American Water Works' Management Presents at Bank of America Merrill Lynch Power and Gas Leaders Conference (Transcript)

| About: American Water (AWK)

American Water Works Company, Inc. (NYSE:AWK)

Bank of America Merrill Lynch Power and Gas Leaders Conference

September 25, 2013 02:45 PM ET

Executives

Susan N. Story - SVP and CFO

Analysts

Brian Chin - BofA Merrill Lynch

Brian Chin - BofA Merrill Lynch

And get started here for the next panel. Okay. So most of us -- most of you that have been with us for the day understand that we’ve been focusing on power, natural gas, energy efficiency. This panel is a little bit of a different panel. We are looking at another type of utility, water infrastructure, water utilities. Very fortunate to be joined by Susan Story, the Chief Financial Officer of American Water Works, the largest water utility -- publicly traded water utility in the country.

Just by way of brief background, Susan is the CFO of American Water. Prior to this position, she was the Executive Vice President of Southern Company. And she has served as President and CEO of Gulf Power Company, a subsidiary of Southern and she brings a wealth of experience from both the power side and the water side. Because Susan is our only panelist on this panel, Susan has been kind enough to come together with a few slides to talk about the American Water story and also the water utility industry backdrop in general. Susan thank you very much for coming, appreciate your comments.

Susan N. Story

Thank you, Brian. I appreciate it. Good afternoon. I must show my first slide as our Safe Harbor slide. And on what this slide says is I’m going to talk about several things that could be forward looking and if any of this stuff happens nothing I say you can hold against me or American Water. This will make sure you know everything is in here and it covers everything unless we’re overrun by zombified monkeys or something like that while we are in here, so I have done that, Ed and Muriel, so thank you.

I do want to talk just a little bit about the water industry and then I want to talk a little about American Water. And it’s interesting I’ve been in American Water for six months now and I’ve spent 31 years in the electric industry with Southern Company. So it’s been interesting coming into this space to look at what’s similar and what’s different. And there are very striking similarities as I came from the electric into the water, but there are also a lot of differences especially as it relates to the growth story and capital investment and I'm going to talk about those in just a minute.

What I want to talk about first of all is the industry itself. The industry itself is almost the reverse of electric utilities. In the electricity market about 70% to 75% of all electricity is generated by investor-owned utilities. It's almost exactly the opposite in the water industry. In fact for water, for drinking water, about 85% of all the systems are owned by municipalities or governmental entities. And in the wastewater space about 97% to 98% of the systems are run by governmental entities. This is very different. It's also very fragmented and if you look at the chart, it shows that the vast majority of these municipalities, governmental entities running the systems are very small, less than 500 customers. So that's one big difference even though we are regulated by the same body.

The second thing I want to talk about because this is also very important in terms of the growth story, but the water industry in general and then specifically when I talk about American Water in just a moment, is the situation with the infrastructure. A lot of you’re very familiar with electric and gas and you understand transmission, distribution, you understand generation facilities and baseload generation. For us the infrastructure is underground for the most part and it’s at its end of age. In fact, by 2020 it's estimated that 44% of all the water infrastructure will be at the end of its life or in very poor or poor condition.

Now this may be daunting, but for us at American Water it provides us a lot of opportunities. It provides us opportunities in terms of long-term infrastructure replacement that we invest capital in that we return -- we earn returns on as well as situations where we can do acquisitions of more distressed municipalities who need to use those funds for other sources as opposed to investing in their water and their wastewater.

Some of the key facts here and this is fascinating when we think about it. There is a million miles of pipe in the U.S. that is far greater than four to five times the highway system in the United States. A major water main break every two minutes in the U.S and you may say so what does that matter? Well, when there are water main breaks you have road closures, there are subway closures. There was in Prince George’s County in Maryland, just a couple of months ago during a heat wave a water main break they were having to take down, they were telling people you wont have water service for four, five days, people were going to grocery stores, Home Depot, trying to get as much water as they could to make it through those times.

So there is a big economic impact whenever there is a water main break, especially a major water main break in a major city. Two trillion gallons of treated water are lost every year at a cost of $2.6 billion. Now think about it this way, one thing is very different for water also is as compared to electric and gas, we don't own water companies, nor municipalities own the water that we treat and then serve to the homes of the residential, commercial or industrial customers. We are just stewards of that water; the states have the rights to the water. So our value is in the treating that water to EPA standards and then getting the water where it needs to go to be consumed. So two trillion is lost basically through leakage.

So in addition to the dollar value of the treatment and the delivery that’s lost, you also have the economic impact. Then you look at waste water. 700,000 to 800,000 miles of sewer remains in the United States, 900 billion gallons of untreated sewage is discharged each year because of the problems with the infrastructure. Again, these are concerning figures, but for us and for the water industry they’re also opportunities for investment.

And you see these stats, I’m not going to read these on the right, but I will point out that $633 billion that the EPA estimates that we’ll need for water and waste water for the next 20 years just to keep the kind of service we have today. So painting the picture, a very disjointed industry, it’s very fragmented. It’s mostly municipal and you have a small water space. Now in the water space, investor-owned utilities, the whole space is about $15 billion to $15.5 billion and American Water is about half of that. We are the largest as Brian said investor-owned water and waste water utility in the country. We are about half of the market cap of the entire IOU water space.

Not going to go through this, the good thing for us is that it is recognized nationally and it is recognized in the great majority of our state and by people that we have an aging infrastructure that we must do something about. You know water -- I worked after hurricanes on the Gulf Coast for several years in the early 2000 as head of the local power company and I heard when I came to American Water its true -- your power goes out; you grin and bear it and make it through the next few days, your water goes out, you leave.

And I learned even when I was over the electric utility there that is critical as electricity was, if you don’t have water you do have to do something different. You can get by a little bit without electricity. So the water situation and the recognition of how critical it is, is been recognized. And then what I want to mention is that we are fortunate and that the water bill seems to be the lowest of all the utilities bill that residents in this country have. The Environmental Protection Agency has an affordability index that they look at 2.5% of the medium income and say that's what the water bill should be around $84 a month. Fortunately in the vast majority of our customers it is less than that and in some cases far less than $84 a month. And you'll see there we're talking about the capital investment, which I'll mention in a minute as I talk about the solutions.

So just kind of summarizing, the water industry fragmented mostly municipal, very small space of industrial utilities, but it is growing. We are seeing in the past it was a lot of money that a lot of municipalities and governmental entities could get from the federal government, a lot of those are drying up. And so, what we’re seeing now are -- and you also have municipalities who are getting the tax revenue they’ve had over the years and so some of them are looking for alternatives, and that’s part of our growth story not the entire growth story.

So what are we doing at American Water? One of the things its important is what we call the value of water. How many of you really and truly think when you turn on the tap everything that went in to treating that water to EPA standards and getting it to your home? We just don't think about that. And also in this country is what water is naturally occurring, it’s the human right, correct? But because of that there is not a value placed on water unless you live in the western part of the United States, where there are actually costs to the water rights.

So part of our issue is the whole issue of value of water, the other is the financial implications. When you look financially at the implications, there are lot of things in this country that basically say we need to -- that they don't incentivize public private partnerships. Even if we don't buy assets, what if we have municipalities run their assets. So we are looking at a lot of those things and what are some of the issues around those and I wont get into some of those financial mechanisms that we at American Water are very involved with resolving some of those, so that if a municipality decides that it wants to sell or do a long-term lease, that there is constructive regulation, both federally and state to do that.

This is just a picture of who we are. I'm not going to walk through this. You can read this on the slide and Brian is going to ask me several questions. One thing that's not on here that I will tell you we have given guidance to The Street that we have a long-term EPS growth, projection of 7% to 10%. We’ve 7% to 10% EPS growth projections, we also have a goal for a dividend payout ratio 50% to 60% and that it will be correlated with our EPS growth. We are currently in the low end of that payout range at about 50% on our dividend payout ratio so we have room to grow, when you see our other statistics here.

One of the critical component of our growth is capital investment. Now in the electric one thing you found and they’re graphed out there, you tend to go through a slug of investment in generation, then you reach capacity you have reserve margins go up and then you don’t do a lot of building for a while, then you have -- you cycle back and forth. And in transmission the same thing, although transmission is more spread out.

In water I mentioned to you that we have an aging infrastructure. And we have about $1 trillion by some estimates, $633 billion by the EPA that we need to get that in the next 20 years. So we have a long runway of investment that’s needed in the water utility industry. And in fact nationally the replacement of pipes in this country is about 0.4%, which is a replacement of every 250 years. Most water pipes are not put in the ground to last 250 years.

American Water were about 50% better than that, but we’re still at about 150 year. So there is a lot of runway ahead of us in terms of capital investment. And you see the asset renewal tends to be the replacement of a lot of that infrastructure and this is how we break down our CapEx. We have projected spending $800 million to a $1 billion a year in capital investment in American Water. This year we will basically invest about $950 million. So this is just where the majority of our investment goes.

Another solution we’ve got is in California. Is there anybody here from California? Monterey, okay. A lot of issues in California and we actually find California a very positive place to do business as American Water. Two big projects -- two of our biggest projects that we have in our Company are related to California. One is the Monterey Peninsula Water Supply project. There were some regulations that were passed. We used the Carmel River as a water supply. In 2017, our ability to basically withdraw water from the Carmel River, its severely reduced. So we worked with environmental agencies, the PUC, we worked with environmental partners and we’ve reached an agreement earlier in this year for a solution, to the water issues in the Monterey Peninsula. Those solutions include a desalination plant and based on its size, also groundwater replenishment and based on the size of the groundwater replenishment, we will determine the size of the desal plant and the related piping to get the water where we need it to be.

The price of the plant will be $277 million to $321 million depending on the size of the plant, and in the piping another $100 million for that. It was one of these efforts that took a long time, but brought a lot of parties together and we’re very pleased with the outcome.

The other is the San Clemente Dam removal. We have an old dam, American Water, California American Water there, it’s been there for decades, it was seismically unsound and so we -- again, working with our partners and stakeholders found a solution to this problem to basically dismantle the dam, reroute the river and then be able to get full recovery from the PUC, which we did.

And the last one, I will just mention briefly, we have places where we’ve been around since 1886, American Water. We had some old facilities and in places like Pennsylvania where we’re able to go in and do a large number of improvement in order to ensure that we’re able to deliver affordable safe, clean and reliable water.

The last couple of slides I mentioned is, we’re very much into automation technology in finding new and better ways to do things in the water industry. We actually have patented, our own technology called NPXpress and there is a lot of nexus between water and energy. And so we’re looking for ways to really benefit from that.

In the wastewater treatment plant, a large amount about half of the energy is used to dissolve oxygen and what's called aeration tanks to ensure that we treat the waste water. And so we came up with a process that basically reduces energy used in half as well as reduces the need for chemicals and carbon almost 100%. So this is the way that we’re continuing to find ways to run our business more efficiently.

And the last example, a lot of people are talking about the electrical smart grid and my job at Southern Company -- actually one of the jobs I had was coordinating the roll out of the smart meter deployment, $4.6 million meters at Southern as well as coordination of smart grid technology. We have two intersections at American Water, with smart grids. One is with the electricity smart grid.

We’ve partnered with a company, it’s not this one, called ENBALA, where we look at our pumps at our water treatment stations, waste water station and we’re able to synchronize with the groups you really take advantage of demand side management programs and to help with the grid especially in the Northeast. This was one that we’re really excited about. We partnered with a company called Smart Earth Technologies or SET. And what they’ve done is as we do acquisitions of small systems all over the country, we’ve different meters, different technology, we have SCADA systems that are different, a lot of the legacy systems they don’t communicate with each other. This software provides us a standardized communication platform, that we’re able to have all of our meters talk to each other on a common platform, regardless of the manufacturer, which also saves money in supply chain if we go out to bid out for meters, it also is able to look at SCADA data and also we can look at pressure monitoring, different things in our system and put it in the communications platform that our operators can take advantage of. So innovation is a really important part of how we want to attack some of the problems with water infrastructure.

So that's just a very brief overview, Brian. And for those who weren’t familiar with water industry or American Water. Now, Brian give me some questions.

Question-and-Answer Session

Brian Chin - BofA Merrill Lynch

Fantastic. Thank you very much, Susan. I’m going to throw out the first question. As long as I have been covering American Water, which has been a few years now, one of the interesting stories for American Water was that several years ago due to ownership changes and a few ill timed contracts, the earned ROE of the company had dropped to dangerously low levels. And over the last -- about four or five, six years, that earned ROE has been clawing back up due to the efforts of management. With the earned ROE story now, moving a lot closer to that ROE, we are not all the way there yet.

Susan N. Story

Right.

Brian Chin - BofA Merrill Lynch

I’m talking about roughly 8% versus an allowed ROE of a little -- right around 10% or so. Once you get close to that earned allowed ROE gap, what other elements give you confidence that you can maintain that 7% to 10% EPS growth rate, now that, that earned ROE is getting as high as it nearly can go?

Susan N. Story

Well Brian, one thing is the difference between the 8% where we’re now and the 10%, there is two components. The regulated side of the business is earning about 9% to 9.1%. So there is about an 80 basis point drag from parent company debt that came from the RWE era. The other is regulatory lag. So I'll start there. In terms of the 7% to 10% growth, there are few components. So let me just tell you what those are and then I will come back to the regulatory piece and that the CapEx, the regulatory lag. So one is -- and the driver that has been for the past three years, our EPS growth has been more like 20% on average and a big driver has been the capital investment that I mentioned in my earlier remarks. It’s also been getting the headroom, the ROE making up the headroom as well as regulatory lag. So those are three big components that driven us in the past. CapEx will continue to be the major, probably driver of growth getting less on the ROE headroom and then of course the regulatory lag we think we have about 90 basis points we can make up.

So our growth story for 7% to 10% is capital investment, continued work on regulatory lag, acquisitions because for us in the electric side of the house an acquisition is a big deal. It’s a big size company; it takes much or maybe two to three years to go in for acquisitions for us. It can be anything as small as 500 customers on a small municipal system or waste water system or it can be up to we’re closing on 20,000 customers in Virginia waste water where we’re already serving water. And it’s going through the regulatory process and we look to closing it by the end of the year. So acquisition is another slice of our growth. Another slice is we’ve a market based business that does a lot of privatization on military basis, water and waste water. We have contract services group where we actually contract out and run some municipal systems and we’ve a homeowner services group where we provide warranties for water piping, sewage piping that the customer has ownership as opposed to the municipality or the utility. So you look at those, we have several key components of the growth, not just we understand that there is not as much headroom to make up on ROE, so what are the new ways that we’re going to grow and keep the growth at 7% to 10%.

For the regulatory lag one of the biggest things that we’re excited about is what we call our distribution system infrastructure charges. Because of what I showed you up here in terms of the need for replacement of aging infrastructure, in our five biggest states as well as another state, six of our states we’re able, we don’t have to wait until the rate case to get capital expenditures on this distribution system which includes piping, valves in some states meters. We don’t have to wait through a rate case to get it into customer rates, when we have a rate case we put it in the rate base. That eliminates the lag and allows us to be able to get recovery sooner as well as perhaps put off rate cases. Couple of that with a fact that we’ve been driving O&M cost down so much that our rate case is filed this year or finalized this year, the whole request is 96% for CapEx not only 4% -- 6% for O&M. And just three years ago we were going in asking for 58% O&M recovery and 42% capital. So the ability to run our business efficiently, keep to minimum levels, what we’re asking for is O&M recovery have it most in CapEx, had almost 40% of this years spend in these mechanisms that allow us to get recovery before we go in for a rate case or helping us reduce that regulatory lag.

Brian Chin - BofA Merrill Lynch

Understood -- understood. With that I don’t want to over dominate the questions here. I know that was just the first one, I have a few other topics. Before I ask you about those, what don’t we turn it over to the audience to see if there is any question’s from the audience on water utilities and water infrastructure growth.

Unidentified Participant

Thank you for taking my question. Actually have three relatively unrelated questions, apologies for that. First, on one of the slides, you talked about the privatization and the percentages of the systems that are privatized on the wastewater versus the water distribution. And I was just wondering why almost none of the wastewater systems were privatized, and if more municipalities are looking towards doing that versus the water distribution. Two -- again they are unrelated -- you talk about all this growth. How much does that run through into rates? Because that’s obviously a concern on the electric and gas side, on whether the growth translates into significant rate increases for the customers? And then, three, I think there has been some action in Congress related to the Water Resources Development Act. I don't know if you are -- I'm sure you're aware of it, but I was just wondering what – if there is any read-through to you guys or if there is any benefit or detriment to that Act on American Water?

Susan N. Story

Okay. The first is the water waste water to percentages right? I may have to come back and ask you second and third after I finish this, so we’ll see. Actually the fact that 97% to 98% of waste water is governmentally owned, we see as a huge opportunity for us and that’s actually become a focus. As you look at our acquisition strategy, we of course are interested in water customers and working with municipalities. And typically there’s two big plugs. One is; the small municipalities that are contiguous to where we already serve, they tend not to be a lot of competition for those; they tend to be much smaller. Because we have such strong state leadership, state presidents and we’re very involved in the communities we tend to understand that those are going on and we’re there, and typically those aren’t as comparative. Then you have medium to larger starts where we actually have competition for. But if you look at waste water for example only 3% or 4% of our revenues come from waste water. So what better target than to target waste water systems for people we already serve water. The Dale Services Corporation that we purchased that we’re in the process of hopefully closing that by the end of this year is 20,000 waste water customers and we already serve them water. So there are a lot of efficiencies there as we look at billing, as we look at back office support, corporate support. So you’re absolutely right. The fact that there is a difference even though 84% is a large percentage of municipal systems for water in fact that 97% to 98% of waste water to us is a tremendous opportunity that we plan on taking full advantage of. And then your second question?

Unidentified Participant

Rates -- regarding rates.

Susan N. Story

Rates. So 90% of our revenues and about 94% of our continuing income -- of our operating income comes from the regulated side of the business and the rest is from our market base business. If that tells you anything that’s where the revenue and the operating income is predominantly from regulated. We’re very dominantly regulated so you can assume from there that’s in the rates. Now the question you’re getting at which is absolutely key to us is; so how much headroom do you have in terms of price increases? We’ve talked about a long-term capital investment play. So the next question is, so how long can you do that? How long can customers take price increases? And that is very, very important because at some point you get to a point where they say no more. Let me go back to something I said in my earlier comments. We get the same price increase to customers for $0.90 of O&M recovery versus $6 of capital investment. So as we invest $6 of capital or $0.90 O&M recovery it's the same price increase for the customers, same revenue requirement. That’s why we keep driving our O&M costs down, because we want -- the headroom we have for price increases to specifically go for CapEx which not only is more positive, the regulators see this more positive, it's going to replace infrastructure, it's going to make service better but it gives us more headroom for more CapEx because we’re reducing O&M. And then on the Water Development Act the specific question that you’re talking about of what we’re dealing with on …

Unidentified Participant

I guess maybe give a broad overview on what you see as revolution for this and how it would impact the company?

Susan N. Story

Just in general, let me talk a little bit about our philosophies at American Water. First of all, we are a huge supporter of water efficiency and sustainability. For us we think, and in fact our vision is to be the steward of our customer’s most precious resource. So understanding that of where we have EPA regulations? Where we have guidelines? We typically see that as an opportunity. We have our own lab in Illinois. We have our own R&D Department. We work a lot with EPA. We work a lot on standard. And so for us having clean safe water is the most important thing we do and it is what we hinge our reputation on. So whenever we talk about EPA guidelines, when we talk about guidelines in terms of congressional mandates probably we have been a part of the discussion and we see it as an opportunity to make a difference in the space that’s water. It's akin to – and I don’t know how many people in here are in E&P and especially gas drilling – the majors in natural gas whether it's Exxon or Marathon Oil or you name them, they really want good regulation, because they wanted to drive out the folks that make a big mistake and they ruin it for everybody. So, we do supply water for example for shale drilling in Pennsylvania. And one of the reasons that people like to partner with us is because of our reputation for quality and the fact that we are going to be up there upfront making sure that we push good regulations that we’re very supportive of whatever is good for water supply and water quality in the country.

Unidentified Participant

Thanks and apologies again for so many questions.

Susan N. Story

It was a test, I know.

Brian Chin - BofA Merrill Lynch

Additional question’s from the audience.

Unidentified Participant

So what’s the Company’s decision on [cash] revenue?

Susan N. Story

Good question. So we do supply water. Last year we sold 430 million gallons of water for shale drilling in Pennsylvania. Here’s our position. If we don’t supply -- if we don’t build water lines and serve them, they’ll basically take trucks and they’ll truck the water. You have issues for example with roadways, with trucks going back and forth in neighborhoods with emissions, those types of things. So we -- and also in our service areas they’re also in some cases looking at water that comes from some of the same sources we use. So the integrity of that water supply is really important to us. So, when we partner on and we do, and so far all of our business on shale has been in the regulated space which means; we work for the driller’s, they help offset the cost for the pipeline, it goes into rate base and we pick up -- we get new certificated franchise areas and we serve those customers along that water pipeline. So we do serve that, and another thing is that we think we help ensure that the water is getting there in the best way possible. We do not deal with produce water, at the end of the fracking process currently most of it is being diluted and reused. Some of it's been injected in deep wells, mostly in Ohio. We are not involved in that. There’s a lot of interest in the major, it's too big. I will also tell you that one example is when these drillers use our treated water. When they use well water they have to treat it and they use the biocides that’s non-plant. That’s the only ingredient they use that’s non-plant base. When they use our treated water, they don’t have to add the chemicals. They don’t have to add the biocides. They don’t have to add that in there. So we do support shale drilling and we think that we bring a value proposition that’s more than just the water, but assurance that from the water input side and our delivery of the water that we do it in a safe, clean way and that we ensure the integrity of the ground water.

Brian Chin - BofA Merrill Lynch

Other question’s from the audience. Susan, I’ve got a question for you. You had mentioned the distribution system improvement charge. And we know that you guys had successfully requested that in the State of Pennsylvania. In fact if we look at Pennsylvania and New Jersey over the last two to three years the company has successfully got the rate agreements. Those two constitute 50% of the company’s rate base. One is the next set of rate case cycles for those two states and what other mechanisms can be pursued by the company on top of the DSIC charge in those two regions?

Susan N. Story

Well, the rate cases first. At Pennsylvania we filed a rate case earlier this year. It is public information that a settlement has been reached amongst parties, but the details of that settlement are not public at this time. So we are just concluding a rate case in Pennsylvania. In the other states where we don’t have ongoing rate cases we are constantly evaluating the need to have those. As I mentioned earlier, when you have mechanisms like the distribution system, infrastructure charge or forward looking test years, you don’t have to go in as often for rate cases. So now as we evaluate the need to file rate cases in any of our states, any of our 16 states we have operations in, we’re looking at the mechanisms in place and that’s also an encouragement for public utility commissions to allow these mechanisms because they know that it will help us stay out of rate cases and not have a rate short as frequently. And by that I mean, if you have these mechanisms, for example distribution system infrastructure charge the bills go up a little bit at a time throughout the year. Pennsylvania we file every quarter. New Jersey we file every six months for those charges. So you may have a bill go up $0.20, $0.25 we don’t get compliance. Then when you get to a rate case you don’t have everything from the prior two, three, four years that’s showing up in the request for the rate case. So the first part of that is, finalizing when in Pennsylvania, we are always evaluating in our other states. In terms of mechanisms this year I mentioned that specifically the distribution system infrastructure charge is almost 40% of the $950 million. However one thing too as we look at forward looking test years, in some cases that is as good or better, because you’re able to go ahead and get continual. You’ve already got it in the rates from the time you get the rate case finalized because you’re looking forward in the years. So we are seeing even more adoption. We have even more states who have forward looking test years. And so the combination of those two we know has made a big difference in reducing regulatory lag and making up some of the ROE headroom and we think that the ability going forward to do even more of that through forward looking test years in DSIC will be positive. An additional issue is that we’re winding up an SAP implementation that’s been going on for about three years. With AFUDC that’s about $320 million, last three years or so we spend $60 million to $100 million that’s not eligible for DSIC that goes away, at the end of the this year we won't be spending it. So even if we held CapEx the same we’re going to be able to put more into that part of the business.

Brian Chin - BofA Merrill Lynch

Interesting -- interesting, excellent. Another topic that you brought up in your prepared comments was this idea that municipalities might monetize their assets and thereby allow American Water to do bolt-on acquisitions. Can you talk a little bit about what does the outlook look like over the next two to three years on that front versus what the outlook has looked like over the last two to three years?

Susan N. Story

It's a great question, and I’m going to split it again, I’m going to fabricate that a little bit. I think you’ve got the small systems that sometimes are troubled systems and those are ones that’s not -- I don’t think what you’re referring to where you have a lot of competition. For us if it's less and about 20,000 customers, it's really those small acquisitions, medium to large 50,000 and above you tend to -- they get the headlines and so there was a thought a couple of years ago that we’re about to enter this huge time when half the municipalities in the country are going to put up their water systems -- waste water systems and there’s going to be just free for all out there, and it's not happened. Now some of the pressures on the municipalities I mentioned in my prepared remarks which are the declining ability to get money from Washington, the declining tax base in any of these municipalities and governmental entities, and then they have other needs. You got unfunded pension liabilities, you have roads that are deteriorating, you have parks that need buildings. So, if you’re in a municipality you may have 40 different priorities. So if you have a certain amount of money what do you want to underground versus what people can see. On the opposing side though, the other argument is water is very personal, and municipalities and governmental entities they’re controlling water as controlling economic growth. So it's not what people thought would be this huge wave of people doing this because water is very emotional. Another reason we’re focusing on waste water; waste water is not quite as emotional to people as water. We love waste water. So we’re going to the one water the whole cycle, so that’s another reason that why we are pursuing water and waste water we believe there’s more opportunity in waste water because it's not viewed in quite the same line as water. So we think there will be opportunities. It's not going to be this big flood gate in our opinion, but it's going to be the one-on-one understanding, the local relationship, it comes down to truck. If I had something as precious as water that I’m willing to turn over to someone else to manage and to run, do I trust that you’re going to do as good a job or better than I’ve done? What do you bring to the table that benefits me as a municipality? And so that’s the value that we are out there talking to people about it. It's why they can trust that precious resource to us.

Brian Chin - BofA Merrill Lynch

Got it. I want to ask one last question for you, this really stems from the fact that now you’re new arrival to the company from Southern. In my time at looking at American Water people have always compared American Water’s valuation versus Aqua America and all the other water utilities out there, and people constantly point to there’s this big discount between American Water, Aqua and other water utilities. Coming in as the new Chief Financial Officer you had a lot of meetings with investors and sort of the world wind tour. What's your impressions of what American Water can do to close that valuation gap over the next two or three years?

Susan N. Story

I think that that’s a great question. A couple of things is that; our recent history is a little different. We were privatized in the early part of the 21st century and then we were IPO’d back out in 2008, 2009. Part of the IPO we have huge number of institutional on our succors in our equity, and we’re working on that. Also I think there is in the utility space and many of you in here I know believe that, it what's been your history over the past 10 years, 15 years, 20 years, 25 years. When I was at Southern one of the biggest things we loved to show was the TSR for the past 30 years. So what's the annual average TSR for 30 years? Well we have this break in our history from being publicly traded and so we’re rebuilding that back. So when we came out from the IPO you said it earlier, we had very low ROEs; we were at 4.5%, 5%, 6%. We had a lot of make up to do and people were questioning; can they really make up this ground? And I would tell you in the past short period of time, three to four years, we’ve done a tremendous amount of rather than going out and beating our chest and saying how great we are, we just kind of execute every day. One of this -- I have to tell you, coming into American Water six months ago, the passion that every one of our 6700 employees feel about of what we do, we are not a water company, we’re in the health business. And every one of our employees take very seriously that our job is to make sure that we deliver that safe, clean, affordable and reliable water. And I think that is what allows us, that’s what has allowed us to execute on a plan and this is just the beginning. So I think as we continue to show improve that this is who we are and we’re going to continue this path, I think that you’ll see that close.

Brian Chin - BofA Merrill Lynch

Susan, thank you very much for your comments. I appreciate it.

Susan N. Story

Thanks.

Brian Chin - BofA Merrill Lynch

Thank you.

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