.

As Jeff indicated, we continue to see strong financial results for the third 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.

Positively impacting our results is the stabilization of residential usage quarter over quarter, mainly due to the drier weather in certain states this year than last year, as well as our continued focus and success relating to cost efficiencies.

For the quarter ended September 30, 2010, we reported revenue of approximately $787 million, a $107 million increase or around 15.7% over the $680 million reported for the third quarter of 2009. Revenues from our regulated business increased by $92 million or a little under 15% from September 30, 2009 to 2010. During the same period, our Non-Regulated Businesses' revenues increased by $15 million or around 23%.

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, as well as an increase in total water sales volume in all customer classes.

Revenues for our Non-Regulated Businesses increased primarily as a result of our entry into the industrial market through an acquisition that closed in December of 2009, as well as incremental contract work at a number of military bases.

These next two slides include a lot of detailed information relating to our filed and completed rate cases. You could also find this information on our website.

We have received around $148 million in annualized rate authorizations, assuming normalized sales volumes, through the end of September 2010, the impact of which is reflected in our third-quarter results. Note that about $33 million of that increase relates to rates implemented under bond, meaning they were implemented but may be subject to refund when a final rate order is received.

During the most recent quarter, we were authorized increases of around $3 million related to infrastructure investments. And subject to the quarter's end, we were authorized increases of around $9 million related to infrastructure investments.

During the quarter, we filed one general rate case that could increase annualized revenues by $10 million. At the end of the third quarter of 2010, we are awaiting final orders in nine states requesting additional annualized revenues of around $217 million.

And yesterday, we filed a general rate case for three districts in Arizona, requesting additional annualized revenue amounting to approximately $21 million. There is no assurance that the filed amount or any portion thereof of any requested increases will be granted.

Now total sales volume increased across all customer classes from the quarter ended September 30, 2009 to 2010 by 8.2 billion gallons or around 7.4%. We experienced increased sales volumes of 7.1%, 6.5% and 17% in the residential, commercial, and industrial customer classes, respectively.

The primary driver of the increase was associated with residential sales due to the warmer, drier weather for the quarter versus the prior year. However, we believe that the economy, including the housing market, and our customers' general conservation efforts, could continue to negatively impact overall demand.

We are unsure at this time if we will see with our sales in this fourth quarter, which is generally not impacted by weather, a similar 4% to 5% decrease in usage that we saw in the fourth quarter of 2009 and the first quarter of 2010 versus their respective time periods a year earlier.

We are continuously assessing and analyzing this trend to determine its impact on our rate cases, rate case testimony, capital expenditures, and other actions necessary to ensure quality service to our customers, as well as an appropriate return on our investments. As a reminder, declines in water sales volumes generally impact our results only during a period of regulatory lag.

I would like to take a few minutes to discuss our operating expenses. Total operating expenses for the quarter increased by approximately $47 million or 10%. Operating expenses of our regulated businesses increased by about $31 million or 7.4% for the third quarter of 2010 to $448.7 million.

Production costs that fluctuate with the volume of water sold, primarily fuel, power, and chemical costs, increased consistent with the 7.5% increase in system delivery over the prior year.

Our Non-Regulated Businesses operating expenses increased by $12.4 million. This increase relates primarily to the additional revenues generated as a result of our entry into the industrial market through the acquisition mentioned earlier, as well as incremental work performed under our contract with the military.

The ratio of operating income to revenue increased to just slightly under 35% for the quarter ended September 30, 2010 as compared to 31.5% for the quarter ended September 30, 2009. We continue to see improvement in this margin quarter over quarter as we remain committed to cost containment and long-term margin improvements.

To meet our continued commitment to providing water resource solutions to communities we serve and to deliver reliable service to our customers, we incurred capital expenditures of around $195 million during the third quarter 2010. This is slightly higher than the $193 million incurred during the same period last year.

Year-to-date capital expenditures of $522 million are around $71 million or 12% less than the same period last year. After giving consideration to the amount of capital investment made but not yet paid by the end of the quarter, the amount of year-to-date capital investment as compared to last year was only about $26 million or 4% lower. As such, for the full year of 2010, we still believe we will be in the lower end of our $800 million to $1 billion annual capital expenditure range in 2010.

To fund our ongoing capital program, we primarily use 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.

Continuing this trend, cash flow from operations for the three months ended September 30, 2010, totaled almost $290 million. This represents around a $47 million or 19% increase over the three months ended September 30, 2009. And year-to-date cash flow from operations has improved slightly under 25% over the previous year.

As we have mentioned on prior calls, one area we continue to address is the gap between our earned return on equity, or ROE, which has now risen to 6.4% at the end of the quarter, to our average allowed ROE of 10% to 10.5%.

One way to lessen this gap is to lower the interest of parent company debt. As such, in July of 2010, we began this process by swapping $100 million of fixed-rate debt that was at a rate of approximately 6% to a variable rate of six-month LIBOR plus 3.4%. We will continue to initiate similar swaps when market conditions are favorable.

As a reminder, as a result of the RWE purchase of American Water back in 2003, approximately $1.2 billion of debt was placed on our books with the cash being permitted to RWE. None of this debt was used to finance any capital needs of our regulated subsidiary.

As we continue our focus on providing cost-effective water and wastewater service to our customers, in July, we 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 0.8%. We have updated our New Jersey rate case filing for this information. We also had new debt issuances of around $71 million during the quarter, and in addition, we refinanced another $75 million of New Jersey callable bonds on November 1, 2010.

And finally, we are confirming our 2010 earnings guidance of $1.42 to $1.52, and do expect results at the upper end of that range. And as Jeff mentioned, we may exceed this range, dependent upon, among other things, the trend in residential demand, as was mentioned earlier on this call.

We are committed to creating value for our customers, employees and shareholders. And our results for the third quarter and guidance for the year show that commitment.

This now concludes our prepared statements on American Water's quarterly financial results. And with that, I will turn the call back to Jeff.

Thanks, Ellen. Again, we're very pleased with the quarter. We still have a lot of things to do, obviously. And, we would like now to stand and take any questions that you may have.

(Operator Instructions). Steve Fleishman, Bank of America Merrill Lynch.

Good morning. Two questions, first, is there any way to get your hands around kind of weather normalizing your performance for 2010, at least in so that it helps kind of think of a better base for 2011? I know last year was kind of bad weather. This year seems like it was clearly favorable weather. It's kind of hard to know what the real base is.

Yes. What's your other question, Steve?

My other question is just any update on equity issuance plans. Last call, you had said you don't really need it this year. Just any further update on equity issuance plans?

Let me take the first one and I'm going to have Ellen take the second one. And this comes -- coming from the electric side, weather normalization is just one of those basic things you do.

What I've found in the water side is it's not nearly as simple because it's multidimensional rather than just temperature. Because you can have high temperatures and rain, and so the -- I don't -- I have not seen any solid way -- you can weather normalize for temperature, but then, the precipitation side is what really affects us.

And rain is very localized. And since we have scattered systems, we can't just look at like rainfall in major metropolitan areas, and impute from that what the precipitation was because it can be vastly different. So, I don't know if Walter, do you have anything --? I have not seen any mechanism that asked about it.

No, I think that summarizes it quite well, Jeff. We are scattered, and it depends on not just how much rainfall but where it happens, and the longevity of it as well.

If I could also add to that, Steve, trying to figure out what is normal in this environment is very difficult because of, as we said, the economy, housing markets, number of vacant homes, and finally, just because of conservation. So, there's an adjustment to what is the new normalized.

Let me make one other comment, Steve. If you look or remember the breakout that Ellen gave, the one thing that we are seeing is industrial demand pickup, and that is not as weather sensitive as residential. So, that -- and that tracks I think with what you all are seeing on the energy side, that there is some, not enormous, but some increase in overall economic activity reflected by a lot of indices. And, when you look at the amount of increase that we had this year, it raises the question that you don't -- I don't -- there isn't a simple way to answer as to whether there is any fundamental economic return, if you will, on the residential side. I know we are seeing it on the electric side in many elements of the business, but it's just weather patterns are very different on the water side than they are for electric.

Okay.

But, to your second question, on updating on equity, we have no intention to do any equity offering this year. That position hasn't changed, and we continue to see very strong movements in our cash flow, very positive movements in our cash flow.

Thank you.

Jonathan Reeder, Wells Fargo.

Yes, just piggybacking off of Steve a little bit, I mean is the strategy now to keep CapEx kind of in the lower end of the range, and that way it kind of alleviates some of those equity needs, at least for the next maybe 12 to 18 months?

Yes, in terms of our strategy, we are still within the $800 million to $1 billion. It really depends on a couple things -- market conditions; ability to raise capital; but more importantly, what are the needs right now of our customers and addressing their needs. If you remember, we had a major plant put in, in 2009 -- most of Kentucky was from 2009, early 2010.

And the other projects that Jeff mentioned earlier, those projects really the [expanding] expenditures will probably be more in 2011. And, also, to just keep an eye on where rates are for customers so that we are not overwhelming them with rate shock.

Okay, so it isn't a strategy then to kind of shift any CapEx. It's just kind of the way it's falling out and the system needs?

Right. At this stage, that's correct.

That's right.

Okay. Can you go into a little more detail on I guess what happened in the Non-Regulated ops this quarter? It looks like expenses rose at a faster pace than revenues.

The -- when you look at -- I think when we highlighted what was happening in the revenues, we just highlighted really what was happening on the contract ops for the industrial as well as the military, which are part of it.

We continued to -- had a couple contracts that we closed down this quarter. And there were close-down expenses. But basically when you look at what's happening on our EBIT in the contract op, we do continue to grow quarter over quarter. And that's where we are focused is really on the EBIT. So those revenue and expenses did grow, but the result was a much higher EBIT than a year ago. I think it's about $3 million higher.

Okay. And then if you could lastly, can you remind us what I guess fourth-quarter 2009 weather and consumption trends were? I think you said something like down 4.5%. Is that what we should have -- is that what you would have assumed this year for the year would have been, had it not been for the favorable weather or --?

Yes, Jonathan, it's very hard; weather does not really impact the fourth quarter that much. And when we look at a year ago, the fourth quarter of 2009 was about 5% lower than the fourth quarter of 2008.

And when we look at the first quarter of 2010, that was around 4% lower than 2009. So what we don't know at this point, as we said earlier, is what piece, and that's what made it difficult to answer the first question as well -- is what piece is really due to factors outside of weather?

And when you look at those two quarters, those are more typical because they don't have the same weather impact. So what we are waiting to see as we hit this fourth quarter is are we going to continue to see that negative trend in consumption?

Okay. And can you comment at all on what you've seen thus far in the fourth quarter regarding weather and consumption?

Have you got anything you want to say?

No, we do see conservation trends in certain states in California, primarily, that are impacting the usage and that's declining, but overall --

But on [that] in California, we have a true-up mechanism --

That's right.

-- that allows the recovery due to that decline.

And we will discuss -- as we get a better feel for it, as Jeff mentioned, we will be having the investor conference and we will be disclosing our preliminary numbers at that point.

Okay, thanks a lot.

And just one other thing, Jonathan, that you've got to try to keep in mind also, when we look back, we're trying to see what impact does that have on the future. When we look at 2008, 2009, we also have to be -- we also have to recognize about the very turbulent economic time, and so changes from 2008 to 2009 can -- there's an awful lot of moving pieces in there.

Right. Very understandable how (multiple speakers) separate it all out. But we're supposed to take a guess at it, right?

We are sympathetic with what you are trying to do.

Right. Thanks a lot.

Ryan Connors, Janney Montgomery Scott.

Jeff, I just wanted to kind of go high level for a minute. Now that you've had a few months to get to know the Company and what's working and what's not and where the opportunities are, based on that, can you kind of give us a little more specifics on how you are thinking about where the specific opportunities are in terms of cost controls and other profitability improvements; what areas you are now thinking are where you will be focused early on based on your -- I guess you've been there a few months now?

Yes. It's 80 days in fact, Ryan.

Okay.

But who's counting? The -- two aspects to that. First is, is the overall what I call operational excellency, opportunities for efficiency and effectiveness improvements. And there are some what I will call easy hits that are just because I haven't been here. I look at things with a different set of eyes. We find things that I will just call de-bureaucratizing opportunities. And these are things where we can start to get rid of friction in the organization, paperwork and all that stuff, that helps streamline the operations even as it's being done today.

Then the second piece, which is really where you focus on, is a little longer term to implement. And this is where we are going through this very in-depth process review and have mapped six primary processes that drive all of our business; things like hire to retire, meter to cash, that we then are re-mapping how can we better perform that process and building that map then into the new systems that we will be bringing online over the next three years.

Some of this change is also cultural because we all get into old habits, and so you got to change people's willingness to adapt to new things in order to really get that value.

So those are the two areas on cost efficiency. And a big chunk of that is, frankly, in our overhead functions. But there are also real opportunities that Walter has and is continuing to pursue in our operational areas, whether it be how we use our fixed assets like trucks and cars, to little things like our error rates on water sampling and things like that.

As we drive down the error rates, error rates cause rework. That means increased cost. We drive down error rates, we drive down operating costs. As we are doing that, we're also going to build in more flexibility, so that we create a greater amount of flex in our cost structure, so as we have windows where we have a really wet summer and sales go down, we can end up with more of our costs being variable than fixed, which allows us to maintain more steady margins as we move through weather cycles.

Moving to the business side of it that affects revenue as well as expense, I think we're finding a number of opportunities. And we will spend a lot more time talking about this in February, but certainly the Company has been playing a catch-up game on rate cases.

But I think we have to think about regulatory strategy in a broader way. And I will just take, for example, California. It's an interesting state to operate in. It's got its challenges. Our folks that are in California are doing a heck of a business in turning around a state operation that really wasn't making much money, and they are doing very well this year.

One of the things that allows them to focus truly on their business is that their sales track. They have a sales tracker mechanism. So we are able to, as efficiencies go into place, consumer efficiencies, we get those sales, lost sales, picked up.

So we're going to be focusing across the business, looking at, are there areas where either because of regulatory environment or size, maybe we shouldn't be everyplace we are today. What's the right strategy on our competitive operations? Where do we focus to get more regulated-like returns out of that business and not maybe have as much exposure to more traditional kinds of contract ops? So that's the kind of work that's going on now, and we will talk about that in February.

Sure. And I guess a follow-on to that, and this might be something Walter might be able to address as well is, my understanding of the organization is that there's a fair degree of autonomy in terms of the operations of the various state-level subsidiaries, and then even within those, in terms of purchasing and things like that. Might there be opportunities to leverage the collective scale of the organization to achieve the sort of Wal-Mart effect, where whether it's on chemicals or meters or whatever it might be, you can drive a pretty hard bargain if you went to the market as one entity, and be a massive potential contract for the various vendors? Is that something that gets discussed at all?

Yes, it definitely gets -- this is Walter -- it gets discussed and we are taking action. We have leveraged our supply chain a lot more in this last year than we ever have and we will continue to focus there.

But we've gotten more favorable chemical prices on a national basis. We purchase power and we have done reverse auctions in certain states that have driven down our cost structure, so right to your point, we buy over $1 billion worth of products and services, and that's a key focus for us. So, we're going to continue to focus on that and drive down our cost structure.

Okay. And then just one -- one last one and I will jump out. Just Jeff, in terms of portfolio moves -- and again, now that you've had 80 days to kind of access, start to assess the organization, what's your view on portfolio moves? Are there areas where, from an acquisition standpoint, you would like to focus? And then conversely, are there areas and states where you feel like perhaps, you would maybe want to pull back in terms of making some targeted asset sales?

Yes, we are absolutely in the middle of that, and I'll tell you that we will be talking about that in February. I'm not in a position to give any specific indications of the changes, because they are still under works, but I think what you will see is a much more targeted and focused approach that's based on regulatory environments, opportunities, growth, and our cost structure.

Super. Thanks for your time.

Jim Lykins, Hilliard Lyons.

Good morning, everybody, and congrats on the quarter. First, to follow up on the efficiency improvements question earlier, I'm just wondering, with O&M, you've had three quarters of some really significant improvements. This quarter was 210 basis points of improvement. So I'm just wondering if you can give us a feel for how to think about that in 2011 and maybe you might even have a range that you could give us on how much that O&M line could improve as a percentage of revenues.

Yes, that's a great question, and, we will answer it in February. We will be -- we will have great information for you then. I don't want to start moving out piecemeal things. I certainly understand you all are trying to build your models, but we've got a trend going, and we're not going to reverse that trend; I will say that.

Okay. Well, that's helpful. What about with rates, can you -- excluding what is already pending, can you give us an idea? And I know you probably can't talk about amounts, but at least which states you plan on filing for over the near term and what the timing might look like?

No, we decline -- I would rather not talk about specific states, but I think with the portfolio of 19 states we have, probably at any time, we will have six to nine rate cases going on. That's about what we have --

(multiple speakers)

(multiple speakers) we file each year.

If you look historically, that's been about our average for the year, for any year. And as you know, as we continue to invest the type of money we're talking about investing, we will need to file rate cases to ensure a return on that investment.

And the other thing that affects that is how effective will we be in expanding things like [DSIC] to other states, which creates another mechanism for recovery of critical capital investment without having to file a rate case -- saves everybody money. So, it's a little more involved.

Okay. And, lastly, could you just make some general comments regarding what you are seeing with the acquisition environment right now and what the focus might be toward maybe managing more systems versus looking to be an acquirer?

Yes. And that is another great question, and you're going to hear about it in February. Sorry; I really want to present a coherent, consistent picture on that stuff, and to talk about it at this stage is a little premature.

Okay, fair enough. Thanks, everyone.

Walt Liptak, Barrington Research.

Thanks. It's Walt Liptak with Barrington. I wanted to ask about the fourth-quarter guidance. And, you know you mentioned that you're going to be at the high end of the range, but then in the commentary, you talked about it might be better than that. What are the swing factors? Is it largely weather that could push you over the high end of your guidance?

Ellen?

One of the biggest issues, as we mentioned, is just the uncertainty over usage and the decline in that usage. While weather is not a big -- there are -- the only impact generally you see of weather in the fourth quarter is not on the usage side, but rather on the expense side because of very cold weather could result in incremental main breaks above a normal run rate. That's one outstanding issue you could see on the expense side in the fourth quarter.

The second is really, as I mentioned earlier, just not yet understanding -- not yet having a good feel for how the fourth quarter in terms of usage may be, going back to as we've said sort of over and over, that the whole conservation, the economy, and recovery of the housing market.

And as Jeff mentioned earlier, we are seeing recovery in industrial, but we're not seeing that same recovery in the housing and residential markets. So, it's, again, really seeing if we're going to see a repeat -- the uncertainty about what we're going to see in terms of decline in usage.

Okay, got it. And, if I could ask one on the operational excellence, you know, you mentioned a couple of different levers I guess that you've got. And I wonder about the reduction in the bureaucracy within the business; did some of that start to take place during the quarter? And should we see a benefit in the fourth?

Well, it's ongoing. And, is it part of what's helping move down our operating margin -- our operating efficiency ratio? Yes. Are we going to continue to drive that? Absolutely.

And as I said, there's really both some short-term things -- and the short-term things aren't huge dollars. The bigger impact becomes in the longer term when we can really leverage systems and process change. But the systems we have today, we have to be very careful about making too many process changes because the systems we have are a little tenuous. They're just not as vigorous and well-connected. So, the shorter-term things that we can do help change culture. They will have less impact, but they will have a positive impact on O&M.

Okay. Is there a numerical number, in millions of dollars or something, you can talk about for the short term and the long term operational efficiencies?

We will give some insight around that when we talk in February for 2011. But, I really couldn't give you a short-term sense in terms of next quarter because then it's also what are you comparing it to, and so we will talk about that in February.

Okay, yes, fair enough. What about on the systems side? Is there going to be a capital expenditure related -- system sounds like software systems.

Yes; we have disclosed -- it's around $280 million for the entire project, which includes the software, the hardware, and putting in the different business (multiple speakers)

Oh, right, right. Okay, okay. Okay, great. Nice quarter. Thanks.

Steve Fleishman, Bank of America Merrill Lynch.

Thanks. First, just the New Jersey rate case is probably an important one. Do you have a sense on when that will be ruled on and chance of settling it?

Walter?

Yes. Yes, historically, we have seen the rate order come out between nine and 12 months, and we still feel that that's consistent here in this filing.

Okay. And then also, just on this issue of kind of thinking about the baseline, on the slide on the earnings and the growth rate, you still have the 7% to 10% growth you've talked about kind of off the $1.42 to $1.52 range. Is that the right way to think about things, including the whole thought on weather and sales?

Yes --

This year -- the base -- yes.

Yes. The 7% to 10% -- and I've said that I'm comfortable with it coming in -- it's a long-term rate. It's not a single year to year. It's what we believe we can build into this business from a long-term sustainable growth. Any given year will have its aberrations. And what we have to really look through is, what are the aberrations and which way does it drive it? But from a long-term sustainable growth, that's our target and we think we can do it.

Great. Thank you.

(Operator Instructions). Tim Winter, Gabelli & Company.

Good morning and congratulations on the quarter. It's great to see you're going to come in at the higher end of the new range. I was wondering if you could give some color on the initial guidance of $1.30 to $1.40 to where you are today. What some of the drivers were to get you toward the top end of the range; how much of that could be weather, economy, those sorts of things.

I can't, but Ellen can.

Yes, Tim, as we said, I think last quarter or the quarter before when we started to talk about this, throughout the year, we saw a couple things. Our operating efficiencies and the contracts that Walter talked about taking effect a lot earlier than anticipated; we -- seeing more normalized weather in the first and second quarters, than we had seen if you'll remember in 2009, an extremely, extremely wet summer, and just being able to distinguish the weather versus what was happening in conservation and other usage throughout.

So I think we really wanted to get and have gotten a much better handle on those as well as on our rate cases, and the timing of when we saw results from that rate case -- is very difficult -- as you just heard Walter talk about in New Jersey anywhere from nine months to 12 months trying to estimate when a rate case will come in.

So I think that was the sum of the thought process, both at the initial time we put the earnings guidance out as well as our learning process as we put the updated guidance out.

Okay. If we were to go to slide 18 and look at the -- trying to get to the allowed ROE range, how much opportunity do you have to lower that $1.2 billion of Company debt?

And on that New Jersey rate case and eliminating some of this regulatory lag, where are you on the [DISC] filing in New Jersey? Is that a separate filing? And --

Let me answer your first question on the current company debt, and I will turn it over to Walter to talk about the status of the DISC filing. On the parent company debt, of the $1.2 billion, approximate $1.2 billion, we have put $100 million of that into swaps. The market right now for swaps is not showing anything beneficial to us versus what we are currently paying on that debt. So we will continue to watch the market, and as we see a benefit to us in terms of lowering our interest expenses, we will continue to do swaps for a portion of that $1.2 billion, but right now, the market is not exactly conducive for that. With that I will turn it over to Walter.

Okay. As far as the New Jersey DISC, it's a generic filing that we are working with the BPU and other water companies to work that through. We've been working on that now for some time, and we are hopeful that that is going to materialize in New Jersey. But it is a generic proceeding that we are working with, with the entire industry, trying to move that forward.

And the timeline, Walter, is probably second, third quarter next year?

Yes, I would say second, third quarter.

This concludes the question-and-answer session. I would now like to turn the call back to Jeff Sterba for closing remarks. Please go ahead.

Thanks, again, very much for joining us today. We look forward to seeing you in February if we don't see you before then. If not, have a great set of holidays and we will talk to you later. If you had any questions, obviously, you can get a hold of Ed or Muriel for follow-ups. Take care.