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American Water Works (NYSE:AWK)

Q1 2012 Earnings Call

May 03, 2012 9:00 am ET

Executives

Edward Vallejo - Vice President of Investor Relations

Jeffry E. Sterba - Chief Executive Officer, President and Director

Ellen C. Wolf - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Walter J. Lynch - President of Regulated Operations and Chief Operating Officer of Regulated Operations

Analysts

Kevin Cole - Crédit Suisse AG, Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

Timothy Feron - Janney Montgomery Scott LLC, Research Division

David A. Paz - BofA Merrill Lynch, Research Division

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Spencer E. Joyce - Hilliard Lyons, Research Division

Operator

Good morning, and welcome to American Water's First Quarter 2012 Earnings Conference Call. As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation through the company's website, www.amwater.com. Following the earnings conference call, an audio archive of the call will be available through Thursday, May 10, 2012, by dialing (303) 590-3030 for U.S. and international callers. The access code for the replay is 4531958. The online archive of the webcast will be available through June 4, 2012, by accessing the Investor Relations page of the company's website located at www.amwater.com. [Operator Instructions]

I would now like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Edward Vallejo

Thank you. Good morning, everyone, and welcome to American Water's 2012 First Quarter Earnings Conference Call. At the end of our prepared remarks, we will have time for questions. 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 estimate. However, since these statements deal with future events, they are subject to numerous risks, uncertainties and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the company's SEC filings.

Now I'd like to turn the call over to American Water's President and CEO, Jeff Sterba.

Jeffry E. Sterba

Thanks, Ed. Good morning, everyone, and I appreciate you joining us today. Ellen Wolf, our Chief Financial Officer, will join me in our comments this morning. Also with us here are Walter Lynch, who heads our Regulated Operations; and Kellye Walker, our Chief Administrative Officer and General Counsel.

It's a pleasure to report on another quarter of success in both our financial performance and the execution of our strategic plans. On Slide 5, you can see we delivered strong first quarter results with a quarter-over-quarter increase in earnings from continuing operations of more than 20% to approximately $49 million or $0.28 per share. This was fueled by an almost 4% growth in revenue while total operations and maintenance expenses were held flat to the same quarter last year.

In our regulated segment, increased revenue driven by implementation of rate case decisions in a number of our states and reduced O&M costs improved our O&M efficiency ratio by about 280 basis points quarter over quarter. Now you will also notice that it shows consolidated cash flow from operations decline of about 8%. This is attributable to timing changes in working capital.

These financial results are due to our focus on investing resources in capital in areas where we can drive value for customers and the company as well as our focus on continuous process improvement that's ongoing throughout the business.

Financial results are obviously important, that's what we all are here to talk about. But their sustainability, I think, has a lot to do with how we serve customers and whether they think they are getting good value for the price. Like most companies, we survey our customers to understand their overall satisfaction with us and they're perception of service of quality and I thought you may be interested in how we're faring on this front. In the most recent survey, which was done in the last 30 to 45 days, 94% of our customers responded in the satisfied categories concerning their overall satisfaction with American Water during the past 12 months. And among customers who had specific service contact with us, almost 90% were either extremely or very satisfied. We take these measures and the confidence our customers place in us seriously, particularly as investment in facilities critical to providing service to our customers could cause us upward pressure on rates.

Our capital investments directly benefit our customers to improve reliability. And we've increased our efforts to help customers understand these investments and the associated benefits that come from having reliable water service such as fire protection, quality water and wastewater treatment in the economic vitality of the towns that they live in.

We're also levering technology to help us serve our customers better. For example, we recently upgraded our call management system, which has significantly improved call handling performance. And while substantive improvement to our customer outreach and online service capabilities is tied to the implementation of our new CIS system next year, we have improved our web self-service application and it's seeing a more than 65% increase in a number of customer-initiated web-based transactions over the last year. This enables us to meet customer needs more effectively and also at lower costs.

Turning to Slide 7. Let me highlight just a few other key accomplishments of this quarter. As you know, we have now closed the previous announced portfolio optimization transactions, which have added about 55,000 customers in Missouri and New York and generated more than $510 million of cash, which can more effectively to be deployed in the 16 states in which we now have regulated operations. So far in 2012, 2 rate cases have been filed and cases in 5 states has been resolved, providing an annualized revenue increase of over $62 million. The most recent decision came a couple of days ago in New Jersey, where the New Jersey BPU approved the stipulated agreement in that rate case, as well as approved the distribution system improvement charges for the state.

We also received 2 proposed decisions in California that are of significance. One is on the revenue requirement for our general rate case for 2012 through '14, and the second one is the cost recovery of the San Clemente Dam removal proposal. Both of these recommendations still require final commission action, which we hope will be forthcoming soon after comments have been filed by all the parties have to be out for comment for 30 days before the commission can take final action. We view these recommended decisions as generally constructive but there are some points that need clarification with the commission.

Lastly, I know there's been talk about dry weather in the media lately. We've assessed our reservoirs and other sources of supply and at this time, are comfortable where we are with virtually full reservoirs and our supply sources. But as always, we'll assess our supply on a continuing basis as we go forward.

With that said, let me turn the call over to Ellen to delve into our financial performance in more detail.

Ellen C. Wolf

Thank you very much, Jeff, and good morning to those of you who are listening to our first quarter 2012 earnings conference call. Jeff has just reviewed with you some of the key highlights for the quarter, all built around our commitment to ensure reliable service to our customers and results to our shareholders. I am now going to take a few minutes to describe in more detail the drivers of our results for the first quarter. As always, additional details can be found on our 10-Q, which we filed late yesterday afternoon with the SEC.

Now turning to Slide 9. As Jeff indicated, we produced solid financial results for the first quarter of 2012 with increases in revenue, net income and earnings per share, as well as continued improvement in our O&M efficiency ratio. These results were driven by our team's commitment to strategies that focused around the value of our customers, investing needed capital and controlling costs.

For the first quarter ended March 31, we reported operating revenues of approximately $619 million, a $22 million or 3.7% increase over the approximately $597 million reported for the first quarter of 2011. Income from continuing operations for the first quarter was around $49 million or $0.28 per common share compared with around $41 million or $0.23 per common share in 2011, with both up over 20% year-over-year. Included in income and earnings per share for continuing operations, is an after-tax charge of about $1.4 million or $0.01, respectively, related to severance costs associated with our organizational realignment.

Net cash, as Jeff mentioned, provided by operating activities for the 3 months ended March 31, 2012, was $148 million compared to $161 million for the first quarter in '11. This again, is mainly due to the changes in the timing of working capital need.

Now I'd like to turn the discussion to the various components of our income from continuing operations starting with revenue.

Revenues from our regulated business increased by a net of $13.6 million or 2.6% from March 31, '11 to '12, driven by new rates awarded and various surcharges granted by the regulators related to our continued investment in infrastructure. As of March 31, the 2012 impact of these rates increases, most of which were granted in 2011, was approximately $20 million. These increases were partially offset by decreased revenues of around $6 million, attributable to a decrease in overall demand of 1.5% in the first quarter of 2012 compared with the first quarter of '11.

During the same period, our market-based operations revenues increased by $5.2 million or approximately 7%, primarily as a result of incremental capital project activity related to our military services contracts.

Now turning to Slide 11. As you all know, our ability to invest in our infrastructure is driven by our ability to earn appropriate rate of return on our investments. This slide shows rate cases that have been filed and are awaiting final order. As of May 2, we are awaiting final orders in 4 states, requesting additional annualized revenues of $101.5 million. There is, of course, no assurance that all or any portion thereof of any of the increases will be granted.

During the first quarter of '12, we filed a general rate case in Virginia requesting additional annualized revenue of approximately $5.7 million. As a reminder, we anticipate filing a total of 4 rate cases in 2012.

Slide 12 shows rate cases and infrastructure charges that have been granted since the beginning of 2011. As of May 2, 2012, we've been granted additional annualized revenues from general rate cases totaling around $190 million and another $11 million in additional annualized revenues from infrastructure charges. The most recent rate case decision was just this week in New Jersey, where the commission approved a revenue increase of $30 million to be effective immediately. The outcome of this case balanced the requirement for our customers and shareholders by taking into account for the first part -- for the first time as part of our original filing, the decline in customer usage as well as our own efforts to control costs since that original filing back in July of 2010.

Turning our attention to water sales volumes. Total company sales volumes decreased quarter-over-quarter by 1.5%. During the first quarter, usage is generally not impacted by weather. The quarter-over-quarter decline we are seeing is in line with the 5-year demand usage trend. While we can never be completely sure of the reason for the declining usage, again at this time, it appears that for at least the residential decline of 1.7% that is related to concentration in more efficient water-related appliances.

I'd now like to take a few minutes to discuss our operating expenses. Total operating expenses, including depreciation, for the 2012 first quarter increased by $5.4 million or 1.2% from the 2011 first quarter. This increase includes a $7 million decrease in the regulated business operations and maintenance expense, offset partially by a $3.2 million increase in the market-based business expenses, mainly related to the increased revenues from our military contracts.

The regulated O&M decreased of approximately $7 million, the mild winter we experienced this year affected expenses by lowering our chemical usage due to lower water turbidity and by increasing our capitalized labor as more time was spent on replacing old pipes rather than fixing main breaks. Also employee-related expenses decreased due to employee vacancies and lower Orissa-based pension expense. And finally, included in the O&M expense for the first quarter was, as I mentioned earlier, a $2.4 million pretax severance charge again associated with organizational realignment.

Overall, our O&M -- our regulated O&M efficiency ratio improved from 48% for the quarter ended March 31, 2011 to 45.3% for the quarter ended March 31, 2012. We continue to see improvement in this ratio quarter-over-quarter as we remain committed to cost containment and long-term margin improvements.

The results of the first quarter, as well as our rate case decision, allow us to reaffirm for you our 2012 ongoing earnings per share range of $1.90 to $2.

And with that, I'd like to turn the call back over to Jeff for closing comments before opening it up for your questions.

Jeffry E. Sterba

Thanks, Ellen. Before taking questions, let me just close our discussion with the slide, remember that we presented this in January for the first -- this year on some of the things that we are striving to achieve in 2012, so you can track our progress. Now of course, that is all in addition to our target of earning $1.90 to $2 per share from continuing operations.

While it's still fairly early in 2012, good progress is being made on all of these fronts. And I won't go back over them because we've discussed most of them already today. We're making solid progress in getting declining use and other regulatory-like items recognized by regulators. Our continuous process improvement efforts are really starting to take hold, and we're seeing increased opportunities in both our regulated- and market-based segment for customer growth, all of which lead us to continue to believe in our long-term growth prospects of 7% to 10% per year.

With the approximate 3% dividend yield, I believe we have committed to investors to providing a double-digit investment return under an investment thesis that's centered on investing in our country's structure.

Lastly, just a reminder that we'll be holding our annual meeting here in Voorhees and also online through our virtual stockholder meeting on Friday, May 11, next Friday. So we welcome your participation.

And now, we'd be happy to take any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

Jeff, I guess, on your last comment, I guess, how should we think about the natural regulatory leg now with both Pennsylvania and New Jersey offering disc-like structures? As I know, traditionally, I've always though of it as -- so we have like a target ROE of, say, 105 and then we minus 100 to 125 basis points of holdco debt and then 100 to 150 basis points for regulatory lag. Where do you see that migrating towards?

Jeffry E. Sterba

Yes. I think the 150 basis points of regulatory lag is declining as we get discs in place and as we get declining usage built into place. Now obviously, the best approach is when you have an automatic adjustment mechanism. But in other states, like we've done in New Jersey, we have a future test year and then have forecasted 1 year forward in terms of consumption and then that's what's being put in. So by the time rates go into effect, they're recovering costs. You go 2 years and you start to still have more lag. So I think that 150 basis points is what we're trying to shrink. Do we ever get it to 0? Well, probably not. But if we can squeeze it down to 50 basis points, that's 100 basis points pickup. Plus in some of our jurisdictions, I'll use New York as an example, we have a dead band where we're allowed to earn above our allowed return for a little bit and then we start sharing excess, if there are any additional returns. So our goal is to drive it to 0. And we're not going to be satisfied til we get there. But you'll always have a little bit of friction. And on the parental debt, obviously, that percentage -- when I first came, it was about 125 basis points. It's already shrunk down to about 100 just because it's static and our total business is growing. And so that will continue to happen. But obviously, until something is done with that debt, it won't go to 0. It'll slowly migrate down to 75 basis points and lower.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. You don't mind if I ask one more question. I noticed in some recent presentations, you've put in a new area charge, that kind depicts your 7% to 10% EPS growth, like the sources of that. And I guess, can you kind of talk about where you think we are in -- when I look at the X axis because over the short term, it depicts, say, half of EPS growth comes from ROE improvement. I think we have achieved a good chunk of that, right?

Jeffry E. Sterba

Yes.

Kevin Cole - Crédit Suisse AG, Research Division

In that way, you start going towards the right, it leans more into new services and then acquisitions?

Jeffry E. Sterba

Yes. We started using this, frankly, at the Analyst Day 1 year ago, a little over 1 year ago, February of 2011. And its purpose is to conceptually present and there's no specific timeline because, frankly, we're in different parts of that curve or different parts of each of these curves today. So for example, on the ROE improvement, frankly, we're making more progress than -- we're making faster progress. Here's the way I think about it long term. We are investing $800 million to $1 billion of CapEx a year. Call it a mid-point of $900 million. That $900 million is offset by depreciation of about $300 million. So that's a net rate-based addition of about $600 million. As you add that into our existing rate base, we're driving 6% to 7% growth in earnings just off that fundamental driver. And that does not include, for example, acquisitions, new services, the value of efficiencies that we build in because we think about the efficiency as really creating headroom of add this capital. So that's where we're comfortable with the 7% to 10% growth rate is it's basically given -- the baseline of that comes from the investment strategy. Now the key is, obviously, could we recover that? And that's why the focus on efficiency because it gives us that headroom. Remember though, one of the kind of rules of thumb that we talk about is $1 of O&M has the same impact on rates as $6 of capital. But that $6 of capital generates $0.30 of earnings for you. So that's the way we think and work on how do we drive operational efficiency to create headroom for capital growth.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. And one follow-up question for that. So with regards to the drift in equity needs, how big has the drift got and would you agree that through use of a drift into the NOL, it looks like you could be equity free from a long time?

Ellen C. Wolf

Let me first address the drift and employee stock purchases. Last year, they provided about $5 million worth of cash for the company. So they are not huge providers of cash. And year to date, we've seen about $700,000 that's come in for the first quarter. So again, we're not seeing them as large inputs. As we have said, there won't be equity offering. We don't foresee one in 2012 because we had around $450 million come in as it relates to Arizona and New Mexico and another $60 million that came in as a result of our acquisition of New York and divestiture of Ohio to on May 1. So we have sufficient cash to get through this year. And we have not yet talked about the future years. But again, we're continuing to see our equity ratio improved and I should note that for the first quarter, actually, we moved up to 43% equity. We were at 42% as of yearend.

Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

A couple of questions here. First is, Jeff, if you could talk about the way you're thinking about a potential dividend raise and your dividend payout as you think about the cash that's coming in from some of these asset sales.

Jeffry E. Sterba

Okay. Obviously, we think about dividend as efficient use of capital decision in terms of what can we invest to continue to build the business and what's an appropriate cash return. As you know, our payout ratio has now drifted below 50% because of our strong earnings growth. And what we're seeing, obviously, is our dividend growth has been about 5% but our earnings growth has been substantively higher than that. That's something we're taking a hard look at as to what that appropriate mix on a go-forward basis. I think when the first company first came public, I think we used the payout ratio of 50% to 70% as a guideline. Frankly, that's fairly broad. We're obviously, now even a little bit below that. So we're taking a look at what's appropriate going forward. I think you'll see from us a little more specific conversation relative to the dividend and what our policy is going forward as we move forward through a little more time this year.

Neil Mehta - Goldman Sachs Group Inc., Research Division

Got it. And the second question relates to volumes here. At some point, you've got to think they're diminishing marginal returns of efficiency and changes in customer behavior, where all the easy gains have been won and the volume decreases associated with it will start to fade a little bit. How are you thinking about that? Or do you think that 1.5% that we saw in the first quarter is sustainable for a long period of time?

Ellen C. Wolf

What we're seeing is it's been sustainable for a long period of time. We would expect it to continue as a lot of the areas that we serve are older areas. And so over time, their homes continue to take out the older appliances and put in the newer appliances. We have seen it start to flatten only in a very, very few places. And again, as you talk about more water-efficient devices, we've now seen that move to the outdoors, so more watering devices have become more efficient as well. So I would expect that to continue for a while.

Jeffry E. Sterba

Yes, I'd agree, Neil. The big thing that Ellen hit on and this is one of the things that, I think, you'll see is on the irrigation side. More people have not just gone to drip irrigation but now, they're starting to use sensors. And so I think we'll continue to see -- I think to begin house stuff, yes, you hit a point of diminishing returns. I think out of house that we probably see more potential for that. And that's why we're focused on making sure that we get appropriate mechanisms in place. At some point, does it level out? Yes, I would agree with you. But I don't think it's in the next -- we personally aren't expecting it in the next 3 to 5 years, let's say.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And then the last question is on a quick update on the New Jersey rate case. When I looked at the final outcome here, a little bit of lower hit rate than we historically see versus your ask. Can you help us understand some of the components of the delta between the request and the final outcome?

Jeffry E. Sterba

Yes. I'm going to let Walter take that.

Walter J. Lynch

Yes. thanks, John. Yes, there are 2 real reasons. The final revenue requirement and the rate case showed a decrease in expenses from the original filing. And it was in our press release that we issued a couple days ago, that there's about $10 million less expenses in the filed revenue requirements than when the original filing occurred. And also, we've taken a more aggressive approach in our declining usage mechanism. The original filing, we filed for a 2-year look ahead to get the revenue recognition for that and in the settlement, in the $30 million, we got about 1 year of that. So that really explains some of the gap.

Jeffry E. Sterba

When you take a hard look through it, there's no capital that was disallowed. Costs were allowed. All of our operating costs, we got a 1-year forward look on declining usage. So in a sense, I think, making -- because some people will look just at the $98 million and the $30 million sale, you only got 1/3. Well, that's not really the appropriate comparison because of the O&M change, which is really a savings and you bet we're going to pass it on to customers, as well as the way that we approached the declining usage caused the size of the increase to look much larger than, for example, it has in prior years.

Operator

Our next question comes from the line of Ryan Connors with Janney Montgomery Scott.

Timothy Feron - Janney Montgomery Scott LLC, Research Division

This is actually Tim Feron filling in for Ryan who's on the road. I just have another question on the New Jersey case. We obviously have the numbers, but I was just curious if the whole process was more or less contentious than in the past? And do you think the fact that the disk was attached to the case could have some effect on the ultimate award?

Jeffry E. Sterba

I don't think the disk really had much effect on it. I think this is one of the reasons why we are being much more active in communicating with our customers on issues around value of water. New Jersey has had a series of rate increases and it's because we hadn't done what needed to be done there for a while. And so I think that attracted a bit more attention, particularly in -- there's a couple of individuals who took the mantle up about just no rate increases. We understand that. I think the notion that this was a settled case with all of the major parties continues to speak well for a stable regulatory environment in the state of New Jersey. And it's -- obviously, it's a settlement we believe we not only live with but think it's fair and reasonable. I think the media coverage, because of some of the stir up, if you will, from a couple of folks in the political world, created more attention, if you will. Well, that's fine, we understand the concerns and we're going to continue to work with those folks to help them better understand why you have to invest and what that means to rate long term.

Ellen C. Wolf

Tim, I'd also add that this was actually a separate filing from the rate case. And it just so happened they were on the same agenda. But up until now, the comments we have had are very favorable around the disk. So I want to separate, we don't believe the disk was in any way driving reaction to the rate case.

Operator

[Operator Instructions] And our next question comes from the line of David Paz of Bank of America.

David A. Paz - BofA Merrill Lynch, Research Division

Just on New Jersey on the disk specifically. Can you just walk me through how that will be implemented if we look close to next year? And then just any expected earnings impact but more specifically, maybe capital deployment impact?

Walter J. Lynch

Yes, Dave, this is Walter. I'll take that question. The board of public utilities has approved the disk program on May 1. But it's not effective until it's published in New Jersey register. We expect that to occur in early June. And then American Water in New Jersey, American Water will file the foundational filing shortly thereafter. You either have 90 days or a few that filing and when it is reviewed, and we'll start investing and we'll invest for a 6-month period and then we'll make our first filing. The board of public utilities will then have 60 days to review that filing and approve it and then the rates will go into effect at that point. We expect the impact to be sometime in the third quarter of 2013.

David A. Paz - BofA Merrill Lynch, Research Division

And in terms of just how you allocate capital, what should we expect? Higher percentage going in New Jersey versus other states versus historically?

Walter J. Lynch

Yes. I mean, with this mechanism, it's an incentive to invest in New Jersey. And we're going to increase our investment there.

Jeffry E. Sterba

You've seen, Dave, I think, a flow of capital into Pennsylvania, into Missouri and now into New Jersey because that's what these mechanisms incent.

David A. Paz - BofA Merrill Lynch, Research Division

All right, okay. And then on declining usage. Can you say which states that you believe you have the mechanisms in place that address declining usage?

Ellen C. Wolf

I'm sorry, which states we have mechanisms in place that address the declining usage?

David A. Paz - BofA Merrill Lynch, Research Division

Yes.

Ellen C. Wolf

Clearly, California, which has a balancing account for declining usage.

Jeffry E. Sterba

New York.

Ellen C. Wolf

New York also has a similar account that takes into effect defining usage as well as costs. And then in New Jersey, we now have a 1-year forward look on it. Illinois has always been a future -- has been a future test year for us, so that has a 1-year look in it. Missouri has recognized some of it as well and Pennsylvania definitely this time through has recognized a 1-year future on declining usage. And I'm sure I missed one. Iowa and Kentucky.

Jeffry E. Sterba

Well, Kentucky also. Kentucky is also a future test year. So that has built in. Now a future test year in and of itself, it does not fully meet what we believe is necessary. But if you do a future test year plus a roll forward, we're getting pretty close. And that's what happened in New Jersey.

David A. Paz - BofA Merrill Lynch, Research Division

Got it. Okay. And then just last, to clarify, Jeff, I think, you said that you filed 2 cases here today, and, Ellen, you said one. Just to clarify, how many cases have been filed here today?

Jeffry E. Sterba

We have filed 2, 1 of which has already been resolved. And so it's kind of odd but it's a very small operation and we filed a notice and it has already been accepted and approved. So that's why we have only one outstanding.

Ellen C. Wolf

We have this internal debate whether Michigan really filing or not since we have the ability to put in rates after we have submitted our letter notifying them.

Operator

Our next question comes from the line of Heike Doerr with Robert W. Baird.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Not to belabor this New Jersey rate case, but I wondered if we could talk a little bit about the ROE, I believe, you [indiscernible].

Walter, you mentioned that there was $10 million that was related to O&M if we look at that 95.5 as our starting days. Maybe it makes more sense to think about it as maybe 85.5. I know the ROE is a little bit below what the going rate has been in New Jersey. Is there anything you can comment on that?

Ellen C. Wolf

We believe, Heike, our ROE is in line with what Aqua and United and others have perceived as well.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. I thought that those companies had during their last rate proceedings, the most recent being completed in February, had been at a 10.3.

Ellen C. Wolf

No. I think they're at 10.15, I think, is what Aqua just got.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. And as we look ahead, Ellen, I believe you mentioned we were expecting 4 rate cases in 2012. Does that include the Michigan and the Virginia case that's already been filed or is that 4 more from here on out?

Ellen C. Wolf

It does include the Virginia case that has been filed.

Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division

Okay. Can you share with us what states those are?

Ellen C. Wolf

No. Heike, it is our philosophy and belief that really the first person we share that with is the regulator and their staff.

Operator

[Operator Instructions] And we do have a follow-up question from the line of Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

Can I just ask a quick follow-up question on the dividend? I believe you have been doing some, I guess, a grass-roots-like conversation with your investors to see what they want from a yield and a payout perspective. I guess, how did that shape up and were you able to get an indication from your investors that they want to keep -- they want to stay, I guess, in the sub 3.5% water, I guess, normal payout ratio or be elevated to more in electric, in the mid-4% range?

Jeffry E. Sterba

What you find in those conversations, which I have found very helpful and interesting, is people are obviously have little different perspectives on the basis of what kind of a run they run, et cetera. But the fundamentals were predictable, stable and growing. And those are the 3 components that, I think, were common in all of the folks that we've talked to. And so that -- the effect to that is that is what we'll be guiding us going forward. Remember, when I say stable, that doesn't mean that you don't change at all, but it means that it's -- there's not a risk of it having to be cut, obviously. And the predictable really goes to the -- more of the notion that the dividend policy as opposed to what the specific dividend is. We had good conversations with different approaches that have been used by different firms. And I think you'll see from us an approach going forward that will be predictable, stable and growing.

Kevin Cole - Crédit Suisse AG, Research Division

So I guess from recent years, the dividend increases have not tracked the EPS growth? Should we think of there's going to be like a one-time true up in the payout?

Jeffry E. Sterba

Yes. Kevin, as you know, the dividend decision is a subject matter for the board and their action. I think what you'll see is something that fits those criteria of predictable, stable and growing. I'll tell you that I have a personal bias against things where you do 1x, whether it's big jumps or X dividends. Those are rare times when I think those kind of approaches are appropriate.

Kevin Cole - Crédit Suisse AG, Research Division

Okay, that's fair. And then did you say earlier when the board was deciding the dividend?

Jeffry E. Sterba

Well, we meet often on all throughout the year. So no, we have not said when a specific decision. Our next declaration, I can't remember when the date is.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. But your investor meeting is next week? Is that right?

Jeffry E. Sterba

Our annual meeting is next week.

Operator

And our next question comes from the line of Spencer Joyce with Hilliard Lyons.

Spencer E. Joyce - Hilliard Lyons, Research Division

I had to hop on here kind of late, so I apologize in advance of you may have already covered this but just a couple of quick questions. The $1.90 to $2 guidance range, that is continuing operations, correct?

Jeffry E. Sterba

Correct.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. And just the other one regards to the expense side. It looks like we had a real nice quarter. bringing down some employee related cost, I'm just wondering if you all can provide a little color on maybe how close you all are to sort of a terminal destination there or should we expect some significant improvement in some future quarters?

Jeffry E. Sterba

Well, we've given -- we've made public a goal of having an operating efficiency ratio of at least no greater than 40% by 2015. We're certainly on target, I think, to hit that kind of a goal maybe even be able to be a little bit. It's not just what our absolute level of operating costs are because we have rerun 2 very different businesses. Our regulated business is capital intensive. Our market-based business is operating cost intensive. So we really look at the 2 as separate pieces. Also keep in mind that one of the major things we've got going on now is our Business Transformation project, which is bringing to the table new platform IP systems that we have not had. Over time, we expect that to be able to help reduce operating costs because we will not have to do as much as we're doing today manually. That doesn't happen on day 1 that the systems get implemented and those systems start being implemented in August of this year through about the same time frame next year in 3 different phases. But it takes a bit of time to get people comfortable to these systems and then we can use attrition and the like to help continue to reduce the employee side expenses of running the basic business. Ellen, anything you'd add?

Ellen C. Wolf

I think that's it. And again, when you look at our operating expenses, the total transformation going through with our systems will impact all lines of our expenses, including things like today, we can't do an electronic bill. So we will be able to do that in the future, so we will expect to see less printing costs, less mailing costs. So again, we're looking at all lines that will be impacted as we put new and much more customer-friendly systems in.

Spencer E. Joyce - Hilliard Lyons, Research Division

Okay. Yes, so it looks like we do have some ongoing things there.

Jeffry E. Sterba

Yes.

Operator

Ladies and gentlemen, this does conclude the question-and-answer session. I would now like to turn the call back to management for any closing remarks.

Jeffry E. Sterba

Well, I guess, thank you for your continued interest and support with what we're doing at American Water and again, invite you to participate in our annual meeting and we look forward to seeing you down the road.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.

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Source: American Water Works' CEO Discusses Q1 2012 Results - Earnings Call Transcript

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