American Water Works Company, Inc. (AWK) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to American Water's First Quarter 2013 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with accompanying slide presentation through the company's website, www.amwater.com. Following the earnings call, an audio archive of the call will be available through May 15, 2013, by dialing (303) 590-3030 for U.S. and international callers. The access code for the replay is 4613407. The online archive of the webcast will be available through June 7, 2013, by accessing the Investor Relations page of the company's website located at www.amwater.com. [Operator Instructions] I would now like to introduce the host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you, and good morning, everybody, and welcome to American Water's First Quarter 2013 Conference Call. As usual, we'll keep our call to about an hour and at the end of our prepared remarks, we will have time for questions. So although we do have a new CFO on the call today, we do have our same cautionary statement concerning forward-looking statements. So before we begin, I'd like to again remind everyone that during the course of this conference call, both in our prepared remarks and in 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. And such risk factors are set forth in the company's SEC filings. And now I'd like to turn the call over to American Water's President and CEO, Jeff Sterba.

Thanks, Ed. Good morning to you all, and appreciate you joining us for the call this morning. Besides Ed, I'm joined in our presentation by Susan Story, our Senior Vice President and CFO, whom a number of you I know have had a chance to meet, and she certainly looks forward to visiting with you, each of you all over the coming months. In addition, Walter Lynch, Head of our Regulated Operations; and Mark Chesla, our Controller, are here to help as needed with your good questions. So we're pleased to present our first quarter results. Let me start by hitting on a few key themes for the quarter centered around our overall financial performance; execution of our regulatory strategy; and third, the success we've in growing both our Reg Ops and our market-based business because, obviously, all 3 are important drivers of our long-term growth. So going to Slide 5, you can see that we're off to a good start for 2003 with strong financial results. For the first quarter, we reported a 17% increase in income from continuing operations and a 14% increase in earnings per share from continuing ops, as well as increases in revenues and cash flows. Our consolidated return on equity for the 12 months ending March 31 was 8.29%, an 83 basis point improvement from the 7.46% return for the comparable previous last 12 months. And Susan will go into more detail about those results in a moment. Let me move to Slide 6 and talk a bit about our regulatory strategy. As you are probably aware, we have filed rate cases in Pennsylvania, Iowa and California, requesting approximately $98 billion in annualized revenues. With all 3 of these requests, the main driver is the needed investment in our system. As wastewater service and water providers, we have a responsibility to invest wisely, updating and maintaining the many components that assure the reliability of service for our customers. So for example, in Pennsylvania, we have invested approximately $731 million since the last rate case in April of 2011. In Iowa, we've invested $26 million since our last case. And in California, which remember, has a 3-year forward-looking rate case process, we anticipate a total investment of $130 million over the next 3 years. Two of these filings, Pennsylvania and California, are future test year cases. And this is important because, obviously, what we've been talking about is how do we reduce regulatory lag, so we're promoting the expansion of future test years and other mechanisms. So in Pennsylvania, Act 11, which was passed last year, enabled full future test year cases; California has had them for a while. In Iowa, the filing uses known and measureables for our forward period of investment, costs and usage to take into account the continued decline in usage from our residential customers. In Pennsylvania, additionally, Act 11, which was passed by the Legislature last year, allows us to consolidate water and wastewater costs and rates. And this enables the rolling in of wastewater systems into our overall system and costs and facilitates wastewater system acquisition. This will be the first case filed that implements those provisions of Act 11. Now that said, we're also very mindful about the need to balance needed investments with the customer impact, and we remain and will continue to be diligent about managing our costs. Our Regulated Businesses continued to increase operating efficiency resulting in an O&M efficiency ratio over the last 12 months of 40%, compared to 41.8% over the same previous 12 months. Susan will talk a bit more on how this focus on expense controls allows us to more efficiently use our capital and the headroom that we believe we've got under what would be appropriate rates. We also continue to utilize mechanisms that reduce regulatory lag and maximize our ability to replace existing aging infrastructure. Our largest 3 states have the ability to recover CapEx cost through infrastructure surcharges, and that's certain CapEx elements, not all is that -- typically, the distribution and infrastructure side where we're replacing infrastructure that doesn't add incremental revenues. And so now that we have the DSIC mechanism in place for New Jersey, we anticipate about 39% of this year's CapEx spending, which is about $950 million, will qualify for recovery through these mechanisms. I think 3 years ago, you'll go back and it was in the high-teens, we're now at 39%. And I think that, that shows the significant progress we've made in our regulatory strategy. Turning to Slide 7, let me just talk about the growth of our business a bit. And let's break it into 2 parts, as shown in the water picture slide that you can see. And I credit whoever came up with a water picture for a water company, it's so unique, so innovative. Just kidding, Ed. We have core growth, which includes efforts to reduce lag and seek appropriate returns on our capital investments, tuck-in acquisitions, the continued improvement of our regulated operating efficiency, as well as continuing to grow our military contracts and Homeowner Services business. And then there's our enhanced growth, which includes medium to large acquisitions providing new products and services and expanding into new territories in our Homeowner business, pursuing concessions and longer-term contracts, and continuing the expansion of our shale gas opportunities and other new business lines. Combined, these are the opportunities that will deliver our 7% to 10% long-term earnings per share growth. Since the beginning of this year, we've had a number of successes in both buckets. We've completed 5 tuck-in acquisitions, already in the first quarter, and also signed 2 agreements for acquisitions, which all added together, will have more than 22,000 customers to our base. One of these agreements, which we show under the enhanced growth area, is the acquisition of Dale Services Corp., a regulated wastewater utility in Virginia that serves approximately 20,000 customers. That's a sizable wastewater acquisition, expanding our operations in this important sector. As we've talked to many of you, we view the wastewater area as an area of significant growth potential for us. It's something that we're very heavy in on our market-based side, but it only accounts for about 4% or so of our Regulated Operations. Our Homeowner Services business reached its 1 millionth contract milestone this quarter, partly due to the launch of the partnership with New York City to provide service line protection programs to its 650,000 eligible homeowners. I got to tell you, response to this has been very strong. We now have more than 80,000 customers, so about a 12% penetration rate in only 1 quarter of marketing. And we've got nearly 160,000 contracts, which means that almost all of the customers signing up are taking 2 products. On the shale energy front, we added 5 new connections with shale drilling companies and signed an additional agreement with XTO Energy. That's the third pipeline extension in Butler County to support drilling operations in the Marcellus Shale area. And it also, as we've talked before, when we extend our regulated pipelines, it provides us the opportunity to provide the public in that area with a much-needed treated water service. So it's a positive for the environment also. XTO has told us that with those 3 pipeline extensions that we've done with them, they will have over 500,000 fewer water truck hauls on the roads of only 1 county, Butler County. So just within Butler County, it will be 0.5 million fewer water truck hauls over the next 5 years or so. In addition, because they're using our treated water, one of the other things that they've told us is that they are able to use less chemicals in their injection fluids, because they don't have to put in as much biocide. And that's important because biocide is the only nonfood grade material that they use in the creation of their fluids. So we think there's some really positive environmental aspects to that. Turning now to Slide 8. This week, our board of Directors authorized a 12% increase in the quarterly dividend from $0.25 to $0.28 per share. This is in line with the dividend policy we articulated this time last year, that more closely ties dividend growth to growth in earnings per share while targeting a 50% to 60% payout ratio. With the strong results of the first quarter, as you can see on Slide 9, we are reaffirming our 2013 earnings guidance range of $2.15 to $2.25 per diluted share for continuing ops. And with that, let me turn the call over to Susan for a more detailed discussion of our financials.

Thank you, Jeff, and good morning to those who are listening to our first quarter 2013 earnings call. I'm excited to be here with you today, and I look forward to working with all of you. Jeff has already reviewed some of our key highlights. I will now take a few minutes to describe in greater detail the drivers of our results for the first quarter. Turning to Slide 11. As Jeff mentioned, we experienced solid financial results for the first quarter of 2013 with increases in revenue, net income and earnings per share. These results were driven by our team's commitment to strategies that focus around delivering value to our customers, investing in needed infrastructure and controlling costs. During the first quarter, we reported operating revenues of approximately $636 million or a 2.8% increase over the approximate $619 million reported for the first quarter of last year. Growth in revenues was strong in our Regulated Businesses, as we will discuss further in a few minutes. But our market-based business was down for the quarter. This is primarily due to timing delays in starting some projects in our military services group, which we fully expect will catch up during the latter half of the year. Net income from continuing operations for the first quarter was $57.6 million or $0.32 per share, representing a 17% growth over the prior year. Net cash also improved quarter-over-quarter, increasing to $149.6 million compared to $148.1 million for the first quarter in 2012. Now let's discuss, on Slide 12, the various components of our income from continuing operations, starting with revenue. I also encourage you to read our 10-Q on file with the SEC for a more detailed analysis of both revenues and expenses. Overall, operating revenues increased $17.6 million with revenues from our Regulated Business increasing $31.4 million or 5.8% from 2012. This increase in revenues is primarily due to new rates in a number of our subsidiaries with an impact of approximately $25.3 million. Additional revenues of about $5 million were related to acquisitions, the most significant of which was our New York acquisition in the second quarter of 2012; and our increased surcharge and balancing account revenues of $5.2 million. These increases were partially offset by lower customer demand, which impacted revenues by approximately $3.6 million in the first quarter of 2013 compared to the first quarter of 2012. For our market-based businesses, revenues for the first quarter of 2013 decreased due to lower Contract Operations Group revenue by $14.7 million. Of this decrease, about $9.8 million was due to delayed activities in our military-based contract, which we expect to make up in the latter half of the year. The remaining decrease was due to the termination of certain other contracts continuing our rationalization of the municipal and industrial contract business. This decrease in Contract Operations Group revenue was somewhat offset by a $1.5 million increase in Homeowner Services revenue, which Jeff talked about earlier. On Slide 13, total operating expenses for the first quarter of 2013 increased by about $13 million or 2.9% from 2012. Operation and maintenance in the Regulated Business increased $11 million or 4.3% in the first quarter of 2013 compared with the prior-year period. Production expense increases include an increase in chemical costs related to the acquisition in New York and price increases and increased chemical dosages as a result of some unfavorable water conditions in our Illinois subsidiary due to drought. Operating supplies and services increased $6.3 million or 13.2%, primarily due to higher contracted services. This was mainly a result of incremental contractor cost related to the stabilization of our ERP project, as well as cost involving projects to improve our processes and our operating efficiencies over the long term, also due to the ERP implementation. Maintenance materials and services, which includes emergency repair, as well as costs for preventative maintenance, increased $2.1 million or 12.9%. This was mainly a result of higher-than-normal main breaks in a number of our subsidiaries, increased cost as a result of the New York acquisition and an increase in tank cleaning cost in California. Customer billing increased $1.3 million due to an increase in uncollectible expense, and we also experienced a $1.8 million increase in casualty and liability insurance premiums. Employee-related costs decreased $2.5 million or 2.1% driven by decreased group insurance and pension expense. The reduction in group insurance cost was mainly attributable to higher capitalization rate. Salaries and wages expense were relatively flat compared with the prior-year period. The market-based business operations decrease in total operating expenses coincide in part with the decreases in revenues which I have described previously. Turning now to regulatory highlights of the quarter. Slide 14 shows our new expanded rate case update template. We wanted to make it a bit easier for you folks to look at the rate case activity in the quarter, be it formal rate cases awaiting final order, which we separate on this slide between those filed in 2013 versus those filed in 2012. And also any step increases or district filings which impacted the quarter or are still pending. Including Pennsylvania, Iowa and California, we now have approximately $135 million in requested additional revenues from formal rate cases. And looking at the timing of these rate cases versus previous years, the rate cases we expect to resolve in 2013 should hit towards the end of the year versus midyear in 2012, when we had 3 rate cases finalized in the second quarter. Turning now to Slide 15. As you all know, internally, we challenge ourselves to build a culture of continuous improvement and excellence as a way of providing a path for sustainable earnings growth. As part of that effort, we strive to manage our cost structure as efficiently as possible. And this slide shows that the result of that focus are paying off for our customers. We've graphed for you the incremental revenue requirement across our states for 3 different time periods. As you can see, just a few years ago, about 60% of our rate case filings were to recover operating cost. Thanks to our focus on operating efficiency and expense control, we began to see a change. And in subsequent filings, in 2011 through 2012, we lowered by more than 1/3 the level of operating expenses we were seeking to recover to just 16%. And in fact, if you look at the most recent rate cases filed, that percentage is now approximately 6%. Fully, 94% of our recent cases filed are driven by needed capital expenditures in our infrastructure. This is a solid and sustained improvement and a testament to the discipline in cost controls that I see at American Water, which provide a tremendous benefit to our customers. In fact, on Slide 16, this continued effort to drive operating efficiencies also translates into an improved O&M efficiency ratio, which Jeff mentioned earlier, now at 40% for the 12 months ended March 31, 2013, compared with 41.8% during the same time frame last year. I have to tell you, as a new member of the American Water team, it's great to see this type of commitment across the business to continuous improvement to benefit our customers. And now I'll turn the call back to Jeff for his closing comments and for your questions.

Thanks, Susan. If you go to Slide 17, this is the slide that you see each quarter. It shows the expectations of what you can hold us accountable to and kind of measure our progress. Since we're really only into the first quarter, let me talk about our plans for the rest of the year. We'll pursue the completion of our pending rate cases in West Virginia, Kentucky, Pennsylvania, Iowa and California, as well as contingent -- continue to evaluate appropriate timing for additional rate cases that could be filed possibly later this year or in 2014. We'll continue to focus on operational excellence and increased efficiencies, and we expect to beat our 5-year goal, which is to have an O&M efficiency ratio of 40% or below in 2015, we'll beat that by 1 or 2 years. We'll also begin to leverage some of the efficiencies gained through our business transformation project, though the real savings associated with that, really, won't come into play until about 2015 or very late 2014. The second phase of our BT project, which involves the customer information system and enterprise asset management, which is obviously the management of all of the assets that we're putting in place, should be substantially complete by the end of this year. We'll also maintain our investment in our systems with an estimated spend of about $950 million in 2013, and we'll further leverage our supply chain initiatives to realize additional improvements in both our capital and O&M efficiency. We'll continue to leverage our IDP offerings. And you will recall that we've talked about what we've been doing on the innovation development side, we've developed some very interesting technologies that we're starting to use and are starting to be put into place elsewhere in the industry. They're small, they're meant to be small, they don't consume our capital, but they have the potential for growing significantly in the future. And so we'll continue to push that through the commercialization process. And in the Marcellus Shale space, we expect our number of connections to steadily increase as we continue to have discussions with numerous energy companies about opportunities to expand our pipelines to improve water service to these growing areas. So far, these have all been on the regulated side though, as we've said before, we're open to both regulated and nonregulated pipeline pension to meet market needs, with the right risk return profiles for those. These efforts will anchor our long-term earnings per share growth of 7% to 10%. We seek to provide investors with a long-term double-digit total return investment on a thesis centered around investing in our country's infrastructure in an industry whose product is essential to all people. Before we go into the Q&A side, just a reminder that our Annual Stockholder Meeting will be held here in Voorhees, New Jersey, and also online through the Virtual Stockholder Meeting this coming Monday, the 13th, I believe it's at 10:00 a.m. All stockholders are invited to attend and if you all have not voted your proxy for any of the holders that are online, we certainly encourage you to do so. And with that, we'd be happy to take any questions that you all may have.

[Operator Instructions] And our first question comes from the line of Ryan Connors from Janney Montgomery Scott.

So one sort of tactical question and 2 bigger picture items. Just on the -- in the short term, obviously, 1Q is a seasonally slow quarter and then now we move into 2Q, 3Q and more of a stronger seasonal demand period, and last year was a really strong year. So can you kind of update us with your perspective on, obviously, the challenging comparisons and how we should be looking at year-over-year growth potential? And maybe even any early perspective, a little over a month into second quarter, on how that issue of tough comparisons is playing out.

Yes. Ryan, let me just touch on that briefly, remember, this is the reason why, last year, we provided a sense of what the impact on earnings from continuing operations was from the unseasonable weather, and we indicated it was about $0.13 to $0.16, so that you could kind of normalized out the impact last year. So our suggestion is you kind of look at that from a trending side to look at the performance of it as we go through this year. We're not going to give you much -- say much about what's going on in any quarter until the end of the quarter. I'll just say that, certainly, April, it didn't give us any cause for concern on the sales side at all. We'll have to see what happens to weather. The thing that's -- this is one of the things that we're really starting to focus on. Regardless of what your views on climate change are and whether you believe in anthropogenic causes or not. The reality is we're going to face significantly more volatile and variable weather patterns. They will be extreme, and so we will see significant changes. And so one of our real focuses is building resiliency into our system, both physically and financially, so that we can manage these kinds of swings, while maintaining the same kind of financial risk profile and ensuring that we have the systems that will allow us to meet those customers' needs. So we'll just have to wait and see what happens in the second and third quarters, but at this stage, we're very comfortable with the earnings guidance we've given.

Okay. That's great. And then can you just update us on your assessment on the regulatory climate, broadly, as it relates to awarded ROEs? Obviously, interest rates remain low, that puts downward pressure on cost of capital calculations, economic backdrop is mixed. And so how do you see commissions responding to that environment here as you gear up for a few fairly significant rate cases in the pipeline as you talked about?

Well, let me put in a few words, then I'd like Susan to add her thoughts, coming out of the same kind of regulated marketplace. Clearly, it's been downward pressure on returns. One of the things we remind regulators is, look, you have to be very careful about looking at what the -- what an artificial -- artificially held down risk-free rate is and use that as the basis for calculating what a cost of equity capital is. Because it's being artificially held down for monetary -- through monetary policy for specific broad-based governmental reasons. But that said, the other thing that we share with our regulators is the notion that more than probably any other company in the utility industry, we have a capital allocation decision to make. And it's not that we're not going to do what is essential, but in terms of the variable capital, which is a big chunk of capital, it will move where there is the opportunity to earn our full return in a timely manner. And I think the clearest example is the additional commitment that we made into New Jersey once the DSIC was put in place, the incremental capital that we've committed into Missouri, and where, frankly, some capital has been extracted. Again, we're going to make sure we provide service to customer, but it's an issue of investment in the longer term. So we certainly see returns coming down a bit and we've factored that in our game plan going forward, but we think we can, without -- certainly not in a threatening way, help people understand that we only got so much capital spend, and it's going to be allocated where it's going to get the greatest return.

And absolutely. And I agree with Jeff. And I think, also, remember that when you look at the rate cases that we have filed, we are holding the line on O&M expenses. We are trying to be good stewards of going into the public service [indiscernible] utility commission so that when we go into these, it's for infrastructure improvement. We know from several reports from the Society of Civil Engineers, the water infrastructure is struggling nationally, we believe and we have continued to make investments in that. We know that utility commissions recognize management efficiency, which we think that we are showing by how we are controlling our O&M costs so that we're going in for recovery, basically, for the investments that we're making to improve reliability, safety and making sure that the water is available when it needs to be available.

Yes. Susan raises something that we're going to start helping make sure our regulators understand more fully. It's you look how far this company has come in a pretty short period of time about improving its cost structure, really getting focused on how we serve customers in different ways, the kinds of things that we do that others don't do about helping ensure continuation of service where we have had very little lost service during these weather events and have been lauded in virtually every state where we've had those events because of the way we manage our field force and what we do relative to the loss of electric power. So that's something that we think can help make up for a little bit of the lower natural returns that regulators will get.

That's great perspective. And then one last question for me. Pretty big privatization opportunity in Allentown, Pennsylvania that did not go to either yourselves or any of your investor-owned peers. Can you just talk a little bit to us about that process and what you learned from it as regards to both the appetite for privatization and then, also, how you'll approach that type of opportunity in the future?

Yes. Sure. I'll tell you that I am exceptionally proud of the team that we had working on that project. The way they conducted themselves, the development of the proposal and -- I'm very comfortable with what we did. We would not have paid what someone else is saying they will pay. So in terms of the process, I'm just -- that's fine. I guess, a couple editorial comments. I think from a public policy side, there is a real issue to be had about an entity being able to use subsidized tax-exempt financing. It's being subsidized by all taxpayers. To buy assets, we'll enter into an agreement where you're paying to lease assets at about cost, above the original cost. The notion of using tax-exempt debt to enhance a public systems that already exist is one thing. But to acquire a system and to effectively compete by using something that's subsidized by their taxpayers, I think, is a public policy issue that's going to end up being addressed in Congress. In the kind of economic condition that this country is in, to continue to allow those kinds of subsidizations, I think, are the things that policymakers ought to look at. And I think we also have to recognize that they're paying -- whatever the price, $220 million, I guess, is the price. It's a heck of a lot more debt that they have to issue than $220 million because of the bond, reserve funds and everything else. They don't have any equity capital that's associated with that. So I hope it works for them. They may do a decision, we'll see what happens. I'm very comfortable with how we conducted ourselves and the price that we put forward. It does not dissuade us from pursuing the right kinds of opportunities for the future. We're approaching it with the same care and deliberation that we did this time.

And our next question comes from the line of Neil Mehta from Goldman Sachs.

In California, one of the things we've seen with some of the electric utilities are general rate cases are taking a lot longer to resolve. You just filed in California, how should we think about the timing of final resolution? And do you think there's any read over from the time line in California for some of the electric needs to how we should think about water case resolution?

We have Walter to answer that.

Yes. Neil, it's Walter. In California, there's a 3-year cycle, so we filed on that timing. We filed in May. The rates are going to be effective in January 1, 2015, based on that 3-year cycle. So we expect to take a good portion of it and have the rate case finalized before January 1, 2015. So it's on a regular cycle, and all the water companies are on those cycles.

Yes. Neil, if you'll look at this last rate case, the decision was about, what, 5, 6 months late. But it's -- there is the risk. Because you're right, they are running behind. There is the risk the case could slip. But the rates are retroactive. That's what gives us a little comfort is that it's not an issue where we won't make that revenue. It may be delayed where the actual flow comes a little bit late, but it will be retroactive to that date.

Got it. All right. And then on your comments on dividend, obviously, you had a nice dividend bump a couple days ago. To get to the midpoint of your 50% to 60% payout, you likely have to grow your dividend by faster than EPS growth. So just to get back to your dividend philosophy, is it possible that you grow your dividend in excess of that 7% to 10% to get closer to the midpoint of your payout range?

I just love it when a 12% dividend increase is a nice dividend increase. There is a balance, as I know you understand, between the rate of growth that we have in that. And we're going to always be a little conservative on this because in looking forward, we have balanced that issue of what the opportunities we have for investment. I guess, the short answer to your question is, certainly, there is the potential that it will grow at a rate faster than earnings maybe in any 1 year. But remember that we talk about 7% to 10% as a long-term growth rate, not every year-on-year. And so a year in which we have, let's say, 7% growth or 7.5%, the dividend rate may still be -- will be higher than that. In a year in which we have 15% growth, as we have for the last 3 years, it probably wouldn't be or probably likely wouldn't be above that. So as we go forward, we'll keep looking at that. I think the key for us is to provide a predictable, stable level of growth in the dividend. And we've increased it by $0.01 in each of the last 3 years and -- because it was appropriate to do so. Whether -- we're now at a $0.03 per quarter level increase, so that's 12%. Whether we go above that, we'll wait and see how our future continues to unfold.

And our next question comes from the line of Kevin Cole from Crédit Suisse. Kevin Cole - Crédit Suisse AG, Research Division: I guess, with the shale development, can you, I guess, help me think how the earnings levels will work when you invest in the business? And is it a purely rate-based business, or do you get some volume kicker from it as well? And then also with the XTO agreement and similar agreements, how much CapEx should we be thinking that you're investing?

Yes. Let's take that in 2 parts, let me do the second part first. In most of these agreements, frankly, what we've got is the driller investing a good chunk of the capital or providing a good chunk of the capital as a contribution and aid. And then the whole investment is rolled into our rates and the property is deeded to us, so they then end up paying for treated water. That's what we've done on the regulated side. So in between rate cases, we get a bump from those additional revenues and sales. We also have the opportunity to then serve the retail growth that can crop up around that pipeline or for, in many of those areas, customers that are having well water difficulties to have them come on to the line, and so that's additional revenue. And then if the drillers end up leaving and we don't have any risk associated with those investments, they're rolled into rates and will stay in there for the long term. So that's how the ones that have happened so far are being treated. And I think that the value of that, remember, it's twofold. First, we're getting the revenues from that driller today. In the longer term, we are getting additional certificated territory. So when we make those extensions, the Pennsylvania Commission actually certificates additional territory for us. And that will put us in the position if, for example, this cracker is built to be able to serve what people estimate from anywhere from 15,000 to 40,000 new jobs in that area. So now, as I said and we've said for at least the last year or so, while we focus on regulated investments to serve drillers, we will also consider market-based investments if the risk reward profile is right and it meets what the customer needs and wants. So far, that hasn't been what the customers have preferred. It hasn't been necessary or appropriate but those things can change, and that obviously has to have the right risk reward relationship. Kevin Cole - Crédit Suisse AG, Research Division: And so this is a 0 like business then, given the contribution and aid?

Yes. There's very -- I mean we put in some capital. But I got to tell you, we haven't put in -- I don't know what the number is, Kevin, I couldn't tell you what the specific is, but it's not much. It may be $1 million or a couple of million. Well, it's probably a couple of million dollars so far. Because a big chunk of it is put up by the driller, and then they deed the property to us at no cost. It doesn't -- they don't get a deduction in the rates, so they pay for the pipeline, and then they pay the regular price for the water. Kevin Cole - Crédit Suisse AG, Research Division: Have you provided the rate base growth opportunity for this?

I'm sorry, can you speak up? Kevin Cole - Crédit Suisse AG, Research Division: Sorry, have you provided the rate base growth opportunity for, I guess, the shale development initiative?

No. No, we have not. Kevin Cole - Crédit Suisse AG, Research Division: And then, Susan, with your comments on the non-Reg side, I'm sorry if I missed this. But was the revenue to net income decrease a function of a slowdown and ability to get new businesses, or was it just kind of more of a contract issue? And then also how do you expect to backfill later on this year?

Yes. Thanks for that question, Kevin. Actually, the military services group, just for a little background, these contracts are O&M contracts, but they're actually full scale. We are the EPC contractor and we provide the O&M services with 50-year contracts. So we're the ones who get the permits. We actually also get a bill of sale for the assets, but because it's on the government installation and we can't make any decisions that the government doesn't approve, we don't carry those on the American Water books. So what happens is we have projects that are already awarded. These are not projects we are hoping will happen. They have been budgeted, they've been awarded, we are in process. There was some small delays in terms of getting some construction permits on the majority of these sites. So we fully expect for these projects to continue for this year. It will probably be more towards the third or fourth quarter. And also understanding how this works because we're EPC, we have an agreement that we actually book revenue during certain percentages of the completion of the project. So once we start the project based on where we are in the design build, we're able to bring revenues in. So it's merely a matter of the timing, and most of that is due to the construction permitting.

I think I have one thing to add, Kevin. I think as we're -- as people are finding out, there is an impact of sequestration that's the kind of the hidden impact. And it is that even if there aren't -- people aren't being furloughed or anything, or even if they are, you're losing some effectiveness there. But what really happens is everyone in the government talks about what's going on, and that reduces effectiveness efficiency. And so stuff's just gotten slower, and that's a natural thing to happen, but it isn't going to stop the moving forward of those contracts.

Yes. I mean, the sequestration should not affect these projects that we've got. And also, even going forward, because we're doing water and wastewater infrastructure, these are critical elements. So as long as there are military bases, the work will be done. The question is, who's going to do it? And we're going to compete most effectively for those projects.

And our next question comes from the line of Angie Storozynski from Macquarie.

I just wanted to clarify comments about the timing of rate cases and the revenue contributions and how it ties into your guidance. So is this just purely about the quarterly allocation of revenue increases or that's -- I mean, the timing of those rate case resolutions together with the delay in the military contracts should weigh on your results in 2013 versus your guidance?

Angie, that's exactly correct. Last year, the 3 rate cases were finalized and we received the orders in the second quarter. When you look, for example, at Kentucky and West Virginia, the water and wastewater in West Virginia and the case in Kentucky, we, of course, we don't know. We would hope that by the third or fourth quarter, we would get a final order on those. With Pennsylvania, it could be through the first quarter of 2014, but there's a chance it could be the latter part of this year. In Iowa, probably '14. So a lot of it is due to the timing from last year compared to this year.

But you already knew about it and it is embedded in your guidance, right?

Yes. For the year guidance, that's why we reaffirmed our guidance -- the annual guidance, we reaffirmed our guidance.

Okay. Now how much of a help did you guys have in the realized ROE over last 12 months from the weather? So if I were to look at the weather normalized, realized ROE.

Yes. I'm trying to remember the number. 40 basis points?

Yes. Yes, it was around 40 basis points. Angie, I can give that to you after the call.

Okay. And then when we think about your earnings drivers going forward, how big of an ROE lag we should assume and especially as it ties into a potential refinancings of debts and further bridging of the gap between allowed and realized ROEs from the rate cases?

Well, if we look at the regulated return, which I think was on a weather-adjusted basis, it was somewhere just at or under 9.0%, so right around 9%. We're seeing -- we've got a regulatory lag, but it has shrunk considerably. Our goal is to drive it to 0. We think that's appropriate. As we go forward, what helps get us there? Well, expansion of DSIC. If you look at the 39% of our CapEx that qualifies for DSIC, remember that of the $950 million we've got this year, a chunk of that is for BT. BT doesn't qualify for DSIC. We go forward next year at this stage into 2014, subject to further decisions, but we don't see backing away from the total level. So probably a greater amount of investment will be eligible for DSIC. We've got more future test year rate cases going forward. So we're doing the things that will help close that gap. I certainly don't expect it to increase from what we've got right now, and which looks to be about 80% or so -- 80 basis points.

Okay. And that's on the regulated side, how about on the corporate level?

Yes. So on the corporate level, Angie, the major piece, as we've talked about before, is the parental level debt. Its impact is declining just because our earnings are becoming much bigger, not that the total hits associated with that interest is shrinking, it's really not. Remember, we did hedge off a piece of the and there's no -- through a swap. There's not really an ability to do much more of that today. And remember that the biggest chunk of that, I think it's about $750 million, Bill? Is subject to -- comes up in 2017. So we will always look for opportunities to manage that debt in a better way. We did a lot of refinancings, about $500 million or so last year of other debt, which has helped reduce our overall cost of debt. But the [indiscernible] of the parent, we have limited capacity to do anything before we face the issue of it coming up in 2017.

Okay. And the last question, so you keep showing us the 7% to 10% earnings growth and when I look at your drivers of earnings and the level of CapEx that you keep deploying, I kind of struggle with the 7% growth. What would be -- I mean, how can I get comfortable with that low case of earnings growth because it's hard to imagine. Is this more a function of -- I mean, are you basically giving yourself a cushion and that's why it's a 7% low end of the range, or is there something long term that I'm missing that could actually weigh on your earnings growth?

Well, Angie, since we're talking long term, I think it's appropriate to think about a range. And obviously, we're going to drive -- as long as it's based on long-term decision-making, we're going to drive to be on the higher end, but there's a lot of things that can happen. If we get in a period of, as some people think will happen, we're we've got an inflationary period, monetarily driven, then for entities like us, that forces interest cost, as well as other costs, up at higher rate, so it exacerbates whatever regulatory lag you have. So there's a lot of things that can happen on the regulatory side, as well as on the market-based side. So I think it's appropriate to think about a range, and that's where you all get to kind of make your own judgments and decide where within that range we may fall long term, because we'll run a bunch of sensitivities that can drive us. Remember the tornado chart that we've used with you all before, that can show how things can affect us. And a number of them can drive us inside or outside of that range very, very quickly. Whether it's on the sales side, particularly on the level of sales side. So I think we're comfortable with the 7% to 10% range.

And our next question is from the line of Heike Doerr from Robert W. Baird. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: I wanted to return to this topic of military base business for a moment. Can you perhaps comment on how the sequestration impacts the trends towards further privatization of military bases?

It's interesting because in looking and talking with the people that we've got working on that, the issue of sequestration has a lot of questions, first of all, so we don't want to speculate. We know that there were talks of furloughs that did not happen. What we do know is that, originally, and I think we have reported in earlier earnings call, the Department of Defense was planning about $11 billion worth of water and wastewater project privatization from 2012 to 2016. We have not gotten information that says that has significantly changed. Again, when you look at a lot of basis, many were built around post-World War II, different areas. Water, wastewater infrastructure, if you're going to have bases, you're going to need those services. So anything we talk about is speculation. However, in some respects, the military, I know, for example, on renewables and different things has actually said that because of things like sequestration, budget cuts, they would prefer to privatize because they take that risk off. That's not their core competency. We don't know that for sure. We are monitoring closely. We work with the Department of Defense frequently. We have a team that does that. And at this point, the projects that we have, we don't see an impact from sequestration, but for what Jeff mentioned which is, if things happen a little more slowly because of discussion and talks about sequestration, looking forward, if we need to revise our forecast, we will. But at this point, we still see projects on the table that will be awarded to someone.

Let me add one other piece of color. I think the probability of a BRAC, another BRAC, is very high, probably in the 2014, '15 time frame. Those are very difficult and exhaustive processes. And consolidation and the efficiency of overall deployment is one of the keys. So I think you can think about the likelihood that we will see some base closings. Now when they do consolidation, there's always an issue about one of the big bases going by the wayside. Frankly, what typically happens as you see consolidation of smaller bases, a lot of the smaller outposts, frankly, we don't even bid on because they're just not big enough for us to mess with. We tend to focus on the larger scale bases, and there are some large-scale bases that are on the blocks for this privatization today. You never know when a BRAC process goes through what the outcome might be. But I think you know 2 things, a, it takes a while because it's a political process and that they're going to be driving for efficiency gains. I don't think anyone can prejudge today whether that means we could lose one of our bases or we could have a greater opportunity to serve a new base that's bigger than it otherwise would be. I agree with Susan, I don't think that sequestration in and of itself is going to impact the privatization, except it may just slow it down because of the process and people being distracted. Because of just the general notion of sequestration, but they'll hit, they'll come back after a period -- a couple of months or whatever of settling down and get back on track.

And tagging on to what Jeff said, not only the issue that we serve the larger bases, but because of our size and scale and the fact that we have a national marketplace, it would provide us more opportunities because we're not constrained by regional lines. So it actually could provide us even more opportunities. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: And can you remind us what that process is if tomorrow they opened up these projects for bid? What's the process, what's the normal timing of that process?

Well, the timing that the federal government will talk about is an 18-month period. We haven't seen one get done in 18 months, so there's always something that slips. But it is a very structured process that's multistage and... Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: So it would be a 2015 earnings event at the earliest?

Yes. Except that there are some that are in process now. So there's already some that are on the table and were started in '12. So when will they come to a conclusion? Well, it really depends, do we 18 months or do we see 24, 26 months. So we don't talk about which ones that we've bid on are currently in process, but they are some very attractive bases. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: And as final question, can you just provide us with an update on the New York City contract services contract?

Yes. As I mentioned earlier, we started the marketing process in early to mid-January. So through the first round of mailings, to about 650,000 people, we've got 80,000 customers, so that's over -- about a 12% penetration rate. And almost all of them are taking 2 products, so we've got about 160,000 contracts out of it, so it's going well. It's certainty exceeding what we expected. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: Can you share with us what the target is for that by the end of the year or...

No. We won't give specifics on targets and stuff like that, but I'll just tell you that we're pleased with how it's going. But there's also shakedowns that occur. Maybe that's not the best choice. Shakeouts that occur when you go into a new territory. Because remember that our key -- the 2 key things that make that business work are contractor management and customer care. And so on the customer care side, we had to significantly expand our capacity to take on New York City. And on the contractor management side, these are bunch of new contractors because we didn't really serve in New York City before. So we've got to go through the process that you always will have a little shakeout as we bring new people on to the customer care side and we have new contractors that we're serving. So we're pleased with how it's going and that's -- there probably isn't much more to say about that.

[Operator Instructions] And I show no further questions in the queue at this time. I'd like to turn it back to management for any closing remarks.

Well, again, thank you for joining us this morning. We'll see some of you at the Brean Conference on Monday. And thanks, again, for your following and your support. Take care.

Ladies and gentlemen, that does conclude our conference call for today. We would like to thank you for your participation, and you may now disconnect.