Good morning and welcome to American Water's 2012 Guidance 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 January 25th, 2012, by dialing 303-590-3030 for U.S. and international callers. The access code for replay is 4498174. The online archive of the webcast will be available through February 17th, 2012 by accessing the Investor Relations page of the company's website located at www.amwater.com. (Operator Instructions) I would now like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo you may now begin.

Thank you. Good morning everyone, and welcome to American Water’s Guidance Conference Call. As usual, we’ll 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 Jeff Sterba, our President and CEO.

Thanks, Ed and good morning to all of you. Thanks for joining us. I have with me Ellen Wolf, our Chief Financial Officer. We will go through a fairly short presentation and then open up for questions. It is good and a real pleasure to be able to once again talk about a strong growth set of results, as well as forecast. I am sure you have seen the release that we made yesterday afternoon or evening indicating that we expect to finish the 2011 year at the middle of the current range of our guidance for adjusted earnings per share of $1.75 to $1.82 and that we also announced the forecast that we look forward to for 2012 which I think is another strong year of growth where we have provided a range for ongoing earnings of $1.90 to $2.00 per share. If you flip to page 3, let me provide just a quick framework for everyone regarding 2011. Obviously, we are not announcing earnings yet, we are still in the process of closing and going through the audit, but we have given the indication of being in the middle of the range which would reflect strong growth over the year prior 2010. And let me just touch briefly on a couple of the four buckets that we have shown on page 3 that really helped to drive 2011. First, relative to operating efficiency, we have continued to see as we have talked about in each of our quarterly calls good improvement in our operating efficiency ratio and our expense controls. A lot of this is focused on process improvement initiatives. Obviously, the major process improvement that we have got on the drawing board is the business transformation effort which is on schedule and continues to be on budget…

(Operator Instructions) Our first question is from the line of Kevin Cole with Credit Suisse. Please go ahead.

Hi, good morning. Thank you for taking my call.

Good morning, Kevin.

And just back to the dividend policy, I guess with your and a few board members largely to the background, what are your thoughts on increasing the dividend yield, to be more competitive with other non-water utilities.

Well, as I said, we have listened to a lot of input from people and we are taking that in consideration. I am not at the stage of indicating any change from what we have put in place so far, we are taking a very hard look at it. I think, there is also a risk, there is no question that the electric and gas side, particularly the electric side has a higher dividend payout. I think about it in terms of relative risk in growth. I think what we provide compared to most of those entities is the higher growth profile, frankly at less risk and so the question of how does dividends fit into that, to me goes to the question of balancing the reinvestment of that in a fairly low risk, good return investment profile versus a yield back to shareholders. So, I understand why the water sector has a slightly lower yield in general. That makes sense to me. The degree of that difference obviously is always one that you have to take a hard look at.

Okay and sorry.

No go ahead, Kevin.

And so should we expect clarity around the June timeframe again?

I am sorry.

Should we expect the next dividend, I guess the dividend would be addressed again in June?

Well, if we follow the course of last year, a dividend increase, well the last couple of years has been acted on in June for payment in September, that could change I would not expect it to be any later than that.

Okay, and then one last question, if I could. And so, now it looks like your ROE to the process is nearly complete, by the end of 2012 or early ‘13. Can you put some color on how you plan on maintaining your 7% to 10% EPS guidance in longer term?

Yeah. This is Ellen and thanks for the question. Two parts to it, one the bit what we have been calling the catch up, it has indeed been completed, it is really now about addressing regulatory lag, which is around our policy as it relates to declining usage and the DISC strategy getting an infrastructure charge and we are progressing along now, but expect, you know it takes time within each of the state. And then the second part of that growth is the continued need to invest $800 million to $1 billion of capital every year. We could easily invest more in that, there is a more of a need than that, but we are constantly trying to balance the concept of how much of a rate increase can our customer handle versus the need to invest in the system. So, when you look at closing regulatory lag and you look at our continued investments, they are for the key drivers of our growth in the future.

And then on the ROE, in the past in the chart you have corporate ROE and then you have a step down from the regulatory lag and hold to debt, do you still see those step down and hold to debt around 1% to 1.1% and then regulatory lag, additionally around 1% --

Yeah, it is going to decrease as a percentage of our net income growth and when you looked at it for 2011 it was slightly above 1%, so we do expect it to continue to decrease overtime.

Great, thank you very much.

Thanks

Thank you, our next question is from the line of Ryan Connors with Janney Montgomery Scott. Please go ahead.

Good Morning

Good morning Ryan.

Couple of questions, first up, just wondering if you can give us a little more of granularity around the assumptions embedded in the guidance range for 2012 on two separate topics, first on O&M ratio and you talked about it qualitatively, but any kind of more detail or color you can gives us about where you expect that to trend in 2012 directionally in magnitude? And then separately, what are the assumptions around, kind of the market-based operations, is what we are calling it, so what are the assumptions you make for that side of the business in 2012?

Well, let me take it and Ellen may add something to it. On the O&M ratio, I can tell you directionally it’s going we are focused on continuing to improve it. We are not at a stage of saying or wouldn’t give a forecast of what we think it would be in any given year. We have given you a target and I think we will clearly hit that multi-year target and the progression will be to continually improve it and 2012 will not be any different. Relative to the market based side, it improved its operations in 2011 versus 2012 particularly focused in homeowner services and our military services side. We expect to see reasonable growth out of those businesses that improve their performance. We don’t give breakouts on them individually, but I’ll just note one thing on the military side there were some changes made at the end of the year in legislation that we signed that we believe will help open up more basis to this form of competitive procurement and we really look forward to that. Ellen anything you would add.

No, the only thing I would remind you Ryan is really the market based operations although they are positive contributors they are a very small piece of our overall net income and earnings.

And then kind of a bigger pictured question, just talking about municipal, the municipal market. Obviously, some of the municipal ward utilities remain under tremendous financial pressure and in theory that creates opportunities for your business, so I want to get your thoughts on that in two respects, first up in terms of acquisitions and secondly in terms of, you do mention in your slides that, the idea of contract operations, I mean, do you think 2012 could really be, could be the year when finally some of those opportunities really start to come to provision or are there structural issues they are that just make the municipalities hesitant to go – turn to the private sector?

Ryan, I guess the two primary comments, the first one is our business plan and the guidance that we provided for 2012 is not predicated on that occurring that said, yes we do see increased concerns by a lot of the municipal water and waste water utilities regarding their ability to, -- how far they are falling behind, because they are not keeping up and you know the challenge differs amongst them and one of the things that we have learnt is, if the issue is that they just want to increase rates and so they that’s why they are falling behind. Well quite frankly that doesn’t create a great opportunity for us, because one of the things we have learnt is, if we are the ones that come in and increase the rates, that is not necessarily a marriage made in heaven. So for those municipalities that have real capital problems or there is a technology issue where they just can’t keep up with the changing regs[ph] they create opportunities for us if it is a, usually it doesn’t also involve rates issue but they have to be willing to get out in front of the rates question, whether if they put in place the rates or they support the rates that need to be put in place. So, we are obviously actively looking for opportunities as I have told you all before, we will not pursue the kind of business that, some of the kind of business that we have in the past for short-term contract ops for municipal either delivery systems or collection systems or plants, that is just not something we are going to spend our talent on.

That is very helpful, thanks for your time.

Thanks.

Our next question comes from the line of Steve Fleishman with Bank of America. Please go ahead.

Yeah. Thank you, just a clarification on the long-term growth rate. Someone mentioned the 7% to 10% in Q&A, but I didn’t see it mentioned in your slides, are you still targeting that from this level? Or is this kind of base of fixing things up? It is higher, should we kind of assume it a little lower?

No, we believe in the 7% to 10% growth rate, it is not just a, -- if you look at what we done through the last period of time on catch up, we have obviously have been well in excess of that in the 15% range, but we believe we can manage this percent and grow it to achieve a long-term 7% to 10%.

Okay, great and just Jeff, one other question just from a kind of a , -- in the last year or two you have had a couple of strategic transactions as you reposition the company, do you see more potential for those over the coming year? Or is that kind of largely done with, you kind of looked like, I guess the maybe the easy pickings, so to speak.

Well, we have done the ones that we have put a 5 star on, that these were ones we really wanted to do. So, I wouldn’t say that we would necessarily see a higher likelihood, I wouldn’t say that. We are pretty comfortable with the properties we have, but we will absolutely look for opportunities for a mutually beneficial transaction, whether it is a swap or a acquisition, we do have some smaller properties that, the smaller properties we have, today really don’t take a lot of overhead and time and attention, so they are, the scale question, you think about a little differently in those states, you don’t necessarily have to have enormous scale, if we can operate the fundamental operations efficiently. So, we will continue to look and see if there are opportunities but that’s probably a shift from being out aggressively saying, we want to restructure the portfolio and we are going to give ourselves a limited period of time to do it.

Great, thank you.

Thanks.

Thank you. Our next question comes from the line of Jonathan Reeder with Wells Fargo. Please go ahead.

Good morning Ellen and Jeff.

Good morning.

Jeff, could you just repeat, you said the consumption embedded in guidance is down on 0.7% or 0.8% is that for residential or total retest?

No, it is residential.

Just residential?

Yeah, we have talked about declining usage for our residential customers and we have built into our plan, roughly three quarters of a percentage point decline off of 2011 actuals and that is just to provide you a sense of where is the starting point.

Jonathan I said, note that on the long-term trend, however, we are still seeing the numbers in that half to one-and-half, if not a little bit more percentage, if you look at usage not impacted by weather.

Right and then remember, this is off 2011 actuals because that’s all you have really got is the actuals. Because we can’t, no one has figured out a way to weather normalize water sales.

Right, so you are implying that the weather had a negative impact in 2011.

Yeah.

Okay.

It certainly did in the East and mid Atlantic areas, which is where the predominance of our business is.

Right, and then on the four rate cases planned for 2012, do you have any kind of comments around the dollar melt we could expect or at least what states you plan to file?

Thank you for giving me the one question, where I can say no comment.

Well, I might have another one for you, Ellen, you don’t know.

But nice try, now at this point, it is always our practice that we are going to have a rate filing we like to notify the regulators first and the commission first.

Okay, and we don’t it by these calls.

Fair enough, last question for you Ellen, deferred income taxes, can you kind of just talk about what you have seen as far as the cash flow benefit in 2012 and 2013, it look likes 2011 is probably going to be pretty similar to 2010?

Yeah. We continue to have a substantial NOL that we are carrying forward, so we would expect that the trends you see in 2009 and 2010 and going into 2011 will continue. At this point, we believe that NOL given no changes in tax rates is probably got an 8 to 10 year remaining life.

Okay and it should continue at a similar level to what we see in 2010 and 2011 going forward for those 8 to 10 years?

It should, yes.

Okay, thank you so much for ---

There will be some ups and downs depending on the tax curve but yes.

Okay, thanks so much for the additional information.

Thanks.

Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Good morning.

Good morning.

Good morning.

So, a couple of questions looking out past 2012 year, in New Jersey favorable DSIC rule a couple of months ago, when should we think about that impacting earnings at the earliest and how should we think about the magnitude?

Well, if really, when you work through the whole schedule, it probably will not impact flow of cash flow earnings until we get into the second quarter of 2013, because of the process the rule still has to go through and then we have to make a base level filing and then we have to look at a period beyond that. And as you probably know Neil, it provides for recovery in excess of the amount of depreciation which, Ellen I can’t recall.

Yes, we don’t do it.

Okay. So we really -- it’s based on the level of depreciation for those like kind of assets. Obviously, it’s beyond the current year guidance, we are not really in a position to give you any kind of a specific number. I think the importance is you see what the value is that those kinds of mechanisms have created in Pennsylvania, in Illinois, in parts of Missouri [ph] and some of our other states. And this is our second largest state where we will have this kind of a mechanism, it did really helps on the regulatory lag front.

Thank you Jeff. And then also looking out past 2012, the long term rate based growth picture is $800 million to $1 billion still the right CAPEX range here post 2012? And what would get you to spend on the higher end of that range?

Well, that range is correct. Where we are in that range can be driven by, if we get DSIC type mechanisms in more states and more coverage. That can be an encouragement to CAPEX, if the balance of what we really believe we can get through and get rate recovery on, so you have to take into account the social side of where states are in their rates and then obviously you have some larger projects that can cause something to go up, so we have got some reasonably significant projects this year in Pennsylvania and New Jersey, in 2010 we had the completion of the large Kentucky project, so that can move you. Those are the three things that I think can move you towards the higher end. Ellen, is there another factor you would?

No, I think that’s really the key drivers. And again, always looking at the impacts on rates within that state.

Sure and potentially the impact on equity and I guess what you are seeing today is that no equity in 2012, but having closed the door on the potential for equity in 2013, it’s too early to say.

We look at this at the current year of what’s coming up, what we expect our cash flow to be within that year and then – so we do it one year at a time here.

Okay. Thanks fellows.

Thanks.

Thank you. Our next question comes from the line of Heike Doerr with Robert W. Baird. Please go ahead.

Good morning. Thank you for taking my question. I wanted to follow up on a question that Jonathan Reeder has asked. I know you mentioned what the residential usage is looking like. I wonder if you could comment on what we are seeing on the commercial and industrial side as we start 2012?

Heike, as you know, we have an issue -- the 2011 10-K, and so there will be effects in addressing what we have seen in those areas. And just as a reminder, through the first three quarters in 2011 we saw industrial fairly flat and commercial a little bit weather dependant.

Yes, depending on the states.

State.

Okay. And as we think about customer growth, I know for our gas utilities often the decline in usage is offset by some modest customer growth. Can you please tell us what you are seeing as far as or what assumptions you have made regarding organic customer growth and what you see as the outlook as far as some of these tuck-in acquisitions for 2012?

Well, we are not seeing anything significant in customer growth. It varies from area to area, from state and location. So in some areas we see a little higher growth, but frankly Heike, it’s pretty small.

Smaller than this – so it would not offset this 0.7% usage decline you (inaudible) kind of less than that customer growth.

Yes, Heike, that’s not occurred in ‘10 or ‘11. We have not seen that kind of actually starting in ‘09 with the housing crisis we have not seen that type of growth.

Okay. That’s all I had. Thanks.

Thank you. (Operator Instructions). Our next question comes from the line of Michael Roomberg with Ladenburg Thalmann Financial. Please go ahead.

Hi, good morning.

Hi, Michael.

Good morning.

So, this tornado diagram that you have is very helpful for understanding the magnitude of a number of things that are going to be driving the 2012 outlook. One of the things I didn’t see on there was the impact of some of these rate cases that are still outstanding that are likely to be determined in the first half of ’12. And I am just wondering in terms of your base assumptions of how you developed this guidance, are you assuming essentially that your large returns on those states stay the same or increase or decrease slightly? Can you provide a little bit of additional color around that?

I think the best way to answer that is, every state is different. And so, we are try to take into account what we see as the dynamics within that state, if we have specific knowledge we will use that. So I can’t say that there is a single kind of assumption regarding either returns or percent of recovery or anything like that. It’s a little, we are a little more exact than that but we also obviously won’t talk about the specifics of any of those assumptions on a state-by-state basis.

Sure. Okay, that’s fair enough. And I guess this will be a question for Ellen, actually a two part question. Ellen, can you talk a little bit about the changes in your pension expenses in 2012, obviously that plays a part in your assumptions for O&M? Just kind of hoping to see if you could walk us through a little bit of that. And then relatedly, some of the interest rate assumptions that you are using to target 2012, do you assume that interest rates stay the same or increased? Just a little bit more clarity on that would be helpful.

Sure. On the interest rates or assumptions, as we have seen they match those that have been published by research institutes, etc. That interest will stay pretty much flat in 2012 versus what we have seen in 2011. So we don’t see much change in that and we have used a lot of outside sources that can concur with that approach. On the pension expense, as a reminder, we have something unique in American Water in that we have about 60% of our state’s account for pension expense under FAS 87 and the rest are based on ARISA and therefore the expense is based on actual cash contributions. And given that unique mix at this point in time we don’t see any substantial impacts or changes in our pension expense for 2012. Now that may change once we complete the audit and the assumptions that we are looking at as it relates to determining the liability of the fund, but that’s where we are at this time.

Okay. And then Jeff, just one last question. Turning back to be military base business, I know it’s a relatively small piece of the pie, but you know, you had expressed some optimism that some of the changes that have taken place in 2012 in the federal budgeting could be a callas [ph] for increased bidding opportunities. Do you see those being just giving the timeline of misusing regulations more of a first half event or a second half event?

You know, we are talking about the federal government and so things don’t move as fast as maybe we would like, so -- and these are not simple processes. For the Army, they have got it pretty well down. For the Air Force, they have only done a few. So, they have a process, they still have to go through. What happened in the legislation is that process for them got a bit simplified. And so we think that it provides a good impetus and to start hearing is that it will provide a good impetus to move it forward. But I would not expect to see words [ph] of any kind made in the first half. It’s a question of – do we start seeing bids come out through 2012 and really this is more affecting a little longer term, not so much 2012. Because, it takes a little while to get these going, but the good thing is when you get a contract with the base, the big issue where a lot of the value is really in that catch up here, that first year where they got a bunch of projects, they haven’t been able to do and so when they need those are taken care of quickly. So we start to see good returns very quickly after take over operations of the base but the process does takes some time.

Okay. Thank you so much.

Thanks.

Thank you. We have a question from the line of Garik Shmois with Longbow Research. Please go ahead.

Hi, thank you. Good morning. Just a question on the business transformation expense, you highlighted that this morning. Just wanted to clarify, are you expecting another $80 million to $85 million in spend in 2012?

At this time the total that we have disclosed of spend is around $280 million for the entire project, prior to allowance for funds that you are allowed in certain states. And so, we would expect a similar trend in spending in 2012 as we saw in ’11, but still below that $280 million.

Okay that’s quite helpful. Sorry.

Sorry, but the finishing up of the project being in ‘13.

Okay. And can you quantify, perhaps the benefit from that project that you expect to begin to realize at 2014 whether it’s through cost savings, or margin or earnings?

You know, the primary driver of the business transformation project is to provide finally for this company the foundational systems for data recovery, analysis, simplification and integration. We really don’t have platform systems. So the fundamental justification is really, we’ve got to replace what we have today, it is best described as a overcooked spaghetti thrown up against a wall, to be quite candid, we just don’t have good systems because they have been tacked on to each other and not foundational. That said, as they get implemented we do expect it to be able to drive operating cost down because we are reducing the level of manual involvement. But that’s going to happen after the systems are really in place. So, we kind of look at, frankly after it is all settled out, maybe a little in ’14, but ’15 to really see the value of those systems as they are implemented.

I would add. This is truly an infrastructure replacement.

Yes.

Okay, great. Thank you very much. Operator This concludes the question and answer session. Please continue.

Well, I would just thank you all very much for your continued interest and support in our company. As I said, we are pleased that we are continuing to be able to present a strong growth opportunity for investment and we are committed to continuing that as we go forward. Look forward to visiting with you and have a great new year.

This does conclude this morning’s conference call. Thank you. You may now disconnect.