American Water Works Company, Inc. (AWK) Q4 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning and welcome to American Water's 2008 Fourth Quarter and Year End Earnings Conference Call. As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation through the company’s website www.amwater.com. Following the earnings call, an audio archive of the call will be available at 11:00 AM Eastern Time today, by dialing 800-475-6701 in the U.S. and 320-365-3844 for international callers. The pass code for replay participants is 982411. The call replay and online archive of the webcast are scheduled to be available through March 6, 2009, 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 your host for today’s call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you. Good morning everyone and welcome to American Water’s fourth quarter and year end earnings conference call. With me on [warranties] are Don Correll, our President and Chief Executive Officer; and Ellen Wolf, our Senior Vice President and Chief Financial Officer. We released our earnings announcement last night and we anticipate filing our 10-K shortly. If you did not receive a copy of the earnings release, you can find it by visiting our website at www.amwater.com. As usual, we will keep our call to about an hour. At the end of our prepared remarks, we will have time for questions. Before we begin, I would like to remind everyone that in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, we are advising you that certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such statements 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 company’s SEC filings. I would like to turn the call over to Don Correll.

Thank you, Ed, and good morning everyone. I want to thank everyone for joining us today and for your interest in American Water. It’s with great pleasure that I am able to comment on our fourth quarter and our year-end results. This time last year, we still not had our initial public offering, but what a difference a year makes. American Water has been a public company since April 2008. We’ve had many accomplishments that the entire company can point to with pride for this past year. But before I comment on the highlights of our fourth quarter and year-end results, I think it’s fair to say that even at the time of American Water’s initial public offering in April, few would have predicted the economic downturn that would soon follow. Having said that, I think that our results for the year show that despite all of the external conditions. American Water strategy is proved to be a solid one that has allowed our business to weather these times and stay the course to provide our customers with high quality drinking water and reliable water and wastewater services. These strategies include investing in our infrastructure, earning an appropriate rate of return and growing through acquisitions and public private partnerships. Although, the country has seen credit and investment scarcity, American Water managed through the credit crunch that reached its peak in the fall of 2008 by accessing our $840 million unsecured back-up credit lines without a problem. This past November, the company successfully completed a debt offering of $75 million aggregate principle amount, 10% Senior Monthly Notes. We closed a similar debt offering this month of $75 million aggregate principal amount of 8.25% senior monthly notes. Despite the harsh stock market conditions as I mentioned in the last earnings call, the American Water share price continued to outperform both the Dow Jones and the S&P 500 indices, since our IPO in April this sell through the fourth quarter and year end. I should also mention American Water was added some multiple Dow Jones Wilshire Indexes and to the Large-Cap Russell 1000 Index since going public. 2008 was also a solid year for the company financially. Revenues for the quarter ending December 31, 2008 rose 2.7%, and revenues for the year increased 5.5%. Excluding goodwill impairment charges earnings per share for the fourth quarter 2008 totaled $0.23 per share, compared to $0.17 per share for fourth quarter in 2007, an increase of 35.3%. For the year, again excluding goodwill impairment charges, earnings per share grew from $0.99 per share to a $1.10 per share and 11% year-over-year increase. Ellen will discuss our financial results in more detail a little later. In 2008, the company completed rate cases in 14 States generating $206.3 million in additional revenues annualized. This includes the New Jersey rate case, which will result in approximately $72.1 million in additional revenues. The Missouri rate case, which will result in approximately $34.5 million in additional annual operating revenue, and the Illinois rate case, which will add approximately $22.7 million in annual operating revenues per year. As of December 31, 2008, the company has general rate cases awaiting final order in seven states that would provide $104 million of additional revenues, if approved as filed. The extent to which these rate increase requests will be granted by the various regulatory agencies will vary. Again, the increase in revenues reflects a recognition of our commitment to making the necessary infrastructure investments to deliver the reliable service to our customers. We began or completed some major projects to ensure reliability this year, including the $20 million gallon a day water treatment plant and 31-mile transmission main in Kentucky. Once complete, we estimate this will be an approximately $162 million investment. We also completed $44.5 million water treatment plant in Missouri and $51 million water treatment plant in Illinois, and a $48.5 million water treatment plant expansion in New Jersey. We are on plan to invest between $4 billion and $4.5 billion over the next five years in our infrastructure. American Water also had success in growing the business with acquisitions in Pennsylvania, West Virginia and New Jersey. In total, we had 10 tuck-in acquisitions in 2008, equating to approximately 5,000 water and 1,700 wastewater customers. On the non-reg side of the business, we were awarded two major military contracts in Texas and the Louisiana. And our Homeowner Services expanded its customer count to more than 680,000 customer contracts in 15 states. This type of growth in our non-regulated business compliments are regulated business and our capabilities. It also demonstrates American Water’s capacity to provide water resource solutions to communities and need. We are also pleased that we are making progress towards the acquisition of certain assets of the City of Trenton’s water system located in force of urban townships. The transaction would add approximately 40,000 customers to New Jersey American Water's customer base. This type of acquisition is not only aligned with our business strategy, it is a great example of how American Water can work with communities to assist them with sustainability and infrastructure issues. As a Mayor of Trenton said, this is a model of great public private partnership. This has been a year of successes for American Water. We appointed two additional independent board members, Julia Johnson and Richard Grey, reinstituted a long-standing traditional American Water, the declaration of quarterly dividend payments and recently announced William Paterson has joined American Water team as a Senior Vice President of Corporate and Business Development. Bill will lead the advancement of American Water's integrated business development strategy and no work to bring water solutions to communities in our existing markets as well as pursue other opportunities including public private partnerships. After the first six years of working with American Water, the City of Buffalo recognized $21 million in savings through operational and financial improvements. In April, the company successfully completed, [but] was one of year's biggest initial public offerings. In conjunction with the IPO, the company launched its new brand and communication strategy that educate our customers on the value of the services the company provides. Nearly a half-year later, the communication plan and its materials earned 35 MarCom Awards one of the most prestigious forms of international recognition for marketing communications excellence. And rounding out the year, the Lake Pleasant Water Treatment Plant, operated by American Water and owned by the City of Phoenix earned the 2008 National Design-Build Award from the Design-Build Institute and recently won the outstanding award for Public/Private Partnerships from the U.S. Conference of Mayors. Our Applied Water Management team also won an Achievement Award from the Environmental Business Journal for the Design-Build of the Solaire in Battery Park, New York City. The year ended in a similar fashion [to how it] began, with American water being recognized for its industry leading expertise. This expertise in the many accomplishments achieved in 2008, were due to the hard work of American Water 7,000 employees. We are proud of the progress that company has made in 2008 and we are excited about the potential for our future successes. Before turning the call over to Ellen, I would like to briefly address the 2009 stimulus package that President Barack Obama have recently signed in the law. Stimulus still provides for $2 billion for drinking water projects, and $4 billion for wastewater projects. While these numbers may seem small compared to the total package. I think it's important that Congress has recognized this critical area among the nation’s infrastructure challenges. Too [often] because many of our assets are buried beneath the ground, the need to invest in water and wastewater systems is over shadowed by more visible crumbling roads and bridges. While this money may represent just a small portion of what the EPA has estimated at the trillion-dollar challenge for repairing and updating water and wastewater infrastructure over the next 20 years. We are pleased that the legislation includes incentives for States and Local Governments to take advantage of financing and Public/Private Partnerships. The increase in money towards the State Revolving Funds as well as the increase in the cash placed on private equity bonds equating to about $15 billion. We will allow municipalities to tap into much needed private sector capital. The challenge now is with the public and the private sectors that work collaboratively to make the most responsible use of this new funding. We, American Water have had a solid history working with the public sector. And we look forward to helping to deliver more water and wastewater solutions to communities and systems indeed. And with that, I will turn the call over to Ellen Wolf to discuss the fourth quarter and year-end financial results in more detail.

Good morning and thank you very much Don. Good morning everyone. I would also like to thank each of you for your continued interest in American Water as we approach our one-year anniversary of our return to being a public company. As Don mentioned, our results for the year and the quarter ended December 31, 2008 were driven by continued implementation of our core strategies of prudently investing in our infrastructure applying for and receiving appropriate rates of return on that investment, while also making continuous improvements to the service provided to our customers. Through a disciplined approach to executing our strategies, we delivered solid results in 2008 despite the unusually wet weather experienced in the Midwest State as well as increases in certain employee related expenses. While the state of the economy has had some impact on our industrial sales and other aspects of our business, we continue to see growth in revenues and net income to continued focus on the rate recovery aspects of our strategy. Also as we will discuss shortly our results for the quarter and the year also reflect to decline in those expenses that were necessary to enable our transition to a public company. For 2008, American Water reported a net loss of $562.4 million or $3.52 per common share, compared to a net loss of $342.8 million or $2.14 per share common share in 2007. Included in both '07 and '08, our goodwill impairment charges of $501.5 million and $738.5 million respectively. After adjusting for goodwill impairment charges in '08 and '07, net income for the year was $176.1 million versus the $158.7 million in '07, and earnings per common share was $1.10 and $0.99 respectively, resulting in an approximate 11% increase in both net income and earnings per share year-over-year. For the fourth quarter ended December 31, 2008, American Water reported net income of $36.4 million, or $0.23 per share, compared with a loss of $234.6 million or $1.47 per share for the comparable quarter of '07. Excluding the goodwill impairment charge taken during the 2007 fourth quarter, 2007 earnings would have been $27.3 million, or $0.17 per share, representing an earnings per share growth rate of 35.3% quarter-over-quarter. On the following slides, I will be discussing in more details the main drivers of the growth from 2007 to 2008. A more detail discussion of our 2008 results will be provided in our 2008 Form 10-K, which we anticipate filing shortly. For the year, American Water reported revenues of $2.3 billion, a $123 million increase in revenues, or 5.5% over the $2.2 billion reported in 2007. Revenues from our regulated business increased by $95.2 million, or 4.8% from 2007 to 2008. The non-regulated businesses 2008 revenues increased by $29.5 million, or 12.2% compared with '07. The 2008 regulated revenues increased by $132.8 million, primarily due to rate awards and various surcharges granted by regulators in both 2007 and 2008. We received $206.3 million and $158.9 million and annualized rate authorizations in '08 and '07 respectively. By comparison, in 2006, we received only $41.3 million in rate awards. This is one example of our commitment to executing our strategies. Regulated revenues also increased slightly due to organic growth and tuck-in acquisitions. As I mentioned earlier, offsetting the impact of rate awards on our regulated revenue was a decline in revenue or in water sales driven mainly by historically wet weather in our Midwest State Operations, as well as less dry weather compared to 2007 in the Mid-Atlantic region. To a lesser extent, we continue to see a reduction in per customer consumption, and the economic downturn appears to also reduce industrial and other sales. As a result, reduced overall demand offset revenue increases from rate awards by $52.3 million. The overall demand reduction can be seen in our water sales volume for the year. For the company as a whole, sales volume decreased from 2007 to 2008 by $18.5 billion gallons or 4.4%. Our residential customer usage decreased 4.2% to $214 billion gallons. The volume of water sold to commercial customers decreased by 3.3% to $89.9 billion gallons and the volume of water for our industrial customers decreased 5.8% to 42 billion gallons. This year’s increase in revenue for the non-regulated business comes mainly from our Contract Operations Group and Homeowner Services Group. For the year, revenues from our Contract Operations Group increased by $31.1 million, a result of incremental revenues derived from a design-build-operate project for a large treatment plant, as well as from military constructions and O&M contracts in Texas and Louisiana. Our Homeowner Services Group revenues increased by $7.1 million, due to increased penetration within its existing customer base and expanding into new markets. These increases were partially offset by the decline in design and build activity for smaller facilities associated with new housing developments. This is the result of the downturn in the new home construction and primarily impacted our applied water management group. For the fourth quarter of 2008, American Water reported revenues of $568.6 million, a 2.7% increase in revenues over the $553.8 million reported in the fourth quarter of '07. This included a $15.7 million or 3.2% increase from our regulated business, and a $2.6 million or 3.9% increase from our non-regulated businesses. For the fourth quarter of 2008, regulated revenues increased by $32.6 million from rate awards and various surcharges in the fourth quarter of '07 and throughout '08. During the quarter, we received rate authorizations totaling a $120.1 million in regulated revenue. Two of these rate awards granted in our larger operations of New Jersey and Missouri were received in the later half of the fourth quarter and will be reflected in our 2009 revenues. As was the case for the entire year, the increase in revenue for the quarter from rate awards was offset by declines and demand associated both weather and for customer usage. Throughout October, we continue to see the impact on our revenue of the unusually wet weather in the Midwest, and also experienced wet and weather the normal during the quarter and portions of the West. The economic downturn appears to have had a more noticeable impact on revenues in the fourth quarter. Compared to the same quarter of '07 Water sales volume decreased in the fourth quarter by $7.1 billion galloons or 6.7%. Our residential customer usage decreased 6.3%, commercial customer usage decreased 5%, and industrial customer usage declined 11.6%. The reduction in Water sales volume offset our increase from rates by $27.3 million. For the quarter, revenue growth totaled $2.6 million in the non-regulated businesses for reasons similar to that for the full year. Taking a look at our expenses in 2008, operating expenses for the year increased by $324.7 million, compared to the same period in 2007, primarily the results of an increase in impairment charges of $240.7 million over the last year. Adjusting for goodwill impairment charges of $715 million in '08 and $509.3 million in '07, operating expenses increased by approximately $84.1 million or 5%. Operating expenses of our regulated business increased by $63.9 million, or 4.3% from $1.49 billion last year to $1.55 billion this year. Directly related to the increase in revenues; our non-regulated businesses saw an increase in operating expenses of $22.8 million. Overall, employee related expenses for the year increased $42.2 million, or 9.1% compared to the prior year. These expenses consist of salaries and wages, pensions, group insurance and other benefits. Salary and wages increased $27.3 million over the last year. With a focus on continuous service improvement, salaries and wages increased due to growth in number of employees, wage rate increases and other compensation expenses. This included stock-based compensation expense of $3.7 million, mainly related to the issuance of awards granted in connection with our April IPO as well as $4.3 million of wages related to job reclassification of certain hourly employees for services performed. Associated with the increase in employees other related expenses such as the 401(k) and defined contribution benefit plan, our stock purchase program and group insurance increased $2.5 million, or 3.9%. In addition, our pension expense increased by $9.3 million, or 31% over 2007. Our pension cost could increase substantially in 2009 as a result of the stock market performance. I will be discussing this in more detail shortly. During the year, consistent with economic trends, we experienced an increase in our production cost of approximately $10.5 million, or 3.8%. This includes fuel and power costs, chemical cost waste removal and purchased water costs. Chemical cost increased 12.5% due to escalating prices, as well as additional usage requirements related to weather related source of supply conditions in some states. Whenever possible, we seek to manage the timing of chemical and other production cost increases to correspond with rate recovery procedures. Our other production cost increases were more modest and held relatively flat. Operating supplies and services decreased $10.2 million or 3.5% for the year, compared to the same period in '07. The majority of the decrease is due to lower expenses incurred to ensure our compliance with Sarbanes-Oxley and remediation of any material weaknesses. For the year, these costs decreased by $22.6 million. Our Sarbanes-Oxley remediation costs are substantially complete. And I will provide further information regarding our SOX status later in the call. Higher contract services expenses in our Contract Operations Group associated with the design-build-operate project offset some of the decline in the SOX clause. Maintenance, materials and supply services, which include emergency repairs as well as cost for preventative maintenance, increased 8.3 million or 6.5% to $136.3 million in '08. The main driver of this increase was the higher cost of removal expenses of $5.5 million in certain of our operating companies, and an increase in expenses of $1.7 million as a result of higher usage frequency for our service line protection customers. Customer billing and accounting expenses increased by $5.8 million, or 15% for the year. As I’ve spoke about on our last call, this increase was primarily due to an increase in uncollectible accounts in the third quarter. We have addressed this by implementing stricter and earlier shut-off practices. We can see the benefit of that action by the reduction in uncollectible expense in the fourth quarter of 2008, compared to the prior year. Uncollectible accounts also increased in our non-regulated businesses by $2.9 million, primarily related to uncertainty around the collection of receivables from home developers, a result of the downturn in new home construction activity. Depreciation and amortization expense increased by $3.9 million, or 1.5% when compared to '07. This increase is primarily associated with additional utility plant assets being placed in service. Our weighted average composite depreciation rate for 2008, which relatively unchanged when compared to 2007. General tax expense, which includes taxes for property, payroll, gross receipts and other miscellaneous items increased by $15.9 million, or 8.7%. The increase for the year is primarily due to increased gross receipt taxes of $7.6 million in New Jersey, where gross receipt taxes are assessed based on prior year revenues. There is also higher property tax expense of $4.2 million in a number of our states. And additionally, payroll taxes increased $2.7 million consistent with our increased salaries and wages. Other items affecting net income not included in operating expenses. Our interest expense and allowance for funds used during construction or AFUDC. As we relayed on our last call, we continuously monitor the capital markets both debt and equity to most efficiently fund our capital needs. Interest expense, the primary component of our other income increased by $2 million for the quarter compared to '07. The increase for the year is primarily due to the increased borrowings associated with our capital expenditures. Offsetting the change in interest expense is an increase in AFUDC of $11.5 million for '08. As a result of increased construction work in progress. Our consolidated provision for income taxes increased $25 million, or 28.8% to $111.8 million for the year, as a result of our increase in pre-tax income adjusted for the impairment charge. I would like to spend only a few minutes on our operating expenses for the quarter, as many of these areas have already been touched upon in discussing the year-over-year results. Operating expenses for the fourth quarter were $439.5 million in '08 and $708.9 million in ’07 resulting in an overall decrease of $269.4 million. In 2007, operating expenses included a goodwill impairment charge of $266 million. Excluding the effect of the impairment, operating expenses decreased $3.7 million. Operating expenses of our regulated businesses increased by $2 million, or 0.5% from $382.8 million last year to $384.8 million this year. Our non-regulated business experienced a decrease of $3.4 million, or 5.3% from last year. For the quarter, employee related expenses decreased $2.3 million, or 1.9% over the fourth quarter of ’07. The decrease in expense as a result of reduced group insurance expenses related to post retirement benefit expenses. Including a subsidiaries rate case regulatory asset adjustment. Production cost did increase by $2.2 million, or 3.4% from $65.5 million in the fourth quarter of '07 to $67.7 million in '08. Increases in chemical prices were largely responsible for this increase. Operating supplies and services decreased by $7.6 million, or 9.2% to $74.8 million in 2008. Cost associated with our SOX compliance efforts were $6 million lower than in the prior year quarter, and was the most significant driver of this decrease. Maintenance, materials and services expenses decreased by $8.7 million due to several factors including lower tank painting cost and other maintenance expense reductions in several of our regulated subsidiaries and in our non-regulated Contract Operations Group. And in 2008 for the quarter, customer billing and accounting was a $1 million left in the same quarter of the prior year due to lower uncollectible expenses resulting from the efforts that I had mentioned earlier. For the fourth quarter of '08 compared to the same period last year, depreciation expense increased $6.8 million or 10.5% reflecting our substantial investment [in plant] placement service. And general taxes increased $5.7 million in the fourth quarter of '08, compared to the same quarter in '07, the reasons for this increase parallel those for the yearly increase. Other items affecting net income in the quarter not included in operating expenses are interest expense and AFUDC. Interest expense increased by $1 million or 1.4% for the fourth quarter of '08, compared to the same period in the prior year. And similar to the full year, the increase for the quarter is primarily due to the increased borrowings associated with capital expenditure. Offsetting the change in interest expense is an increase in AFUDC of $2.6 million over the same quarter of last year. Our consolidated provision for income tax increased $15.6 million, or 122.8% and $64.6 million for the year, as a result of our increase in pre-tax income. We continue to file and receive rate case awards during 2008. Rate authorizations were received in New Jersey, Missouri, Pennsylvania, Illinois, Indiana, West Virginia and Arizona, as well as other states. Of these we’ve received authorizations for additional annualized revenues from general rate cases in Ohio, Missouri, Pennsylvania and New Jersey in the fourth quarter, amounting to approximately $115.5 million. For the year, we’ve received authorizations for additional annualized revenues from general rate cases of $187.7 million, assuming constant sales volume. Our allowed ROE for the rate cases finalized during 2008 were generally above 10% with the range being from 8.8% to 10.8%. Several of these rate cases remain outstanding, while we are awaiting the final orders in seven states, one of which is for Hawaii, which did put in interim rates. The six other states, we’re awaiting final orders for general rate cases filed in ‘08, requesting additional annualized revenues of $102.7 million. There is no assurance that the filed amount or any portion thereof of any requested increases will be granted. As Tom mentioned earlier, we either completed or started some major projects this year, all reflecting our continued commitment to providing Water Resource solutions to communities in need, and our commitment to our customers to continue to deliver reliable service. In 2008, our cash flow from operations was $552.2 million. This represents a $78.5 million, or 16.6% increase over the prior year. As of December 31, 2008 American Water had approximately $369.1 million available capacity under its $840 million credit facility and had no outstanding commercial paper. As of February 23, 2009, we had outstanding commercial paper of $178.5 million, and we have $345 million outstanding under our credit facility. We also during the fourth quarter successfully completed a debt offering of $75 million aggregate principal amount of 10% senior monthly notes due 2038, and then subsequent to year-end, we issued an incremental $75 million at 8.25% under similar terms and conditions. Earlier I had mentioned the significant increase expected in our pension expense for 2009. Similar to other businesses, due to the impact of the decline in the capital markets in 2008, and the resulting losses in our pension plan in 2008. There is a potential for a significant increase in our 2009 pension expense. To the extent that we are not able to minimize any regulatory lag or otherwise recover the increase through rates. This is a direct result of the volatility in the capital markets and is not germane to our company or industry or the quality of the investments we had in our pension plan. Because of the current volatility in the capital markets, pension expenses might also be somewhat volatile over the next few years. We are prepared to navigate to these potential volatile times and expect to make sufficient cash contributions to our plan to avoid any at-risks status. This year, as many of our continued remediation efforts to address the material weaknesses that we had mentioned in the past quarters, we established necessary policies and procedures and taken actions that we believe address the areas of material weaknesses. Based on these actions, and the length of time controls have been operating at a level that would prevent or detect a material misstatement in the consolidated financial statements. We no longer consider control deficiencies to be material weaknesses as of December 31, 2008 except for control deficiencies relating to the maintenance of contracts and agreements, which in our opinion does remain as a material weakness, until we can complete further testing in the first quarter of this year. As of December 31, 2008 the company had incurred $58.4 million to remediate these material weaknesses and to document and test key financial reporting controls. As a condition of State PUC approval of the RWE divestiture, we agreed that cost incurred in connection with our initial internal control and remediation initiatives would not be recoverable and rates charged to our customers. And finally, as Don mentioned, we are proud to announce since going public, we initiated our quarterly dividend and in 2008 we declared and paid two quarterly dividends. Additionally, we began the year by declaring our first quarter 2009 dividend. Our policy subject to approval by our Board of Directors is to declare and pay a dividend on the quarterly basis of $0.20 per common share and in the long run, we do expect to have a payout ratio in the 50% to 70% of net income. That concludes our prepared statements on American Water's year-end and quarter financial results. To echo Don, it is a great feeling to be a public company again and to be able to relay our year-end results to those of view for are interested and investing in our company. Thanks again and with that I will turn the call back to Don.

Thank you, Ellen. In closing and before we move to the Q&A I want to repeat some of American Water's attributes that we discussed on this call. We demonstrated our leadership through the third-party recognition received and the awards we earned throughout the year. We grew our revenues to our commitment to invest in our infrastructure and to seek an appropriate rate of return. The increased in revenues also reflects our progress in the regulatory process contributing to our favorable risk profile, and our management led the company through one of year’s largest IPOs and one of the largest utility IPOs in U.S. history, all while, we implemented our core strategies. 2008 has been a strong year where we met our stated earnings goals and while acknowledging the challenge that our company in nation face, we remain committed to achieving the goal that we laid out at the time of our IPO growing our earnings per share in the 7 to 10% range over the long-term. With that I thank you for your continued interest in American Water. And I will turn the call back to the operator for our question-and-answer period.

(Operator Instructions). And our first question is coming from the line of Maria Karahalis from Goldman Sachs. Please go ahead. Maria Karahalis – Goldman Sachs:

Ellen you take that.

Maria Karahalis – Goldman Sachs: Okay. Thank you, Don.

Thank you. Maria Karahalis – Goldman Sachs: Thanks, Ellen.

Thank you. Our next question will come from the line of Debra Coy from Janney. Please go ahead. Debra G. Coy – Janney Montgomery Scott, LLC: Yes, thanks. Good morning all.

Good morning.

Good morning Debra G. Coy – Janney Montgomery Scott, LLC: Two questions as well. One on the consumption decline Ellen thanks for the detail on the various customers impacted. But can you break down on a relative percentage basis. How of it you think was weather related versus how much may have been conservation or economic related. And obviously the reason for my question is, if we assume normal weather always a difficult assumption, but if we could count on normal weather going forward, what would be the impact. How much of the decrease was, do you think was weather versus these other factors?

Yeah, Debra. It’s extremely hard to break that down into the consumption versus weather versus economic, namely because we – it’s hard to tell what’s driving and let’s we go knocking door to door. I think on the customer side, consumer side most of that is either weather related very little consumption related. As I mentioned earlier what we are starting to see more the economic impact is on the industrial side and again particularly in the Midwest area, which is connected to the auto industry, very heavily connected to the auto industry. And so I would think on our industrial side as where you may see more of the economic impact. And then on the consumer side I think some of that is consumption, but the majority of it is weather. Debra G. Coy – Janney Montgomery Scott, LLC: So that we would expect to see the industrial we could expect to see that continue through 2009 most likely?

I guess it will depend on some cases what happens in other industrial sectors for example, I can give you one example in January, some of our industrial customers were closed down two days a month. They are back being open through February. So, it really does depend on what's happening in the related industries. Debra G. Coy – Janney Montgomery Scott, LLC: Okay. That’s helpful. And then secondly on the capital spending side. Don you mentioned that you are on track for the 4 – 4.5 billion over the five years, $1 billion of that obviously in the first year of the five. Can you talk a little bit more about your CapEx plans for 2009? And perhaps in some of the individual states such as Governor Corzine asking for utilities to the step-up CapEx kind of there is on economic stimulus. How are you thinking about CapEx for this year? Given the uncertainties in the debt and equity markets, particular the equity market?

Thank you for the questions. Its obviously very valid question given these economic times and that something that we looked at very carefully the fall of last year, because while we were committed to the anywhere from 800 million to a $1 billion range, which is now we get to our 4 to 4.5 over the next five years. You can only spend it if you access the capital markets since we do need to we don’t generate all of our funds from internally generated operations we need to have access whether it’s debt or equity. And we like every other business last fall took a hard look at what might we need to do under a variety of contingency plans. We are still prepared to be in the $800 million to a $1 billion range going forward. We have to adjust a little bit based upon the some of the activities last fall. So we’re probably at the lower end of that for 2009, but we still have confidence borne out by our recent ability to raise some debt to be able to continue to fund this, at this level going forward. We certainly want to be able to access both the debt and the equity markets going forward, but we are looking to spend at that level for 2009. Frankly, we’ve always invested in, to use your example in New Jersey and Governor Corzine. I know he has had some initiatives for the energy companies and we are doing, we have always invested $100 million give or take a little bit in New Jersey and continue to plan to do that. We have an application pending before the New Jersey Board of Public Utilities now to implement something similar to what we have in other states, where we would have a an infrastructure surcharge. And where we are encouraged that it’s getting some momentum now, and that will also support the continued investment in infrastructure in New Jersey as well as in other places. So we don’t see ourselves returning to the days of our industry where we were replacing our infrastructure on a 3 to 500 year replacement cycle. We think it is important to be doing it in accordance with the physical lives of the assets, which is more like a 100 years for some of the long-lived pipe and we’re committed to doing that throughout our systems. Debra Coy – Janney Montgomery Scott, LLC: Okay. That’s helpful. And then just one followup on that, Ellen you talked through the sources of capital for 2008. And I know, you can’t comment on the equity offering per se can you talk through the sources of capital for the 800 for ’09 assuming perhaps somewhere again in the 500 plus million operating cash flow range. Then I would leave you about a $300 million or so. What you still have left than that capacity versus what you need to raise on equity to meet that 800?

Yes. Without going through a specific numbers Debra, we will address our capital needs through as you mentioned operating cash flow, raising of debt and raising of incremental equity. So that as we told the market before, our goal is to be between 45% and 50% equity in our debt equity ratio. We will also be to the extent we qualified the looking for debt through the economic stimulus package and the items that Don had mentioned earlier to the extent we can access that we will also be looking to access that source of cash. Debra Coy – Janney Montgomery Scott, LLC: Thanks. And then just the last question. Just to follow up with Maria’s question on the pension expense. Can you just roughly characterize which half of the state allow the regulatory asset versus which have don’t, in other words is that your bigger operating states that allow that or smaller kind of how would we drop?

Its… Debra Coy – Janney Montgomery Scott, LLC: Customer base in…

It's about 50/50 Debra. Debra Coy – Janney Montgomery Scott, LLC: 50/50 on customer base not just number states…

That is correct. Debra Coy – Janney Montgomery Scott, LLC: Okay. Great, thank you.

Sure.

And next we will go to the line of Ryan Connors from Boenning & Scattergood. Please go ahead. Ryan M. Connors – Boenning & Scattergood, Inc.: Hi, good morning.

Good morning Ryan. Ryan M. Connors – Boenning & Scattergood, Inc.: I had a question for you on the issue of rate cases, we spend a lot of time talking to the municipal utilities to try to get an idea of which – what the key trends are in the industry and one of the things we are hearing is that a lot of the municipal utilities are trying not raise rates in this environment just given the economic times and the pressure on the consumer et cetera. So, my question is, to the extent that is the case does that make it tougher just politically for you all to try to sell your own rate cases and if so how do you see that impacting, the 100 million plus that you have pending and anything that’s filed in the near-term.

Ryan, if I could just also add, while we cannot predict the future. We can only take a look at the most recent decisions in both New Jersey and Missouri, where even though those were large increases, they were a continued recognition by the regulators that even in these times they need to encourage us to continue to put money into the infrastructure. And they do see a connection between that and the job that it creates. So, again we can only look at the past right now. Ryan M. Connors – Boenning & Scattergood, Inc.: Great, that’s helpful and then kind of staying on the same theme, one of the other things that we hear in our conversations with the municipal side, as many of them say that the costs, I have been stubbornly high for things like the basic materials, the hydrants, the valves et cetera that cost for those things have not come down as much as they may have expected given the steep declines in the underlying input cost, the commodity prices. So, I would be interested to hear what you are seeing there whether you are seeing those things not coming down also and if so how that impacts your outlook in terms of operating cost for '09?

In terms of the capital hydrants et cetera all of that goes into our capital budget and that’s included in our $4 billion to $4.5 billion in terms of commodity prices as I've said we have seen the drastic increase in chemicals, I think you as well as rest of us can see what's happening with fuel prices it was sort of hit a high mid summer and it has been coming down since, and we did not see much of an impact of that as I mentioned in the fourth quarter, what really drove our expenses in the fourth quarter were the chemical costs, which some of those still have continued to remain high. Ryan M. Connors – Boenning & Scattergood, Inc.: Okay. Great, thank you.

Thank you.

Next we’ll go the line of Tim Winter from Jesup & Lamont. Please go ahead. Timothy Winter – Jesup & Lamont: Good morning, Ellen and Don.

Good morning Tim.

Good morning Tim. Timothy Winter – Jesup & Lamont: Thanks for quantifying some of the customer segment. I was wondering if you could quantify the industrial revenue decline for the quarter and the year. And if there is any more color there, are there large industrial customers that have shutdown or is this a seasonal thing with trying to deplete inventory at year-end.

Sure. In terms of quantifying it, as I mentioned and Ed mentioned earlier, we will be filing our 10-K shortly. And I think at that point there is a lot more detail in there, that I would ask to you go through. It is difficult for us to quantify each and everyone in terms of dollars, because every state has a different industrial customer rate, but as I mentioned the Midwest seems to be the area right now. We’re not seeing any customers, a lot of customers closing up on the industrial, but what we did see they may close for a day or two, which they hadn’t done before. And we are seeing a couple of bankruptcies, but not significant that it would make a huge impact at this stage. Timothy Winter – Jesup & Lamont: Okay. And can you remind me where your California Americans subsidiaries in the implementation of the ram or the de-coupling? Did what were as we…

As you know we have a couple of rate cases outstanding right now, one is on the rate case for the overall return on equity, we have a couple that have been filed individual areas, and then finally we will be filing the one consolidated rate case, where I believe this will must like be a addressed in an another year. We do have it in one of our smaller subsidiaries out there and that is going through the process right now and... Timothy Winter – Jesup & Lamont: So for the most part you have not experienced a benefit of the de-coupling yet?

Not at this point, although we do have ram accounts on a [couple], where we have been able to start to see some benefit and that would be ’09 not in ’08. Timothy Winter – Jesup & Lamont: Okay. Thank you.

Thank you.

Thank you. Next we will go to the line of [Jonathan Reader] from Wachovia. Please go ahead. Jonathan Reader – Wachovia Securities: Good morning Ellen and Don.

Good morning, Jonathan.

Good morning. Jonathan Reader – Wachovia Securities: Two more questions, I have most of them have been asked, but is there any way you can quantify the increase in the 2009 pension expense, or just give us a rough ballpark as its still probably a bit of a working number?

It is very much a working number and again we have, I think if you would wait to take a look through the financials, the 10-K both the pension footnote as well as further disclosure in the liquidity section about or increase in cash contribution that will help you get there, again remember that some of our states are ERISA-type states. Jonathan Reader – Wachovia Securities: Okay. And then the last one, could you just talk about I guess what you're expecting as far as the weather normalized sales trends go in 2009. I mean, obviously 2008 we saw that deceleration as the year went on. Are you seeing, I guess a stabilization, at what point during the year might it kind of pickup, may be you can expand on that.

I could go to the consumption area, I think as you look through, but our S-1 and 10-K you will see that you we do expect and have seen continuously a decrease in consumption ranging from 0.6% to 1.5% and that’s a sort of ten year average as it goes down. So once you normalize for the weather, we do expect to continue to see that consumption decrease and that is also what we do try, but its part of the regulatory lag that you’ll see in our ROE between our net income and our authorized returns of let’s say 10% you’ll see a lag generally its related to this decrease in consumption as well as increases in expenses. So, we do expect to continue to see a decrease in consumption along those lines. Jonathan Reader – Wachovia Securities: Kind of the economic that I mean I know it’s hard to separate it out, but I'm trying to get at more just, through the economy not just the long-term I guess declining consumption trend?

And while I appreciate where you’re trying to get to I don’t think we could predict what’s going to happen. Jonathan Reader – Wachovia Securities: Okay, thank you.

Thanks.

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

Well, thank you all for joining our call and your continued support of American Water. This does conclude today's call. And if you have any more questions, please feel free to call our Investor Relations team directly. And I will turn it back to the operator now. Thank you again.

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