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

Q2 2008 Earnings Call

August 12, 2008 9:00 am ET

Executives

Edward Vallejo – VP IR

Donald Correll – President & CEO

Ellen Wolf – Sr. VP & CFO

Analysts

Elizabeth Parrella – Merrill Lynch

Maria Karahalis - Goldman Sachs

Ryan Conners - Boenning & Scattergood

Heike Doerr – Janney Montgomery Scott

Timothy Winter - Smith, Moore & Co.

Faisel Khan – Citigroup

Operator

Good morning ladies and gentlemen and welcome to American Water’s 2008 second quarter earnings conference call. (Operator Instructions) Participating on today’s call are Donald Correll, President and Chief Executive Officer, Ellen Wolf, Senior Vice President and Chief Financial Officer, and Edward Vallejo, Vice President Investor Relations. I would like to introduce your host for today’s call, Edward Vallejo; please go ahead.

Edward Vallejo

Good morning and welcome to American Water’s 2008 second quarter earnings conference call. If you did not receive a copy of the earnings release you can find it by visiting American Water’s Investor Relations page of the company’s website at www.amwater.com. The slides used in this morning’s conference call will also be available to download following the call.

Before we begin let me remind you that in accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, the company notes certain matters to be discussed by members of management during this call may constitute forward-looking statements. Such statements 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. Today, American Water’s President and Chief Executive Officer, Donald Correll, and Ellen Wolf, American Water’s Senior Vice President and Chief Financial Officer, will be discussing our second quarter and year to day results.

Following their presentation we will be accepting questions. Now I’d like to turn the call over to Donald Correll.

Donald Correll

Thank you Edward, good morning everyone. Today we will be commenting on our second quarter as well as our year to day results, reviewing some of the highlights and how they all relate to our business strategies. Ellen will go into further detail regarding our second quarter, but first I’d like to give a brief overview of our key financial results.

For the quarter the company reported an operating revenue increase of 5.5% to approximately $589.4 million. Net income was $45.5 million compared with $49.2 million in the second quarter of 2007. Ellen will detail the changes in net income during her portion of the call.

The substantial increase in operating revenues is a result of our successful rate cases. Earning an appropriate rate of return is a core strategy for American Water, and a critical competency of any regulated utility.

In the second three months of 2008 we received authorizations for additional annualized revenues from general rate cases of $19.2 million which brings the total for the first half of the year to $47.2 million. At present, we have 11 rate cases pending across the country.

A main driver of increasing rates is our capital investment. Company-wide year-to-date, American Water has invested approximately $426 million on infrastructure improvements. This prudent investment, also a core strategy, is needed to ensure the reliability of our services and is on target with our anticipated annual capital investment plan.

We expect to invest in the billion dollar range per year for the foreseeable future. These investments include both infrastructure renewal programs and construction to meet new customer growth and help to ensure our continued compliance with water quality standards.

American Water takes great pride in meeting our surpassing water quality standards and in fact during this past quarter we earned nine more Director’s Awards from the Partnership for Safe Water. This is the environmental protection agency’s voluntary program to meet more stringent water quality goals than is required.

In total American Water has earned 70 Director’s Awards across our business since the inception of the program.

American Water continues to look for opportunities to grow our regulated business and pursue public private partnerships. The evolving needs in the marketplace for water and wastewater solutions create a wide range of growth possibilities. Currently we are pursuing numerous regulated or regulated-like opportunities that range in size and include many tuck-ins.

Growing our regulated business through tuck-ins allows us to integrate systems, operations and management as well as achieve efficiencies. A recent example of this was the June acquisition of a small system in Eastern Pennsylvania called Mountain Top Estates. Our subsidiary in Pennsylvania already provided water and wastewater services in a number of nearby communities and as such this acquisition was a great fit for Pennsylvania American Water and were able to meet a 100 person community water needs.

In additional Pennsylvania American Water acquired the assets of [inaudible] joint Municipal authority, water and wastewater systems. The purchase price is approximately $2 million. The newly acquired systems provide drinking water to approximately 550 customers as well as wastewater treatment services to nearly 500 customers. The transaction represents Pennsylvania American Water’s first wastewater acquisition in Western Pennsylvania.

And just this past weekend, the residents of Fayetteville, West Virginia voted overwhelmingly to sell the towns water and sewer systems to West Virginia American Water. The town has been purchasing water from West Virginia American Water since January. With the sale now approved by voters the company awaits final closure on the $3.9 million purchase agreement likely to occur at the end of September.

That system serves approximately 2,200 customers. While our business mix focuses predominantly on regulated activities, we continue to pursue public private partnerships including O&M and military contracts and services and other non-regulated businesses that are complimentary to our regulated businesses.

Other news for American Water includes the appointment of our newest Board member, Julia Johnson. Ms. Johnson brings more than 20 years of experience and a wealth of knowledge in the utility industry to American Water. She is an excellent addition to our Board and an independent member.

American Water also announced some key organizational changes that we believe will better position this company to execute its key strategies and deliver positive future results. Walter Lynch has been appointed President of Regulated Operations and John Young was named President of American Water Services and continues to serve as President of American Water Service Company.

Walter and John are key leaders at American Water and have vast experience in this industry. In his new role Walter will be responsible for the successful performance of American Water’s 20 regulated states as well as the company’s two national customer call centers. All of the state Presidents will now report to him.

John will work to align the organization’s capabilities to support various growth opportunities like the company’s recent successes with the Tampa Bay [desalination] project in Florida and the Lake Pleasant Water Treatment Plant in Arizona. John will also continue to lead multiple operational functions as well as the business transformation related to the company’s information technology initiative.

This critical effort will ensure the company employs the proper technology to meet future customer and business needs. I have every confidence that through these two new positions both Walter and John will help this company achieve its full potential.

We also declared our first dividend payment since going public in April. We realize the importance of meeting shareholders’ expectations. This declaration represented the first dividend payment since American Water’s IPO and reinitiated a policy that was a long standing tradition of American Water’s prior public history.

Finally although Ellen will have further information on the financial impact of the weather, I want to acknowledge and congratulate the American Water teams in our central states. While the Midwest has not seen flooding like this since 1993, thanks to the additional steps that were taken by the company during and after the floods, American Water’s operations had no difficulty maintaining service to our customers.

It’s an absolute credit to our employees and reflects our commitment to those we serve. With that I’ll turn the call over to Ellen to discuss the second quarter and year-to-date financial results in more detail.

Ellen Wolf

Thank you very much Donald and good morning everyone. American Water’s second quarter results continued to show our commitment to investing appropriately in our infrastructure, applying for and receiving rates of return on that investment and addressing our customer requirements.

For the second quarter ended June 30, 2008 American Water reported net income of $45.5 million or $0.28 earnings per share compared with $49.2 million or $0.31 earnings per share for the comparable quarter of 2007.

Included in our second quarter results are incremental employee expenses related to job reclassifications and awards granted in relationship to the initial public offering. A [cap] amounting to approximately $5 million on a pre-tax basis. In addition the second quarter results for 2007 included a one-time gain on sale of property of approximately $6 million on a pre-tax basis.

For the six month period we reported a net loss of $687 million or $4.29 earnings per share. After taking into account a net after-tax impairment charge in the first quarter of 2008 of $738.5 million net income for the six months ended June 30, 2008 was $51.5 million or $0.32 earnings per share compared to $51.8 million or $0.32 earnings per share for the six months ended June 30, 2007.

A key contributor to our net income for the second quarter was our growth in revenue. For the second quarter of 2008 American Water reported an increase in revenue of 5.5% to $589 million from $559 million reported in the second quarter of 2007 or a $30.6 million increase.

This increase was driven by an increase in our regulated revenues of $17.6 million and $11.6 million increase in revenues from the non-regulated business. As I just mentioned for our regulated businesses revenues from customers increased by approximately $7.6 million. This is mainly due to the implementation of granted rate increases resulting in additional revenue for quarter of approximately $26 million.

However the full benefit of this rate increase was offset by a decrease quarter-over-quarter in the volume of water sold. This is largely attributable to the weather conditions in the Midwest where the rainfall was approximately 70% higher then average in Iowa, 40% higher in Missouri, and 30% higher in Indiana and Illinois.

For the company as a whole, sales volume for our residential customers decreased 2.1%, volume of water sold to commercial customers decreased by 1.4% and the volume of water for our industrial customers decreased 2.8% in the second quarter of 2008 versus the second quarter of 2007.

The non-regulated business increase in revenue comes principally from our contract operations group and homeowner services group. These increases were partially offset by decreased revenues in our applied water management group which have been impacted by the slowdown in the housing market mainly in New Jersey.

Offsetting the increase in revenues were $39.5 million higher operating expenses for the three months ended June 30, 2008. The increase in operating expenses primarily resulted from higher operating expenses in our regulated businesses of $23.7 million during the three months ended June 30, 2008 compared to the three months ended June 30, 2007 and an increase in operating expenses in our non-regulated businesses of $16 million for the three months ended June 30, 2008 compared to the prior three months ended June 30, 2007.

The rise in operating expenses in our regulated businesses reflects our continued commitment to enhancing customer service and ensuring that we meet both the customers’ and regulators’ expectations. This involves, just to name a few, making sure we are appropriately staffed to answer the phones on a timely basis in our call centers, responding to customer concerns quickly and efficiently, turning on and off service as required, and making sure our meters are read in a timely and accurate manner.

Employee related expenses increased by approximately $12 million from $119 million in the second quarter of 2007 to $131 million in the second quarter of 2008. Included in this $12 million increase in our expenses for the second quarter of 2008 is the $4.7 million previously mentioned related to job reclassifications and a grant of stock to employees at the time of the IPO.

This grant vested in July and was valued at approximately $2 million of which approximately three-quarters was recognized in the second quarter of this year. Also included in employee related expenses is a $3 million increase year-over-year in our pension expense.

After taking into account these items, other employer related expenses increased approximately $4 million or 3.6%. We are beginning to see a slight increase in our production costs particularly related to fuel, purchased water and chemicals of approximately $2 million quarter-over-quarter. Based upon the increases we are seeing in these areas, we have been or will be able to update our rate cases in states such as New Jersey, Missouri, West Virginia and others, for these known and measurable increases.

While we have seen some impact of the slowdown in the housing market on our non-regulated businesses, we have not seen any substantial change in our bad debt for the regulated business. Also in comparing expenses for the three months ended June 30, 2008 versus June 30, 2007 it should be noted that the expenses in 2007 were offset by a gain on sale of assets of approximately $6.3 million.

We continue to make significant progress on our compliance with Sarbanes-Oxley. The expenses to ensure our compliance with and the remedy of any materials or significant weaknesses decreased from $9.1 million in the second quarter of 2007 to $2.9 million in the second quarter of 2008.

This overall decrease in spend year-over-year demonstrates our success in resolving any and all material weaknesses. We do expect to incur and additional $2.8 million for the second half of the year. Other items affecting income from continuing operations for the three months ended June 30, 2008 as compared to the same period in the prior year, include increased allowance for funds used during construction of $3.2 million, attributable to the increase in the construction work in progress primarily in New Jersey and Missouri, and also lower income tax expense of $2.5 million.

During the second quarter of 2008 American Water continued to prudently invest in the water and wastewater infrastructure of its system. Cash outflows for capital investment increased from $138 million in the second quarter of 2007 to $237 million in the second quarter of 2008.

For the six months of 2008 American Water has dedicated approximately $426 million of capital to its system. Additionally the Kentucky Commission approved our building a new source of supply in Lexington for an expected cost of $162 million for an approximately 20 MGD plant.

One of our key strategies in ensuring that we receive an appropriate return of our prudently invested capital is filing rates. During the three months ended June 30, 2008 we received authorizations for additional annualized revenues from general rate cases in California and Arizona amounting to $19.2 million.

While California rates were not granted until May of 2008, they are retroactive to January 1st, 2008 which resulted in American Water recognizing $1.4 million of additional revenue in the second quarter. Arizona’s rates were effective in the second quarter of 2008.

In the first six months of 2008 we received authorizations for additional annualized revenues from general rate cases of $47.2 million. As of July 31, 2008 we are awaiting final orders for $6.8 million in total additional annual of revenues for general rate cases that were filed in October and November of 2007.

In the first six months of 2008 we filed general rate cases in nine additional states to ensure an appropriate return on the capital we have prudently invested in the infrastructure as well as a recovery of any increase in costs or decreases in demand.

The file of rate cases should provide $271 million of additional revenues if approved as filed. There is not assurance that the filed amount or any portion thereof of any requested increases will be granted. As a reminder, it generally takes up to 12 months between the filing of a rate case and the rates being authorized by the state commission. I want to note that in July, 2008, 11 months after we initially filed the rate case, the Illinois Commission approved and granted authorization to increase rates in our service territories in Illinois which will provide additional annualized revenue of $24.9 million.

During the six months ended June 30, 2008 we met our capital resource requirements with internally generated cash, commercial paper issuance, the issuance of $200 million of private placement debt and a capital contribution of $245 million from RWE.

The capital contribution received from RWE was in connection with the IPO and we do not anticipate any such contribution in the future. As you are aware American Water’s common stock began selling on the New York Stock Exchange on April 23, 2008, and on April 28, 2008 the company completed its IPO with the company’s selling shareholder selling 58 million shares of the company’s common stock at a price of $21.50 per share.

Subsequent to the IPO American Water announced the underwriters’ partial exercise of their option to purchase 5.2 million shares to cover overall [inaudible]. As of this date there are approximately 63.2 million shares on the public market with the remaining shares or approximately 60% of outstanding shares still owned by RWE.

I’d now like to take a few minutes and address the issue of goodwill that is on our balance sheet. As a reminder this goodwill relates to the premium that RWE paid for American Water when it acquired the company back in 2003. Over the past years, American Water has written off approximately half the goodwill and has a balance of $1.7 billion remaining as of June 30, 2008.

The company’s policy is to reassess the value of that goodwill on an annual basis in the fourth quarter of every year and we expect to conduct that test at the same time for 2008. As you may recall from our last earning’s call, in light of the initial public offering price we performed an interim impairment test.

Based on that assessment we recorded in our first quarter financial statement a pre-tax impairment charge to goodwill related to our regulated business of $750 million. Since the IPO there have been no triggering events that would warrant our performing another interim test.

As Donald noted earlier we were proud to have recently announced our first quarterly dividend since our return to a public company. As we noted on our last quarterly call, and in our S1, I wanted to reiterate that our policy subject to approval by our Board of Directors is to declare and pay a dividend on a quarterly basis of $0.20 per share and in the long run to have the payment ratio in the 50% to 70% range of net income.

We at American Water want to thank you for your continued interest in our company. That concludes our prepared remarks for American Water’s second quarter financial results and we are now ready for our question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Elizabeth Parrella – Merrill Lynch

Elizabeth Parrella – Merrill Lynch

On the non-regulated businesses, your press release mentions that revenues were up $11.6 million and expenses were up $16 million in the quarter, can you talk about whether there were any unusual items in the expenses or any timing mismatches between revenues and expenses?

Ellen Wolf

There were no unusual items or mismatches. We had really three things sort of driving it; first in homeowner services because of the unique weather we had more frequency of breaks and therefore having to fix those breaks so the expenses were up a little bit there.

Second on some of our contracts we were seeing startup costs related to the military contracts and then third we did start a DBO in [Fillmore] and that has a lower margin on it on the DB part because it’s really more a pass-through. So again nothing unusual there.

Elizabeth Parrella – Merrill Lynch

You mention on the reclassification of certain employee costs that’s in this $4.7 million, just based on your comments on the compensation piece, is the right way to think about it is that the employee cost is about $3 million out of the $4.7 million and the other is maybe $1.5 million or so?

Ellen Wolf

That’s correct.

Elizabeth Parrella – Merrill Lynch

Does that $3 million cost, is there any benefit to you either later in the year or down the road? Does any of that come back to you or should we view that as sort of a one-time cost?

Ellen Wolf

It should be deemed as a one-time cost.

Elizabeth Parrella – Merrill Lynch

On the regulatory side, can you provide any update on the New Jersey case in terms of how that’s going and also the Trenton acquisition proceeding?

Donald Correll

We are proceeding as planned. We are—our testimony has been in for some time. We’re doing the discovery now for the intervener’s testimony. Hearings are scheduled for this fall. We are still on track for both the rate case and the acquisition to get a decision by the end of the year or worst case, the very beginning of 2009. We are always optimistic and hopeful, the possibility of trying to reach some kind of a settlement in advance but there’s been no activity on that front at the moment and I think its safe to say that we’re still on target to have this done at or about the end of the year.

Operator

Your next question comes from the line of Maria Karahalis - Goldman Sachs

Maria Karahalis - Goldman Sachs

I wanted to ask a question regarding the broader economic environment, and if you could comment on the environment for tuck-in acquisitions, I know you’ve talked about a couple of them during the quarter whether you’ve seen a greater willingness or more optimism about the ability to conclude those in the second half of this year and into next, without being specific. And I guess the economic environment [inaudible] the other way, are you seeing more push-back then usual on your proposed rate increases?

Donald Correll

We are indeed seeing more recent activity by more openness by municipal officials across sectors of our business to at least consider either the sale or some type of public private partnership, particularly for communities like the ones that I alluded to earlier and Fayetteville, West Virginia, being a great example of that. I think communities of that size are beginning to accept that perhaps they may not have the critical mass necessary to be able to support the financial investments, to be able to have the technical and managerial capabilities to run the systems and invest in the systems and we’re seeing more of a willingness particularly throughout the Midwest and to some extent here in the northeast to have these municipalities think about some options other than just doing it the way they’ve always done it.

So we are seeing that as a result of the economic downturn, the continued pressure on the municipal budgets, the continued pressure on state budgets and the lack of funding coming from both the states and the federal government that more of the municipalities are at least having a dialogue now. Now as far as trying to close some of them by the end of the year, it does take a while to bring these things from the discussion stage until closing so I wouldn’t necessarily expect the floodgates to open between now and the end of the year but its certainly is a positive sign that we’re beginning to see some of them entering the frontend of the pipeline.

Ellen Wolf

In terms of the rates, let’s start with the recently announced decision by Illinois where we did get a 10.35 return on equity and acknowledgement of all of the infrastructure and costs that we’ve put into this system. As with anything I think when you continually file rates everyone will react, but again we’re watching that very closely. We’re making sure that we are communicating both with the public as to the quality of our investment as well as with the regulators as to the necessity of that investment and the push-back we’re seeing I think is no different then we see with any normal rate case that’s filed right now.

Operator

Your next question comes from the line of Ryan Conners - Boenning & Scattergood

Ryan Conners - Boenning & Scattergood

Regarding the rate cases coming up, with all the inflationary pressures that we’re seeing in the electric and gas spaces, we guess that some of the regulators are a little bit overwhelmed. If this was true then it seems like it would have some impact on water utilities in that their request would either be fast tracked or alternatively swept under the rug, increasing lead times, etc. Can you provide some color on whether and how you see this affecting water utilities and more specifically American Water’s ability to get rate increases?

Donald Correll

I have to admit that we haven’t seen that nor have we heard that on the ground. It is unfortunate that that—there may be more activity in front of the public utility commissions across the country as a result of inflationary pressures and the like, but we have not certainly New Jersey being a good example, we’ve not seen any indication that we’re being swept under the rug or we’re getting second billing.

I think all of the commissions that we’ve dealt with across the country take their responsibilities very seriously. They do what they need to do to meet their regulatory and legislative mandates to process cases in as timely a fashion as possible. So the fact that we’re getting a tick up in some expenses or some electric companies filing again now that they’re [stay off] periods have ended we really haven’t experienced that kind of push-back or delays in any of the commissions we’re dealing with.

Ryan Conners - Boenning & Scattergood

Based on trends in July and August, do you expect weather issues that hurt volumes in the second quarter to normalize in third quarter?

Donald Correll

I think it’s fair to say we’ve not seen any floods in July like we saw in May and June. But beyond that it’s really premature to make any comment about what the weather is going to be or what normalization might be.

Ryan Conners - Boenning & Scattergood

We saw that depreciation was down year-over-year, and given the heightened level of CapEx we I guess would have thought that depreciation would have been a little higher. Can you provide some color on that?

Ellen Wolf

Remember depreciation is always a function of the type of assets that we’re putting in and the life of those assets and a lot of money we are spending on infrastructure; pipes in the ground, etc. which have a very long depreciable asset as granted to us by the regulators. We do work with the regulators over the composite life of any assets. I think what you’re seeing is a slight mix on how we’re spending the dollars and therefore on longer lived assets.

Operator

Your next question comes from the line of Heike Doerr – Janney Montgomery Scott

Heike Doerr – Janney Montgomery Scott

You mentioned that the industrial consumption was down 2.8%, can you quantify how much of that is weather and how much of that is an economic slowdown impact?

Ellen Wolf

We generally don’t have that kind of breakdown but I can tell you we are not seeing in any of our areas right now any of the industries going out of business. We’re not seeing any impact where we’ve lost major customers along those lines right now.

Heike Doerr – Janney Montgomery Scott

Can you refresh our memory how the Trenton approval is tied into the rate case and should the Commission come back and say that the $100 million I believe you requested in rate base is too high? How does that process go if you go back to Trenton and renegotiate that? Can you walk us through some of those scenarios?

Donald Correll

To some extent we’ll be speculating but I think that the fundamental thing to remember is that our contract with the City of Trenton is that we—the $100 million is the purchase price to be included in rate base. If the PUC would decide for whatever reason that $100 million was not the appropriate price our contract with the City of Trenton is that we will only pay them what is included in our rate base. So how it would work mechanically I’d be speculating about somewhat but practically, if the PUC were to say that we’re going to approve something less, our obligation is to only pay what they’re including in the rate base and that’s what we would pay for the asset assuming Trenton was prepared to accept that.

Ellen Wolf

The only other thing is that the $125 million that we did apply for as a rate increase did include in it the capital invested in Trenton. So if we pay less, we might see that $125 million adjusted accordingly to reflect the amount that’s in rate base.

Operator

Your next question comes from the line of Timothy Winter - Smith, Moore & Co.

Timothy Winter - Smith, Moore & Co.

There have been a number of positive developments in the California regulatory environment with revenue stabilization, expense stabilization, and streamlining of rate cases, where is your California subsidiary on the rate case front and implementation of these mechanisms?

Ellen Wolf

In terms of revenue stabilization, we’ve just done or are about to do our initial filing in that area. We have filed our general rate case and we have filed for an overall return on equity to be applied to all of our rates and I would have to check, but I don’t believe that its until 2010 that that’s when our total three year cycle begins for all of our rate cases so we are not this coming year, but probably the year after; 2010 or 2011 and I would have to get back to you on that.

Timothy Winter - Smith, Moore & Co.

In Pennsylvania, I know you got a rate increase in late last year, but what kind of rate case cycle are you on? Is it like Aqua Pennsylvania, a two year cycle and the reason I’m asking is because of the constructive decision with the higher allotted ROE that your neighbor just got, will you be filing sometime later this year or early next?

Ellen Wolf

I would first remind you that we do have the [disk] in Pennsylvania and that [disk] allows us to spend up to 7.5% of revenue or to get an increased rate to 7.5% of revenue, and we would time our rate cases accordingly to match when we feel our expenses have gone—increased enough to go in for a rate case or we’re not recovering enough of our capital under the [disk] program. We’re really governed by our own expenses and making sure our services are appropriate rather then necessarily by what others are doing in the industry.

Operator

Your next question comes from the line of Faisel Khan - Citigroup

Faisel Khan – Citigroup

In your prepared remarks you mentioned that your production costs were up but generally aren’t those production costs captured in your rates?

Ellen Wolf

It depends on the state and they’re regulatory environment. In some states for example California purchase water increases we get to treat through a balancing account. We also get to do that in a couple of our other states. Fuel and power though as they go up, that’s part of the concept of the regulatory lag. So unless we have it covered in rates, if they go up above what we have in rates there is a lag between that and when we apply for new rates.

Faisel Khan – Citigroup

The production costs that you mentioned in the second quarter are those kind of ongoing higher production costs then you’d modeled in the past or are they—or is that more of a regulatory lag that’s taking place?

Ellen Wolf

That is a little bit, a combination of both. One is just regulatory lag and then second we are seeing a slight increase in purchased water because of the cost of electricity to our provider and we are seeing an increase in chemicals and I believe everyone is seeing the increase in fuel.

Donald Correll

To the extent that we have as both Ellen and I noted in multiple rate cases pending we have had and continue to have the opportunity to update some of those costs during the pending regulatory cycle so for instance, in New Jersey where we filed the early part of this year we have the opportunity to update our costs in the case to try to capture some of these higher costs prospectively.

But given that we have to absorb them now, and we haven’t had a rate case decision in New Jersey for a year-and-a-half we are essentially eating those costs right now. But the fact that they are going up while the case is pending as opposed to just having settled the case recently, we do have the opportunity to try to capture them in these current filings.

Faisel Khan – Citigroup

In terms of the year-over-year volume decline, I understand a lot of that is related to weather, but is there any way for you to quantify how much of that could be also related to conservation?

Ellen Wolf

At this point a lot of what is related to conservation generally we find is offset by to a great extent by organic growth. So we would feel the majority of this decline is really weather related.

Faisel Khan – Citigroup

Is there any update on RWE’s ownership position in your company and the timing of when they might monetize that position?

Donald Correll

No, the last official statement that they’ve made that we continue to repeat is that their expectation is to be below 50% before the end of this year. So we would expect that there would be a second tranche sometime this year but there are no further details or announcements with regard to size or timing on that.

Operator

There are no further questions at this time; I will now turn the conference over to Donald Correll for closing remarks.

Donald Correll

Thank you very much for everyone’s attention. This does conclude today’s call. I want to thank all of you for joining us and if you do have any more questions, please feel free to contact the Investor Relations directly.

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