American Water Works Company, Inc. (AWK) Q3 2013 Earnings Report, Transcript and Summary

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 going to Slide 6, let me take a minute to discuss the weather's impact on our business. The same type of weather that impacted our second quarter continued to pressure third quarter regulated revenues. As you can see by this cooling degree days chart from NOAA, which is most of you cover the energy size, so you're very well familiar with this. The country experienced cooler than normal temperatures throughout the third quarter. Now we often talk about our geographical diversity across 16 states and how it helps mitigate things like weather impact. And that was certainly the case this quarter in states like California, where hotter weather caused higher usage. But even with that contribution, we did experience an approximate $0.02 to $0.04 decrease in earnings per share from weather for this quarter, which when you add that to the $0.01 to $0.02 impact last quarter, you've got a total of $0.03 to $0.06 total impact for the first 9 months of the year. Turning to the continued growth of our business, we've had successes that we want to report on briefly in both our core and on our enhanced growth through the quarter. We completed 6 tuck-ins during the quarter, 4 water and 2 wastewater systems. These were in the states of Iowa, Pennsylvania, Illinois and Missouri. And so, for the first 9 months of 2013, these efforts have added approximately 6,500 customers to the regulated footprint, and we've got several Small tuck-ins that are currently pending approvals, and we expect those to close within the next 3 to 6 months or so. Continuing on Slide 7. Relative to the core growth, for the third quarter, our Military Services Group received contract modifications for infrastructure investments in every single one of the 9 military bases that we serve. These are for design and construction of water and wastewater system components to be completed over the next 3 years. And they vary in scale from small water reuse projects at one of the Army Port Places, Fort Sill, that's in Oklahoma, to a complete replacement of the 2 wastewater treatment facilities in Fort Polk in Louisiana. I'll tell you that what we're still -- there are still some things moving, it's the largest amount of awards for modifications that we've received in the military operations since we started that business. On the regulated front, we received a rate case decision in West Virginia that's worth an annualized $8.5 million. And after the quarter ended, about $7.2 million in annualized revenue from infrastructure surcharges became effective in Pennsylvania and Illinois. And also, after the quarter ended, we received a rate authorization in Kentucky for $6.9 million of additional revenues on an annualized basis. So as of today, we're awaiting final rate decisions in 3 pending cases that request the total of $97.4 million in annualized revenues. In one of these cases, Pennsylvania, we have a settlement with the staff, the Office of Consumer Advocate and the Office of Small-business Advocate. This settlement for $26 million plus the $29 million of DSIC revenues that are currently being recovered under DSIC and which will become part of the base revenues under the proposed settlement, that settlement is currently pending regulatory approval with the rates geared to go into effect on January 1. On the enhanced growth side, on October 30, we received approval from the Virginia State Corporation Commission to acquire Dale Services Corp., and we expect that transaction to close later this month. This regulated wastewater acquisition will allow approximately 20,000 customers, most of whom already receive their water service from Virginia American Water. The reason why this transaction, I think, is important is not just its size, but it marks the kind of transactions that we've talked with many of you about, where wastewater is only about 4% of our business. But we -- so at most places where we serve water, someone's providing wastewater, it's just not us. So this is the result of the kind of targeted focused acquisition efforts that we're moving on to expand our wastewater operation. And this transaction also marks our entry into the wastewater service arena in the state of Virginia. Our Homeowner Services business continued to expand its water and sewer line protection programs to homeowners in Florida and Washington DC. In our Service Line Protection Program in New York City, we now have a total of about 1 out of every 7 eligible home owners is enrolled. And most of them, virtually all of them, have opted for both water line and sewer line protection. So far this year, we have added over 250,000 new contracts, for a total of more than 1.2 million contracts nationally. So before turning the call over to Susan, let me just mention, what I think is really a historic initiative that launched in October. American Water and several other leading water industry organizations from both the public and private sector, as well as a couple of other companies, have come together under the name Value of Water Coalition. The coalition's education campaign is aimed at helping to increase the public's understanding and awareness of water services, the value these services provide us and the need to upgrade and maintain this vital infrastructure so that we can continue to rely on it now and for generations to come. This effort marks the first time such a broad coalition of water businesses and non-profit associations has come together in a single voice. And we're doing so because it's critical to address the current state of water infrastructure and the need for significant investment to keep water services at the levels of quality and safety Americans have come to expect. And we're already hearing good feedback from this outreach effort from the regulator, staff and consumers. Let me just also mention that we have been reconfirmed as a member of the Dow Jones Sustainability North American Index, which demonstrates recognition of our ongoing long-term commitment to sustainability. We're the only U.S. water utility on the index, and we're honored to be on it. And with that, let me turn the call over to Susan for more detailed report on our financials.

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 revenues and expenses. Overall, our operating revenues decreased $2.6 million or 0.3%, with revenues from our regulated business decreasing by $7.7 million or 1% from 2012. The decrease in revenues associated with a lower demand was approximately $35.2 million. The year-over-year comparison was significant, due to the diametrically opposite weather effects of 2013 contrasted with 2012 that we all spoke of earlier. This demand decrease was partially offset by revenue increases of $18.4 million from rate increases obtained through rate authorizations awarded for a number of our operating companies and increased surcharge and amortization of balancing account of $9.9 million. At a high level, our continued success in earning an adequate and timely return on the capital, we invest in infrastructure, as well as implementing alternative regulatory mechanisms, such as surcharges and balancing account help us to close regulatory lag and particularly, in this quarter, have helped us to mitigate the adverse impact of declining sales due to weather and declining usage. For our market-based businesses. Revenues for the third quarter of 2013 increased by $4.7 million, mainly due to an increase in our Homeowner Services revenues of $5.4 million, resulting from contract growth, most notably in New York City. This increase was offset by lower Contract Operations Group revenues of $900,000, predominantly related to the termination of certain municipal and industrial operations and maintenance contracts, totaling approximately $2.4 million. These contracts were ended as part of our business optimization effort designed specifically to optimize margins in our contract operation system. Further, these contract terminations were offset by a net increase of $1.7 million from price redetermination from our military contract. You may recall that price redeterminations are periodic adjustments to our monthly service fees for O&M cost, plus the systematic renewal and replacement of aging asset. These are prospects to price adjustment. But because price redeterminations can take many months or even years to finalize, the government makes a one-time payment retroactive to the effective date of that price redetermination period. On Slide 12. Operating expenses for the third quarter of 2013 increased by about $1.1 million from 2012, roughly flat compared with the prior year period. Operation and maintenance expense in the regulated business decreased $7.1 million, mainly as a result of lower production cost and lower employee-related cost, including decreased pension expense and group venture. The market-based business operations decreased, and total operating expenses of $3.7 million is mainly due to the termination of certain municipal and industrial operations and maintenance contracts in 2012 that I mentioned earlier, and a release of a portion of the loss contracts reserve in the third quarter of 2013. In the third quarter, we also reported a higher consolidated depreciation and amortization expense of $6.5 million, and higher general tax, parent elimination and other expense of $5.4 million. The increase in depreciation and amortization was principally as a result of additional utility plant, place in service, including Phase 1 and Phase 2 of our business transformation SAP project that went into service during the third quarter of 2012 and the second quarter of 2013, respectively. The increase in general tax expense is primarily due to higher property taxes incurred, partially as a result of the inclusion in 2012 of credit adjustment to our Indiana and Missouri property taxes. Turning now to Slide 13. To more clearly explain the period-over-period difference in our earnings per share figures, we have broken these out per category similar to our presentation to you last quarter. As you can see, we have adjusted for the positive $0.06 to $0.08 impact of weather for our 2012 results. Taking the mid-point of this adjustment for the unseasonably hot and dry weather, we have a normalized earnings starting point for the third quarter of 2012, $0.80 per share. From there, we lay out the various elements that explain the difference in our year-over-year earnings per share results. I think these are pretty straightforward, so I'm not going to go through these. But I'll be happy and others will be very happy to provide further clarification during our question-and-answer today if you do have questions. Going to Slide 14, we show our O&M efficiency ratio. For the 12 months ended September 30, we maintained a 40.3% ratio, which is in line with the 40.4% ratio we had last quarter for the 12 months ended June 30 and the earlier annual period shown here. And on Slide 15. As Jeff has already said, we have narrowed our guidance to $2.17 to $2.22 diluted EPS from continuing operations, which reflects our year-to-date performance, and assumes no unusual events that would impact water sales volume for the remainder of the year. This includes the impact of the release of the loss contract reserves in the third quarter of 2013 that I mentioned earlier, but excludes cost of our recent tender offer. Slide 16 outlines some of the actions we have recently taken to increase our financial flexibility and reduce exposure to capital market volatility. To briefly summarize. On September 9, we announced we had increased our revolving credit facility from $1 billion to $1.25 billion under its original term. At the same time, we raised our commercial paper program from $700 million to $1 billion. The higher credit facility, along with the increased commercial paper program and cash from operation, provides to the company's near-term financial liquidity. We also announced through our financing subsidiary, American Water Capital Corp., a cash tender offer for up to $300 million, a 6.085% senior notes due in 2017, which represents the portion of what we have typically referred to as our parent company debt. On October 8, we retired $226 million of these notes, meaningfully reducing our exposure to the capital markets in 2017. Also, as a result of the retirement of this debt and based upon our current commercial paper borrowing rate, we would expect to have a pretax interest expense savings of $13 million in 2014. On November 1, we issued a notice of redemption of security with 8.25% and 10% coupon aggregating to approximately $150 million. These notes will be retired on December 1. Additionally, we have debt maturity of $101 million on December 21. We're really pleased with the results of our ongoing debt management program. And from time-to-time and as market condition warrant, we may engage in additional long-term debt retirement via tender offers, open market repurchases or other viable transactions. Turning now to Slide 17. And just mentioned several of these, I'll just go back through some of the highlights. A number of our rates-related regulatory activities occurred during the third quarter of 2013. On July 1, 2013, additional annualized revenue of $3.7 million and $4.0 million, resulting from infrastructure charges in our Pennsylvania and New Jersey subsidiaries respectively became effective. Also, on July 1, 2013, we filed an update to our proposed application in California that was originally filed on May 1 of this year, requesting $33.5 million of additional annualized revenue, which includes increases in 2016 and 2017 of $8.3 million and $6.7 million respectively. On October 9, California Americans filed an update to the final general rate case application adjusting the request to $32.4 million. On July 9, 2013, our West Virginia subsidiary entered into a joint stipulation for their water and wastewater general rate case that was filed on December 14, 2012. On September 26, 2013, a final order consistent with the stipulation agreement was approved and provides for additional annualized revenue of $8.5 million effective October 11, 2013. On August 30, 2013, our Missouri subsidiary filed for an infrastructure surcharge amounting to $2.4 million in additional annualized revenue. The surcharge is expected to be approved and would become effective in the fourth quarter of this year. On September 16, 2013, our Pennsylvania subsidiary, as Jeff said, reached a settlement in principle for its general rate case filed on April 30 of this year with the PUC staff, the office of the Consumer Advocate and the Office of Small Business Advocate. The settlement agreement, if approved, will provide $26 million in additional annualized base rate revenue effective January 1, 2015. And as mentioned previously, this is in addition to the $29 million of DSIC revenues, currently being recovered, which will become part of base revenue. This agreement is pending regulatory approval. Turning now to developments, which have occurred following the end of the third quarter. On October 1, 2013, additional annualized revenue of $6.7 million and $500,000 resulting from infrastructure filings in our Pennsylvania and Illinois subsidiaries, respectively, became effective. Also, on October 1, our Indiana subsidiary submitted an infrastructure charge filing to increase revenue by an additional $4.4 million on an annualized basis. On October 4, 2013, our Tennessee subsidiary filed 4 alternative mechanisms requesting to increase revenues on an annualized basis of $500,000. These alternative rate mechanisms were filed in compliance with Tennessee House Bill 191, that was signed into law in April of this year. Finally, on October 25, a final order was received for new annualized revenue of $6.9 million for our Kentucky American subsidiaries. So in summary, we've had a lot of regulatory activity in the third quarter, and we are currently awaiting $97.4 million in requested additional revenues in Pennsylvania, Iowa and California from formal rate cases we filed this year. Last quarter, we created a new slide, which you can find in the appendix, Slide 25, entitled "Regulated Utilities - Rate Base and Allowed Return on Equity," which shows detail regulatory information for our 10 largest state. Many of you had requested this data showing each of our regulated businesses, authorized rate base, authorized ROE, authorized equity and the effective date of the rate case that we use. These are historic cases, and we advice you to review the footnote for a fuller understanding of the particular case in question. While, you can never project how any new case will be determined, we hope this will help you understand better our rate environment. Finally, as a part of our commitment to shareholder value, on October 27, we announced that our Board of Directors declared a quarterly cash dividend payment of $0.28 common share, payable on December 2, 2013, to all shareholders of record as of November 15, 2013, which continues our commitment to an annual dividend payout goal of 50% to 60% of net income. And now I'll turn the call back to Jeff for his closing comments and your questions.

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.