美國水務 (AWK) 2011 Q3 法說會逐字稿

Good morning and welcome to American Water's third-quarter 2011 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 10, 2011 by dialing 303-590-3030 for US and international callers. The access code for a replay is 447-8086. The online archive of the webcast will be available through December 5, 2011 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 up 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. Please go ahead sir.

Thank you. Good morning everybody, and welcome to American Water's 2011 third-quarter earnings conference call. 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 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.

Now I would like to turn the call over to American Water's President and CEO, Jeff Sterba.

Thanks, Ed. Good morning to you all and thanks for joining us. Besides Ed I have also got Ellen Wolf, our Chief Financial Officer, who will join me in the presentation, as well as Walter Lynch, the President of our Regulated Operations, who will be available depending on the question they have.

We are pleased to report results in another quarter that demonstrates growth, increased financial performance and effective execution of our strategic initiatives. If you flip to slide five you can see the result of this execution with solid performance for both quarter and year-to-date.

Total system revenues increased about 2.3% quarter-over-quarter to a little over $766 million, while adjusted net income and earnings per share increased about 8% and 7%, respectively. So adjusted earnings per share was $0.76 a share for the quarter and $1.46 per share year-to-date.

Now remember these earnings levels exclude the benefit from the cessation of depreciation for the assets under agreements for sale in Arizona, New Mexico and Ohio. And recall that we are recording adjusted earnings so that it is comparable to the guidance that included the basic earnings from properties we are selling, but does not include the added earnings that comes solely from stopping book depreciation on those assets from discontinued ops.

As you know, the East Coast was hit this quarter -- or last quarter -- with extreme wet weather, and overall we experienced a 3.7% reduction in water sales volume. However, revenues for our regulated segment increased by 1.1% driven largely by the rate case decisions that we have gotten.

And I think also importantly our regulated operations and maintenance costs decreased 1.7%. This, of course, drove down our regulated operating efficiency ratio, and it has continued to improve to approximately 39.6% for the last quarter. On a rolling 12-month basis the O&M efficiency ratio improved about 50 basis points to 44.9%.

Just quickly on cash flow from operations, for the quarter it improved about 8%. It remains slightly down year-to-date due to a 2010 tax refund and pension contributions, but obvious it is moving back into the right direction with an 8% improvement quarter-over-quarter.

So these solid results of this quarter allow us to reaffirm the increased earnings guidance range of $1.75 to $1.82 per share that we announced in September.

If you flip to the next slide, slide 6, this continuing performance improvement has resulted in our consolidated return on equity for the last 12 months increasing to 7.02%, which is a meaningful improvement from the roughly 6.4% level of the prior 12 months. So this is obviously moving in the right direction with more to come.

Now let me just touch briefly on growth, a couple of items relative to that. As you know, as part of our portfolio optimization initiative we have entered into an agreement to acquire seven water systems in New York that will substantively expand both our Long Island operations, as well as position us for what we believe to be some good growth up in the northern part of the state.

During the quarter we also completed the acquisition of the Roark Water & Sewer entity that serves about 1,300 total customers between its water and wastewater operations. And we also closed on another small water tuck-in in Pennsylvania. We have signed another five tuck-in acquisitions that we think are probably likely to close by the end of the year.

On the Marcellus Shale front, which is obviously an area where there is a lot of activity, we have added three new drilling customers, so we now have a total of 15 customer relationships, along with three more points of interconnection for a total of 32. We continue to see a lot of interest and they are exploring a number of different approaches and options with these customers that we have developed relationships with.

Now let me switch briefly to something that I think in our industry is somewhat unique to American Water, and that's our focus on innovation. In the past few months we have announced three new innovations all in the area of energy. In August we entered into a partnership with ENBALA Power Networks to utilize Smart Grid technology that allows us to harness the flexibility of our demand-side assets to deliver regulating margin to the electric power grid.

Now we successfully piloted this technology in Pennsylvania. And it has worked very well so we are now expanding this to our other facilities in the PJM Region. As you know -- or probably those of you that follow the electric side know PJM is a structured power pool that has embraced the ability to enable real-time integration of demand-side resources. As that moves forward into other parts of the country, we will also extend this technology and application to those other areas.

Second, in September the Company was awarded a patent for a new wastewater treatment process that reduces energy consumption for membrane treatment by some 30% to 50%, as well as reducing the amount of chemicals used. Power and chemicals are the two biggest operating costs after labor involved in the wastewater treatment process.

And, last, in October our New Jersey operations installed a floating array of solar panels, the first such array on the East Coast. This was done at the Canoe Brook plant, and it enables us to use the reservoir space for clean energy development. And it is also designed to withstand a freeze/thaw environment.

On the capital investment front, we have invested $622 million in the first nine months of 2011 compared to about $522 million for the first nine months of 2010. We expect to end the year having invested somewhere between $900 million to $950 million.

One other thing I want to touch on though is we discussed earlier the impacts of Hurricane Irene and Tropical Storm Lee had on the Eastern Seaboard in August and September. And I think that this is proof positive, not only of our investment in infrastructure and the benefit that has, but also the operating practices we deploy and the, frankly, very strong dedication of our employees.

Through the -- both of those storms we only lost temporary service to less than 2% of our customers in all the states that were affected. When you think about that compared to what can happen and what did happen in other parts in other systems, that is fairly dramatic.

And there is lots of things that I think drive that. We had employees that actually camped out on the roof of a water treatment facility that was flooded. We had employees that made their own decision to switch to self-generation in advance of the storm so we would avoid interruption of service. And a number of other things that I think really helped ensure great service to our customers.

I raise this because increasingly the value our customers perceive they get from their service provider is going to impact regulatory action, whether it be on rate cases or other matters. And we believe that this investment in helping ensure we provide a greater value-added service to them will be proof positive with the regulators and will clearly be in the best interest of our investors.

The last thing I want to mention on this front is really more relative to our employees than the Company in large. We have made great strides over the past 12 months to better manage our health care expenses, which as you know is one of the most rapidly growing expenses for corporate America.

We have done this by putting a very strong focus on wellness and condition management. And given what we have accomplished and what we are seeing with now over -- well over half of our employees being involved in wellness programs, we have been -- we are able to go into 2012 without significant increases in the health care costs to either the Company or employees. I think that is something that is fairly rare these days.

Turning to slide 7. We just talked about how our commitment to making investments in our systems and our people pays off in terms of being able to deliver high-quality, reliable service to our customers. There was an interesting report recently published by American Water Intelligence that makes some points I think you might find interesting. Their analysis of EPA data shows that investor-owned water utilities, especially larger ones like American Water, have a very strong compliance record when it comes to the Safe Drinking Water Act.

The report shows that no major investor-owned water company has been fined by the EPA for Safe Drinking Water Act violations, and that enforcement actions are few and far between, particularly sickly when you compare them to the rest of the industry at large.

And American Water stands out among the industry with an outstanding track record in exceeding those water standards. There are about 11,000 violations of clean drinking water standards across the country per year. We are roughly 5% of the market, so if we had 5% of the violations that would be 550 violations a year; last year we had four.

Again, I think that demonstrates our commitment to ensure the quality of service we provide our customers, which is, as I said, clearly in our investors' best interest.

So with that let me ask Ellen to go into our financial performance in more detail.

Thank you very much, Jeff, and good morning to everyone. Jeff has just reviewed with you some of the highlights of our third quarter and now I would like to turn to the major factors that drove those results.

On slide 9, as Jeff mentioned, you will see overall we had solid financial results for the third quarter of 2011 with increases in revenue, net income and earnings per share, as well as continued improvement in our regulated O&M efficiency ratio. These results are driven by our teams' commitment to strategies that focus around value to our customers that result in value for our shareholders.

For the quarter ended September 30, 2011, we reported operating revenues of approximate $767 million, a $17.5 million or 2.4% increase over the $749 million reported for the third quarter of 2010.

GAAP earnings per share increased approximately 10%. However, the GAAP number includes a benefit from the cessation of depreciation of our discontinued operations. For the third quarter 2011 that benefit was $0.02 per share.

Adjusted net income and adjusted earnings per share represent American Water's results as if we had continued to depreciate the assets of our discontinued operations, which we feel is a more appropriate way to view our business results.

For the third quarter of 2011 adjusted net income was approximately $134 million compared to approximately $124 million for the third quarter of 2010, or $0.76 per share compared with $0.71 per share in 2010.

It should be noted that our net income for the quarter also has a discrete tax benefit of $4.5 million or about $0.025 per share related to the contribution of appreciated land to a county authority in Kentucky.

Now I would like to turn the discussion to the various components of our net income starting of course with revenue. Overall operating revenues increased $17.5 million quarter-over-quarter. Operating revenues from our regulated business increased approximately $7 million, driven by new rates and various surcharges granted by regulators related to our continued prudent investment in infrastructure.

For the quarter the impact of these rate increases, some of which were granted and became effective during 2010, was approximately $27 million. These increases were offset by decreased revenues of approximately $18 million attributable to decreased water sales in 2011 compared to the third quarter of 2010. I will be addressing the water sales for the quarter shortly.

In our Market-Based Operations revenues increased by around $11 million during the third quarter of 2011 compared to the prior quarter. The increase was primarily attributable to incremental revenues of approximately $8 million from our Contract Operations Group related to water and wastewater services we provide under several of our military services contracts.

On slide 11, as I had previously mentioned the drive to earn an appropriate rate of return on our investment, the ability to earn this return is driven by our ability -- drives our ability to invest in infrastructure. The awarding of an increase in rate cases by our regulators is a measure of the recognition of the value of our investment.

This slide shows rate cases and infrastructure charges that have been recently granted. From April 2010 through November 3, 2011, we have been granted approximately $256 million in annualized revenue increases and infrastructure charges, assuming normal usage pattern.

Included in this amount are infrastructure revenues of around $8 million, which we were granted in our Pennsylvania and Missouri subsidiaries subsequent to the quarter end. Just as a reminder, for those of you viewing the chart, shown on this chart are the annualized increases, which will be realized over a 12-month period from the date the new rates were effective. This may or may not match our calendar year for reporting purposes.

This next slide shows the rate cases that have been filed and are awaiting a final order, as well as those rate cases where a settlement or partial settlement has been reached among the various parties involved in the rate case, but still awaits a final order from the commission. During the third quarter of 2011 we saw general rate cases in Ohio requesting additional annual revenue of around $8 million, and in New Jersey requesting additional annual annualized revenue of around $95 million. Subsequent to the quarter end we filed a general rate case in Illinois for $38 million in annualized revenue, granted as filed.

These rate cases are primarily driven by our continued investment [and] aging infrastructure to ensure reliable service to our customers. As Jeff mentioned, the benefit of these investments was demonstrated in our ability to maintain service in the majority of our Eastern operations through some very severe summer weather.

Settlements or partial settlement have been reached in our general rate cases in Pennsylvania, Iowa and Hawaii, which would provide approximately $40 million of revenue if approved in accordance with the settlement agreement. And also late yesterday California time a cost of capital settlement was filed to be effective on January 1, and apply to our outstanding rate case. The cost of capital granted was 9.99% with an equity ratio of 53%. This settlement still needs to be approved by the commission.

As of November 3, excluding those general rate cases with full or partial settlement, we are awaiting final orders in 10 states requesting additional annualized revenues of around $277 million. There is, of course, no assurance that the amount filed or any portion thereof to any requested increases will be granted.

As a reminder, through these rate cases we are working with regulators and their staff to address some significant regulatory issues, including declining usage and return on infrastructure spend, as well as pass-through mechanism for key expenses that are an essential part of the service we provide, such as chemical and power costs.

Turning now to our water sales volume for the quarter and year-to-date. That is slide 13. Overall our sales volume decreased from the quarter ended September 30, 2010 to 2011 by about 3.7%. On a year-to-date basis the overall decrease in water sales volume was 2.9% from the prior year's comparative period.

The year-to-date and quarterly volumes showed continuation of the decreasing usage trends that we have noticed over the past 5 to 10 years, and that we are addressing on our rate case filings.

But it also reflects some of the extreme swings we have seen in the weather over the past couple of years in the third quarter. Last year New Jersey had minimal rain and record high temperatures. This third quarter, in August alone, in parts of the Eastern United States the rainfall for the month exceeded total rainfall in any month in recorded history.

As we have noted in the past, we can never be completely sure of the reason for the declining usage for the given period of time, but we do know that a majority of the decrease of the third quarter was in our New Jersey, Pennsylvania and New York subsidiaries, which suffered extreme wet weather conditions and severe storms, including Hurricane Irene and Tropical Storm Lee.

Our Midwest operations were not affected by similar weather extremes during the third quarter, partially offsetting the weather impact of the East.

Turning our attention now to costs. Total operating expenses for the third quarter of 2011 increased by approximately $2.7 million or 0.6% from the third quarter of 2010. Regulated O&M expenses actually decreased $5 million or 1.7% for the three months ended September 30, 2011, compared to the third quarter of 2010 mainly from lower production costs and lower purchased water expense.

The decrease in production of cost is mainly due to decreasing usage, most notably in our New Jersey subsidiary due to the record rainfall in August. And the reduction in purchased water expense is in our California subsidiary as we were able to meet our customer needs with water from our own system.

Operating supplies and services decreased approximately $1.5 million. This three-month period includes the recording of an anticipated recovery of around $2 million of expenses related to costs incurred as a result primarily of Hurricane Irene, which costs have been recorded in their respective expense line.

And, finally, our market-based operating expenses increased by $6 million, mainly driven by expenses related to the Contract Operations Group's increased activity in our military construction projects.

And with that I would like to turn the call back to Jeff for closing comments, before opening it up for your questions.

Thanks, Ellen. Turning to slide 15 let me summarize the status of our accountability list. And recall we presented is that the investor conference in February, and we touch on it at each quarter to show where we stand on those initiatives.

Relative to the divestiture of regulatory water and wastewater authorizations in Arizona and New Mexico, those are on track to close either at the end of 2011 or very early in 2012. We have basic agreements in both states, but we need to go through the process of having the preliminary order issued and the commission acting on it.

We have also filed for regulatory approval in both Ohio and New York on a transaction with Aqua. And we expect that transaction will close in early 2012 also.

Ellen went into detail on the rate filings, and I think we are in track to get the anticipated rate case decisions that are important to us for this year, as well as the filing of solid rate cases in a number of our jurisdictions. Let me also just mentioned that the New Jersey DSIC is on the commission's agenda for November. So we hope to have a rule in place probably by late in the first quarter of next year.

Declining residential usage, as Ellen mentioned, is of significant import, and it has been addressed in a number of different ways in every single rate case filing. We are continuing to work with our regulators on this issue, both from a structural side as well as in the individual cases that we file.

As we talked about before, we are seeing solid progress in both our regulated operating efficiency measure and our earned ROE. And we will continue obviously to drive for performance improvement in both these areas.

While we have a number of initiatives going on at American Water on the business development front, some of which I mentioned earlier, let me just maybe give updates on two things we didn't talk about.

First, Homeowner Services. This quarter we launched the test offering of an electric and gas line, as well as appliance care program to a segment of our homeowner service customers to see how they respond to that. And we have also expanded the test that we've had ongoing relative to the hot water heater initiative because it is getting good response. We are also seeing good results from direct-mail efforts to customers in geographies beyond the American Water footprint.

On the military operation side there are several utility privatization opportunities that we understand are under development, with notice given by the Army and Air Force that there will likely be additional requests for proposals to be issued in the next 6 to 12 months.

And, as I mentioned, we are also continuing to work in the Marcellus Shale region with both current and prospective water customers, expanding the number of drilling customers, points of interconnection, and the proximity -- increasing the proximity to which that water is delivered to where they are drilling in order to minimize trucking costs and the other associated things associated with trucks moving up and down these reasonably rural roads.

So, in summary, we are on track, and we are pleased to report these results to you today. So let's close our comments and turn it over to you all for any questions.

(Operator Instructions). Michael Roomberg, Ladenburg Thalmann & Co.

So thanks for the pretty in-depth color. I just had one question first on the non-regulated business. It seemed like the operating margin in the third quarter leapt up from 8% in the second quarter to about 15% in this quarter.

I think clearly in the past the third quarter has been somewhat seasonal, and certainly the margins are a bit higher when volumes are higher. But I'm just wondering whether or not this large increase in the third quarter represents a new paradigm in terms of the profit profile of that business or it is something that was more related to the third quarter?

I would say this more cyclical, because -- and seasonal, rather than -- we are obvious focused on improving it, but I wouldn't read more into that than exists.

Okay, okay. But the jump, I guess, from 11% in a historical run rate of high single-digit, low double-digit operating margins in that business, so I guess that is where we are going to continue to shake out and this is somewhat of a quarterly thing that is not likely to be sustainable or --?

I think you see two things going on. One is, as we have talked about, optimizing that portfolio in terms of what projects we go after and where our focus is. And, second, as Jeff mentioned, this is seasonal and we see a lot more of the military capital spend generally in the third quarter. And that is a different margin business from other existing contracts.

Remember that the military operates on the federal budget cycle, and so as you get -- the third quarter is really the last quarter before they end that fiscal year and so they are trying to move through the things, the projects that they can fund. So we typically will see that as a bit of a higher period of performance.

Got you, got you. That is very good, thank you. I guess from a larger picture perspective, clearly the acquisition environment is always the gravy, if you will, to the story. I am just wondering whether or not you guys have seen any changes in recent months that encourage you or discourage you about the opportunities that exist on that front?

I would say that we are seeing an increase in the general volume of inquiries we are interested in discussing. Again, our business plan is not predicated on that happening, it is, as you said, gravy.

We are obviously going to be very focused on what kinds of things we will do. There are a lot of municipalities that even though they are interested in talking it may not be around a full acquisition for political reasons or what have you. The one thing I would just point out to you, as we have talked before, we are much more focused on doing those kinds of arrangements where we can be very helpful, but we can also make money. And kind of traditional O&M contracts within municipalities is not a business that we see serving that latter objective of making a good return.

Got you. Okay, thank you very much.

Christopher Purtill, Janney Montgomery Scott.

Thank you. Good morning all.

Good morning and congratulations.

Thank you, Jeff, I appreciate that. I guess first I was hoping maybe you could add a little bit of color, put some numbers around your long-term plans for improvement in that O&M ratio. When you look at that internally is there like an annual reduction target that you have set, or I guess bigger picture maybe a target level that you would like to hit as you look a few years out?

Sure. We have established a goal -- a five-year goal last year to get our regulated operating efficiency ratio down below 40%. And I think we are on track to do that. It can be a little lumpy, because obviously it is affected by weather on the one hand, but on the other hand it is also -- the efforts that we have got to reduce our operating cost levels has -- is a very structured approach and it has got a number of things, some of which are system related, and so we don't see the reductions until we bring in new systems and so it can be a little lumpy by that, as well as other major initiative related.

So, for example, we have got a major initiative underway on supply chain and some of that takes a little while to get into effect. So it is not necessarily a year-by-year thing, but it is clearly to be below 40% within the five-year window.

Got it. Okay, great. And then also on California, can you give us a little bit of an update there on what is happening with the Monterey desal project? I know that there was some meetings held recently to explore different supply options, so any color you have there would be helpful. Or maybe, Jeff, just your broader thoughts on desal as a viable supply option in California?

Let me have Walter give some thoughts, and then I may add some at the end. Walter.

Thanks, Jeff. Yes, there have been a number of meetings with the three parties out in Monterey to resolve the water supply issues. I think we are making progress. We have been in mediation over the last several weeks, and I think we're making progress to get to the place where we are going to be constructing that desal in the near term.

So that is really key to our water supply out in California in the Monterey Peninsula, because as you know we have cease and desist and we cannot take out of the Carmel River beyond 2016. So it is key that we get that going, and I think we have the team in place working very cooperatively with the other agencies up in Monterey to get that done.

Let me just add more of a general comment. Desal, from everything that I have seen and taking a hard look at that market, it is unique to its location. It is not a be all to end all. But desal, you are seeing increased interest relative to produced water.

Ocean water is probably the one that lags the most. But Monterey is a very unique location that has very limited options. And that is why we believe that this is probably the best option. None of them are cheap. So I don't -- we don't look at Monterey as a resurgence of desal development countrywide or just along the coast. I think it is going to be much more specific to the individual situation. Anything else, Walter, you want to say?

I think that is good, Jeff.

Great, thank you guys. I appreciate it.

Jonathan Reeder, Wells Fargo Securities.

A couple questions for you. I guess the land contribution in Kentucky, the $0.03, do you have anything similar to that in the past or planned for the future?

Kentucky was a unique circumstance. We don't have any land that we have done of this size in the past. You may find very small parcels of land that we have contributed, but they are immaterial in terms of our total asset base. This one was unique. And this is in Lexington. It is a park they have been renting from us for $1 a year. And we felt this was the appropriate thing to do in terms of the community in Kentucky.

Okay, and I guess this sale was probably contemplated when you guys raised guidance, is that correct?

This is not included in the guidance. This was a uniquely -- we're not sure of the timing of this. And again it was not a sale, it was a contribution. So the only benefit to us is through the tax benefit on the value of the land versus its book value.

But the tax benefit is not included in the guidance range?

That is correct.

Okay.

That is $0.025.

Okay. Then, I guess, could you just talk us through -- I guess, Q4 it looks like you guys will need to do then, if the tax benefit isn't in there, like $0.34, $0.35 to get to the midpoint of your range, which seems abnormally high compared to past Q4s. Can you talk about the drivers as to how we are going to get there?

One of the key drivers, if you'll remember, is, one, the New Jersey rate case which was not in effect at the end of the year last year, but did come into effect on January 1 of this year. So, again, if you look at the rate case schedule you will find there are a number of rates that became effective towards the end or latter half of the year that will have an impact towards the end of the year -- Pennsylvania wastewater, which came in on January 1, Arizona, which came in on January 1 as well, and then later in the year Tennessee, West Virginia and Virginia. So we have a number of cases that came in throughout the year, again, of revenue did not exist at the end of last year.

Okay, so you just think the rate increases can get you to where you need to be?

Again, it is a combination of that, and as Jeff has mentioned, our focus on cost containment and becoming more efficient and as well as our continuing ability to take advantage of low interest rates.

Okay, was there any impact on Q4 early on from weather last year? Do you recall if there was rainy or anything like that?

Offhand I can't remember, but that is requiring me to remember yesterday. I'm not sure (multiple speakers).

Okay, all right, thank you.

Let me just, for -- under the rubric of full disclosure, note that in our California deal, if it were to go forward -- assuming it goes forward, which is what we believe, we have got a fairly large tract of land, over 900 acres, that would be a public donation. We have got an agreement in principle that has been disclosed regarding that. So that is the only other one that we have got that is sizable. But it is predicated -- we have got -- it is associated with demolition of the dam and (multiple speakers).

Rerouting to the river.

Rerouting to the river. So it is a couple of years off, but I want to make sure that we remind you of that.

Right.

Michael Gaugler, Brean Murray, Carret & Co.

Jeff, if you would, I would like you to go back to your comments on the ENBALA partnership and the initiatives you're looking at in the PJM area. I'm wondering if you're planning to add any type of generation for internal or external sales?

We have looked at some specific opportunities. We don't have anything to announce at this stage. What we are really doing is we have developed this with ENBALA on the notion that it is our ability to store and regulate our water volume is a more cost effective storage medium than trying to store electricity. And so we both have a demand side management opportunity from a capacity side. This one with ENBALA focuses on the regulating margin, the ability to provide real-time integrated capacity into that marketplace.

So installation of generation has largely occurred in New Jersey where we have focused on solar. I think we have now got three installations that are in operation or -- yes, that are in operation. We have looked at some other things that involve water, but at this stage we haven't -- we don't have anything to announce.

Okay, that's all I had. Thanks.

Heike Doerr, Robert W. Baird.

Congratulations on a nice quarter. I wanted to follow up on Jonathan's question. And I wondered, Ellen, if you could maybe talk to us how we should be thinking longer-term about your effective tax rate? It seems that in past quarters we have had these non-one-time but still infrequent tax items that seem to give you a benefit. How should we be thinking about that as we look ahead?

Generally, I would look at our effective rate anywhere -- trying to pinpoint this is difficult -- but around 40%. We do every now and then have unique items. This Kentucky one was unique. We were never sure of the timing of this. It has been in discussions for five or more years, so, again, it is hard to predict.

As Jeff mentioned, the only other large one that we are aware of that would be coming up is the one related to the San Clemente dam. And, again, that has been in discussions about what to do with the dam for several years, so come again, we are not sure of the timing on that.

I will tell you unique things will always pop up. It is unfortunate, the nature of taxes and the tax rules. (multiple speakers).

Well, sometimes fortunately.

Fortunately, sorry. Fortunately they pop up, but at this time I am not aware of any or we would have gone ahead and booked them.

Okay, that is helpful. And about the New Jersey DSIC, what is the process? Let's say that gets approved in November, what is the process before you can start quarterly reconciling the increase in rate base that you're putting into effect?

Walter?

Yes, thanks, Jeff. Well, if it gets approved, it is on the agenda for November 9, and then it gets published in the state register. And then there is a 60-day comment period and a VP will consider those comments and then issue a final ruling we are hoping at the end of the first quarter beginning of the second quarter.

And then -- so you wouldn't need to (multiple speakers).

Just a clarification -- sorry, Heike, just a clarification. It is a six-month filing for this -- what is in the proposed order, not a quarterly.

Okay. And would each company need to then file their own request or after this action you would all start to be able to every six months start submitting the filing, or whatever it is called?

No, each company would have to file their own.

So we wouldn't see this impact earnings until 2013 by the time you go through the process?

I think it would be the latter half of 2012 is when we would start seeing the impact, if it goes according to that schedule that I just said.

If. Okay, thanks.

Neil Mehta, Goldman Sachs & Co.

So, latest thoughts, Jeff, on portfolio optimization. Are you happy with the mix right now or are there still segments of the business that you would view as non-core?

No, I think both from a geographic, regulatory and business opportunity base, we feel pretty good about the driving down to 16 states. There are a few states where we have very small operations, but they don't require a lot of overhead. So they are not -- typically you're looking for a scale so you can manage the overhead in a reasonable way and these states really don't require that.

I would say that there remain to be a couple of states that we still have an interest in potentially moving into. So you could see growth on that side. And if the right opportunity comes along, whether it be through a trade to rationalize our positions, we'll continue to look at it, but we are pretty comfortable with where we are.

And the timing of the Southwest sales?

I think there is a very good chance they could either close right at the end of the year or there is a possibility it could slip into January. We have a -- Arizona has -- and if it slips into January it may not go until the end of the month, just because it is easier to have these things clear at the end of the month.

But in Arizona we have had -- we have made great progress; we have an agreement. That in fact has now been shared with New Mexico. The potential of having the Arizona Commission act on it before we hit December 1, which would enable a closing by the end of the year. So whether it is December 31 or the end of the year, we have seen nothing come up that has -- creates the opportunity for this not to go forward in that timeframe.

Got it. And then, Ellen, you talked about some demand weakness in the East potentially driven by the storms offset by strength in the West. Do we have a regional breakdown of demand?

We do not disclose or talk about the regional breakdown or by state at this point in time. It is something we will consider for the future. We appreciate your input.

Okay, thanks, Ellen. And the last question on CapEx. It looks like we are trending above last year. What is the driver for the higher CapEx? And is $900 million to $950 million the right run rate going forward, closer to that midpoint of the guidance range for CapEx as opposed to the lower end?

Ellen?

The driver is three things. We have a major project going on in Pennsylvania out in Pittsburgh. We also have renovation of an old plant in New Jersey that is happening. And then, finally, we have -- the costs connected with our transformation is in full swing in 2011 and will continue into 2012. And then finally a plant that we have put in it in India for about $25 million. So they are -- while we continue to refurb and upgrade all of our plants, this is really a year when we've been focused in three states.

We will talk about it when we provide guidance for next year. But I think for the next several years you are safe thinking about the midpoint of the $800 million to $1 billion. I know we had trended on the lower end of that for a couple of years, some done purposely and others just delays in projects. But I think we will be were more in the midpoint of that range.

Thank you, Jeff; thank you, Ellen.

(Operator Instructions). David Paz, Bank of America Merrill Lynch.

I just had a question on just your O&M efficiency ratio. What was that for the last 12 months ending September 30, not the year-to-date?

Ending when?

September 30.

(inaudible) months. It is 45.4% I believe.

Yes, 45.4%, and we have reduced it to 44.9% LTM to LTM.

Okay, 44.9% was this year, (multiple speakers) [July 30]?

About 50 basis point improvement.

Right, okay. And also just to confirm, there is no change to your long-term growth rate of 7% to 10% -- earnings growth rate?

No.

And that is still off of 2011 earnings?

Well, it is a long-term growth rate. We don't -- we have exceeded that range in the last couple of years. There will be years in which it might be slightly lower or slightly higher, but we think about it in terms of not the individual year abnormalities that always happen, but what is the long-term growth rate.

Okay. And then the higher CapEx that you plan this year, $900 million to $950 million, now I know your New Jersey rate case reflects some of the -- reflects the renovation of that plant. And then I believe the Pennsylvania rate case had some of the spend from the Pittsburgh plant.

But how can we -- how should we look at that in terms of rate cases that will need to be filed going forward? I know you have an above trend number of rate cases this year. Does that fully capture the increased CapEx that you see this year or should we see that trickle over to next year in terms of rate case filings?

It is one of those that it depends on the state, because they are all unique and individual. Obviously, the two big ones for us are Pennsylvania and New Jersey. And in both those cases the settlement -- well, in Pennsylvania the settlement reaches forward and we feel very good about the inclusion of the capital through non-measurables since it is a historic test year. So it reached forward into 2012 and certainly includes the major CapEx projects.

On New Jersey, obviously, we filed that case. It does have a -- the capital that is being spent, we are not at a point yet obviously to know what a settlement may be -- or what an outcome would be.

But I think in most of the states we have not -- I'm trying to think, Ellen, and Walter, I don't recall where we have had any capital that we have filed in an rate case, whether it is a future test year or a historic year was done in measurable where we have had capital pulled out in this last round of rate cases.

That we have spent, no.

So I think -- it is always hard to say the amount that we are spending in 2011, when will it actually be reflected in rates. Some of it is being -- going to be reflected in rates starting at the first of 2012, or possibly even in 2011 in the Pennsylvania case. And other amounts of it will be coming in on the states.

For example, Indiana, we are in the midst of a rate case, in which that investment is included in the rate case. So is a little bit of both, I guess would be the easy -- the short answer.

Okay, and then on your call that -- I think in the news release you said that you will have a call to release 2012 or announce 2012 guidance. That is timing -- is that, when, year-end, should we say December? Can you give us any more kind of timing?

We will certainly give you advance notice of when it will be. It will either be mid-December or early in January. It is more calendar driven and stuff like that. I promise we won't do it the week before Christmas, and we won't do it the week between Christmas and New Year's.

Great, all right. Thank you so much.

Garik Shmois, Longbow Research.

Most of my questions have been answered. But if you could just take a look at your operating expense -- operating expenses out to next year, is or anything that jumps out as far as being a potential headwind or tailwind over the next 12 months that we should be aware of?

The one issue, and one that I think every company who has a pension plan is facing in the US is around pensions, and two things that drive it, the return on assets and what is happening in the stock market. And the second, the discount rate, which calculates the liability. I think that is one area we will continue to watch very closely, and as many other companies are doing the same throughout the US.

So it will be on pension. Any costs we should think of that is relatively stable year-over-year?

Yes, in fact, we plan on doing things to help use innovation and efficiency to offset any escalations that come from inflation.

Okay, thank you very much.

This concludes the question and answer session. I will now turn the call back over to Jeff Sterba for any closing remarks.

Well, thank you again very much for joining us today. We enjoyed the visit. Obviously, it is always good to talk about good quarters. But we will let you know as soon as we have resolved when we will be announcing guidance. And if we don't talk to you before Thanksgiving, have a great Thanksgiving holiday.