Good morning, and welcome to American Water's Third Quarter 2013 Earnings Conference Call. As a reminder, this call is being recorded and is being webcast with accompanying slide presentation through the company's website, www.amwater.com. Following this earnings call, an audio archive of the call will be available through November 14, 2013, by dialing area code (303) 590-3030 for U.S. and international callers. The access code for the replay is 4643778. The online archive of the webcast will be available through December 6 by accessing the Investor Relations page of the company's website located at www.amwater.com. [Operator Instructions] I would like to introduce your host for today's call, Mr. Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you, and good morning, everyone, and welcome to American Water's Third 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. But before we begin, I'd like to 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 the 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 statement. 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 on this call. Susan Story, our Senior VP and Chief Financial Officer, will join me in the brief presentation. And then we, along with Walter Lynch, who as you know, heads our Regulated Operations; and Mark Chesla, our controller, will respond to any questions that you may have. As you've seen from the 10-Q and the press release that we filed last night, while mild weather impacted the quarter, I'm pleased to say that we have had a solid performance to date, with strong cost control, good growth in market-based operations and good acquisition success. So based on that, we are now narrowing the earnings guidance for the year from $2.15 to $2.25 per share, on a diluted basis, to a range of $2.17 to $2.22 per share. For the quarter, we recorded decreases in income from continuing operations and earnings per share as compared to the same quarter in 2012. This was mainly due to decreased regulated business revenues, due to lower customer usage related to weather, in addition to the ongoing usage decline that we see on the residential front, as well as higher depreciation expenses due to additional utility plant in service. And that includes our business transformation, SAP conversion project. In addition, as we mentioned last quarter, as you look on Slide 5, it appears in that slide that our 2013 year-to-date cash flow from operations is lower. But this is due to how our bank overdraft is being treated as a reduction to operating cash flow as opposed to a financing activity. And this is a result of the decision we made last year to internally manage our cash activities. Year-to-date, this change in cash flow classification amounts to about $35 million. So…

Thank you, Jeff, and good morning to you all. It's a pleasure to be here with you today to review the quarter and the year-to-date results ending September 30. Jeff has already reviewed many of the key highlights. I will now take a few minutes to discuss the drivers of our third quarter results in more detail. Turning to Slide 10. We reported a decrease in our third quarter 2013 income from continuing operations and EPS over the third quarter of 2012. This decrease is mainly attributable to decreased regulated business revenue, due to lower customer usage related to weather, general taxes and higher depreciation expenses, due to additional plants license service, including expenditures related to our SAP implementation. As Jeff mentioned, we had above normal rainfall and below normal temperatures in several of our states in June and July, which was followed by cooler weather in August, which impacted our sales. These related decreases in usage and accompanying revenue, net income and earnings per share, were in stark contrast to the unusually hot and dry weather we saw in the summer of 2012. Our consolidated O&M expenses for the 3 months ended September 30 decreased by $11.5 million, or 3.2% compared to the prior year period. The variance is primarily due to lower O&M costs in our regulated business segment of $7.1 million, mainly due to a reduction in employee-related cost and in our market-based segments of $3.7 million, mainly as a result of a $3.8 million release of contract reserves, due to the resolution of certain outstanding issues and uncertainty. Now let's discuss, on Slide 11, the different 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…

Thanks, Susan. If you go to Slide 19, this is the slide on expectations for the year that you've seen we use every quarter. We've really already spoken about the progress on each of these efforts, which will anchor our long-term earnings per share growth of 7% to 10%. Let me just expand on one item that Susan briefly talked about and that is our business transformation effort. In October, the last phase of this effort went live. This has been a 4.5-year project to install SAP platform systems as we've talked about before. I've got to tell you, while these kinds of conversions, and this is the third one I've been through. They're never pretty. There is always impact on productivity. So they talk about averages of 30% to 40%. We certainly haven't incurred that kind of a loss of productivity. But they're -- so they're messy, but I am just really tickled and pleased with how well it has gone. And when you step up and look at it from the broad perspective, we implemented new financial systems, new supply chain systems, new customer service systems, and new asset management systems, and it has gone quite well. So kind of hats off to all of our folks because its impacted every single one of our employees. Before we open the call for questions, I want to remind everyone that we are hosting our 2013 Analyst Day at the New York Stock Exchange on Tuesday, December 17. To confirm your interest in attending, please call the Investor Relations phone number you see in this slide. We certainly hope that you'll be able to join us that afternoon and we'll talk about the future in that session. So with that, we'd be happy to take any questions you may have.

[Operator Instructions] Your first question will come from the line of Neil Mehta of Goldman Sachs.

Congratulations on being able to give guidance despite this unfavorable weather here. I guess that's my question here is in the sense of that the big part of the reason you able to maintain the guidance was cost management. How sustainable are those cost cuts? Or were you just put them on the expenses this year to kind of offset the weather?

No, Neil, as we've talked about before, our whole focus in cost management is around driving excellence through business process and continuous improvement. So the things that we're doing, they're not one-offs, they're not slash and burns, they're not -- they're not just headcount reductions, they're geared around changing, what we supposed as the 3 questions. Is what we're doing adding value? If not, stop doing it. If it does add value, is it being done through an efficient process? If not, let's change the process. And once it's being done through an efficient process, what's the error rate and how do we reduce the errors to 0? That helps create a systematic approach to the way in which we think about our cost and cost drivers. And one other thing, and Walter may want to make a few comments about it, that we're still working on is this integration across all of our states to take the best practices that we find one place and move them into in a standardized way across the other states.

Yes, thanks, Jeff. This is Walter. Yes, we are, as Jeff said, taking best practices because we're doing things wonderfully in many parts of our company and we are expanding that across our entire footprint and reg operations and throughout the entire business because we can learn back and forth [ph] in the market-based businesses to regulated operation. One of the other things, too, is the continuous improvement culture, really focused on driving improvements long-term. And we have a lien leader program. We have more than 100 people throughout our company looking at ways to improve our processes and looking at ways that we can reduce errors. That's contributing significantly now and will contribute significantly in the future, as we root out errors and we become more efficient.

And Neil, just one other thing, while that's the -- that's our baseline and we believe that provides us a great deal of ability to minimize operational cost increases and add more capital to the base, and that's the basis for rate increases. As we implement SAP, just as the end of last year, we had some additional expenses incurred because of that recovery and that reduced productivity, we'll see some of that, and we have seen some of that this year. You don't necessarily see it because we are even doing a better job and reducing our other costs. So net, we're still down. But we will see those kinds of things and will make sure that we pay attention to it.

Perfect. And then another question is around dividend growth strategy. Obviously, a double-digit dividend step up this year. How do you think about the pace of dividend growth from here and where you want to be relative to that 50% to 60% payout ratio?

Yes, Neil, this is Susan. As we said before, we have 2 guiding principles. One is that we correlate the growth of our dividend, along with our EPS growth. And we've been very transparent about that, and we have a target of staying between 50% and 60% payout. And as you know, we're on the low end of that so we have headwind.

Okay. And then final question on the California project in Monterey. Can you provide an update of where you stand there?

Yes, I'll ask Walter to add a few things. Let me put a few on the table. Frankly, things are moving well. It's always -- this is a project that will cause rates to increase in a double-digit fashion. So it's under a lot of scrutiny. The -- it's obviously a water constrained area, particularly in Monterey. But this project is, in fact, moving forward quite well. We would expect that the mission recommended decision by August next year.

August 2014, right, Jeff. And there's -- along the way, obviously, there are lot of things and have to occur for that to happen. But there's an informal hearing scheduled for early December. And we've come to settlements with a number of parties out in the Monterey area. And during those hearings is when everyone will be able to put their case forward. But we feel confident that we're working cooperatively with the people in Monterey to get the right solution.

2 other things. We're in the bid process right now for the constructor for that project. And so that is going along quite well. And the testing, the initial results of testing relative to the upper, have been very promising. So the pins that kind of stand in the way are getting knocked down. We still have a few to go.

Your next question will come from the line of Jonathan Reeder of Wells Fargo.

Following up on Neil's question just a bit. So should we interpret the guidance revision or narrowing today as implying that results would have been in the upper half of the original range had it not been happen for the weather impact?

Well, you could probably look at it that way. I mean, we said that weather is worth $0.03 to $0.06 a share, and we narrowed it to basically the mid-point of the range.

What we prefer to say that we have -- we're closer to the end of the year, have a little more look into where we'd end up. And so we're good with the range.

Okay. But essentially, what's keeping you in the mid-point of the range isn't unsustainable stuff?

Well, no.

Like you mentioned before, right?

Right. When, I think, Jonathan, about some of the things we have gotten done this year, and both on the cost control efforts, the growth in the market-based business and the success we're having on the tuck-in and acquisitions side, those are going along exceptionally well.

Yes, and to add to that, Jonathan, and Walter and Jeff talked about this. The BT implementation, the SAP implementation. As Jeff mentioned, we actually had, and we've shown this through the year, disclosed in the Q. We've actually had increased costs in the contract services because we've had to backfill a lot of positions to get the ERP system working to a level that we want it to work to get to the point where it could generate the data and we could do more value added analytics. That will go away next year. And as they both mentioned in addition to the process improvements, the ability to have an integrated system throughout our company, we're just now starting to look at some of the efficiencies and enhancements we can make as a result of that implementation.

So when we look at cost next year, I mean, from I guess the OEM efficiency ratio standpoint, but just an absolute basis with those implementation costs following off, I mean, where do you expect to be? Is it flat? Is it still modestly up?

I assume -- I trust that you'll be with us in December 17, and we'll talk about that.

How did I know that answer was coming. Okay, quickly, just going to the military services group and the contract modifications. It sounds like they're kind of meaningful, something that's going to provide a boost in '14, maybe in '15 results. Is that accurate? And then does that kind of cause a headwind potentially in 2016 or so, if you don't get similar sized contracts moving forward?

Well, I guess, 2 things. You're right about the timing. Most of these projects are 2 -- 1 to 2 and occasionally, 3 years. So for example, the major rebuild on the wastewater system at one of the installations, that could slip beyond 2 years. So -- but we always are hoping and looking and working with our customers on the basis. So what will occur in the next years. But the other piece is, as we said before, there are a number of military installations that are out for bid today. Now we don't go after every single military installation. We go after the ones where we believe we truly can add value, and that value can be recognized through the size of the contract. Because we've got quite a lot going on in that area. We want to make sure that the ones we take on, we can truly excel at. And we have a number of those out in the bids stage today with awards that could happen as early as, let's say, early, first of next year through 2014. So what we look to is to be able to expand the base of business with through the addition of new basis to the portfolio and that this additional modification capital is really supplemental to the fundamentals that we have within the business.

Okay. So any kind of falling off from the contract modifications you think would be replaced by a larger just number of basis operated and everything?

Yes. And probably more than offset.

Okay. And then last question on the parent debt balance. The -- what is it, I guess, it's not associated with subsidiary rate base? Where are you going to be at year-end? And how does that compare to where you were, say, at Q2 before taking some of these actions?

Right. Well, Jonathan, if you remember, it was about $1.2 billion, which we reported $750 million matured -- matures in '17 and another $450 million matures in '18. What we did was take out $226 million of the $750 million that was set to mature in 2017.

Okay. And then you said later in the quarter by year-end, you're going to take out some more. Is that correct?

Well, what we -- not necessarily of that parent company debt. What I mentioned is that we have -- we issued redemption notices on November 1, last Friday, for about $149.8 million, $150 million of bonds that are -- debt to have coupon rates of 8.25% and 10%. So that's going to be a nice pickup. And we have maturing debt of about $101 million by December 21.

Okay. So you will be refinancing that, not taking it out?

Yes.

Your next question comes from the line of Kevin Cole of Credit Suisse. Kevin Cole - Crédit Suisse AG, Research Division: I guess with homeowner services becoming increasingly important and a bigger part of your business, can you talk a little bit about the risk profile of the business? Meaning, are you wearing the event risk or are you simply offering a product that is wrapped by like a third-party insurer? And then do your policies cover like systematic or any catastrophic events that could impact a large number of your customers at once?

Good questions, Kevin. A couple of things. No, we do not use third-party reinsurance. We have basically self insure. But most of these are capped. So there's a cap on the total amount that we are exposed to. So we will do the repair or replacement up to x dollars. So that's the way that we manage the ultimate exposure. But really, the math -- the primary exposure is our contractor management process, which is a very thorough vetting of both what's done, how it's done, the oversight of that and who's doing it. So we don't have unlimited exposure for situations. We also obviously will look at -- we price differently in different areas. So this isn't a uniform price across the United States. And that's because systems are different. Their age is different. The soil chemistry will be different. So they'll have different risk patterns. That gets taken into account, as well as the cost of repairs, gets taken into account in that pricing strategy. And are there limitations on the coverage? Absolutely, and then they run from things like you have to have been a customer for usually a 30 days, sometimes it's longer than that before any claim can be processed, and that's to help ensure that we don't have somebody who realizes they have leak and try to pick insurance for it. I'm sorry, I didn't use that word. Warrants for it. And then it also goes to certain limitations relative to acts of God and things of that nature. So we protect ourselves in a variety of different ways relative to what that exposure can be.

And added to what Jeff said, we have a robust system where we evaluate frequency and severity of each of the events, and we look at where those events are, we look at severity. In fact, this year we disclosed in an earlier Q at the end of the first quarter, that we had a spike in severity. So we started managing looking at where that was, evaluating contractors. And we were actually able to remedy that and in fact to its historic rate. So we have a, I think, a really strong system around managing those risks by looking at what's happening, where it's happening, and to Jeff's point, how we price it.

Some of you have met Sharon Cameron who runs our market base business but she came out of homeowner services and was instrumental in its start-up and bringing it to this level. And she'll be with us at the December 17 meeting. So you get a chance to visit with her. Kevin Cole - Crédit Suisse AG, Research Division: Okay, great. And then just on clear on the final part of what you said. So you do not insure against like act of God, right, like hurricanes, earthquakes and large-scale events like that?

Yes, there's always definitions about what's included and which kind of thing. But -- the answer to that is generally yes. Kevin Cole - Crédit Suisse AG, Research Division: Do you have like a notional like value at risk measurement that we could follow?

That's a good question. We do not put one forward. But you know what, Kevin, I -- that's something we want to think about. Because there are things that we look at but we do not make those available. And part of it is the business side. But we want to think about that. Good job.

Your next question will come from the line of Heike Doerr of Robert W. Baird. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: It should come as no surprise, but I would like to talk about regulatory strategy. If I look the last 2 years, the amount of rate awards you've gotten in total has been 100 to 120 of rate cases separate from the surcharges. Even if we assume that the Pennsylvania settlement is completed, we're looking at a total amount of rate increases awarded of only about 1/3 of that. I'm wondering, is this just an off year? Are we looking at the new normal? How should we think about your rate case cycle and how you manage rate increases versus infrastructure surcharge increases?

Good question, Heike. And let me pose it, I guess, in 3 ways. Remember, if I go back 3, 4 years ago, the amount that we were generating from automatic adjustment clauses was about 13% of the capital investment every year. And that was a lower level of capital investment that we're at today. And today, it's about 40% of all invested capital is coming back through those mechanisms. So the importance of those mechanisms has, and this has been very targeted and strategic, has increased relative to the total amount of rate relief, if you will. So the second one is, we went through a period of rate case catch-up, as we've talked about before. And we're largely out of that today. And our focus is in moving the rate cases that we do file through a much higher percentage of capital cost recovery rather than operating cost recovery. So you'll remember the slides that Susan used that would show, if you go back through 2008 through 2010, the, I think it was 56% of recovery was really our operating cost and only about 44% was capital cost, whereas now it's about 94% is capital cost. So I guess the point there would be, I'm not sure it's effective to look just at the dollars of rate recovery, it's what's driving those dollars. Is it capital or is it operating cost? And also then, what are the other ways in which that revenue is being picked up? Because one of the things we're very focused on is to ensure we can drive efficiency in our business to minimize the rate of rate increase while getting the capital investment that needs to be made on the ground.

Right. And remember, if most of your the rate case is capital, as a more of that you can actually recover through surcharges, then you can extend out your general rate cases. And again, not to be another advertisement, but on December 17, we'll give a look into that we think can be recovered next year. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: Great. And kind of as a follow-up question, we used to think of you as loosely on a 2-year rate case cycle for most states outside of California. Has that strategy been revisited now? Or if we're really capital focused on rate increases, does a 2-year cycle still makes sense?

Well, it's not just -- it also involves what's the DSIC treatment in that state, et cetera. So I think you will see slightly longer because we really were on more on 18 to 24 months. You will, see slightly longer periods. In some states, it may go to 3 years. In other states, it will be 2.5. Some states will still -- will have -- may stay in a 2-year range because we don't have those kinds of cost recovery mechanisms, or we also have an issue of it's not a future test years state, we've got declining usage. So it'll vary by state. But I think that drumbeat of 18 to 24 months is broken. That's not our future.

[Operator Instructions] Your next question will come from the line of Steven Fleishman of Wolfe Research.

Just a little more color on the military business and the Homeowner Services. Relative to your plan for this year, could you give us some answer how they're coming through? Are they kind of on plan, ahead of plan? Just a little color there would be helpful.

Well, I think Homeowner Services has done better than we really expected in terms of the rate of subscriptions in the New York area. It's just -- we really didn't expect that it would be as well-received as it has been. And I think part of that is because of the strength of the partnership with New York City and the administration that it has been -- they've done a lot to help promote it. And then picking up Nashville, which is another opportunity for our 175,000 customers. We're pleased with the way Homeowner Services has come along and their strong performance. On the military side, I tell you, the folks that we have that run that business do a very, very strong job on behalf of their customers, the military. And both in terms of holding cost down and also in terms of quality of performance and bringing home enough of a return that we say this is a good business to be in. I would say that the issues of federal budgets, sequestration, to some extent, and then the stand down for a while does -- did impact some timing issues. And so for example, there's an award we thought may have already -- originally it would have been made by now, it's delayed a bit. And it's got nothing to do with policy. It's all got to do with people being able to be at the office and do the things necessary to issue awards. So it has that side maybe has moved a little slower, but it really hasn't impacted the performance of our overall business. And as I said, the mods that we received recognize that these basis are old and they need capital investment, and we're going to be there to provide it. So we're pleased with the kind of awards that we received in that regard. So both of those business lines have had a very good year so far.

And to add to that, Steve, after the first quarter, we talked about that some of the capital projects were delayed. There still will be a certain amount of those that will roll over into 2014. We have made up some of the ground. But we feel, our folks in that area feel like that which won't get done this year will all roll over into 2014.

Okay. One other question. We saw, over the last, I think, few weeks, an Illinois law that might support more privatization of distressed water companies and then Indiana might be looking one. Can you talk more about, is that something that you're seeing it could be significant for you or more marginal?

Steve, one of the things that we've got built into our strategy, and we will talk a little bit about this in December, but it is -- we've got our key strategic objectives and metrics associated with it. But we have enablers. And it's the enablers that we strategically focus on. Because without those enablers, that objective is really interesting, but you can't get there. So for example, having legislation passed that allows the -- a premium to be paid on the troubled system in order to get that under good control and under the state's oversight is one of the enablers. Another enabler is the law that we've got passed in Pennsylvania that was geared around being able to roll wastewater rate basis into overall rates to be able -- so that the repair work that you have to do with a newly-acquired wastewater system doesn't cause such rate shock by 100% rate increase just on the few customers that are served by that wastewater system. Or the legislation that we got past this year down in Tennessee, which opens the door for, frankly, the filing that we just made requesting a number of different elements of cost recovery and capital recovery. So these enablers are very targeted. We look at each state. We have -- so we have general theorems about what we want to get done but what you need to do in each state will be different. And in some states, we may not make it the first time, so we go back. Or we work with the commission and find out that the commission understands it, they may not be willing to do it, unless the legislator speaks, okay? So we go work with a legislator. So it's a very specific plans around those items, and they're all gear to open up the pathways for what we believe can be that continued strong growth, not only of our business, but of, frankly, better service to customers.

And Mr. Sterba, there are no further questions at this time. Please continue.

Well, thank you all very much for joining us today. Have a great rest of the week. And for those of you that we see in December, we look forward to talking then. And if you have any questions, you all obviously know who to give a call to, Ed, if anything comes up in between. Take care.

And thank you. Ladies and gentlemen, this does conclude the conference call for today. Again, we thank you for your participation, and you may now disconnect your lines.