American Water Works (AWK)

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American Water Works (AWK)

Q2 2011 Earnings Call

August 04, 2011 9:00 am ET

Executives

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

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

Jeffry Sterba - Chief Executive Officer, President and Director

Edward Vallejo - Vice President of Investor Relations

Analysts

Ryan Connors - Janney Montgomery Scott LLC

Barry Klein - Citigroup Inc

Michael Roomberg - Ladenburg Thalmann & Co. Inc.

Cleo Zagrean - Macquarie Research

Garik Shmois - Longbow Research LLC

David Paz - BofA/Merrill Lynch

Brian Chin - Citigroup Inc

Heike Doerr - Robert W. Baird & Co. Incorporated

Presentation

Operator

Good morning, and welcome to the American Water's Second Quarter 2011 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 call, an audio archive of the call will be available through August 11 of 2011 by dialing (303) 590-3030 for U.S. and international callers. The access code for replay is 4456951. The online archive of the webcast will be available through September 6 of 2011 by accessing the Investor Relations page of the company's website located at www.amwater.com. [Operator Instructions]

I would now like to introduce the host for today's call, Ed Vallejo, Vice President of Investor Relations. Please go ahead.

Edward Vallejo

Thank you. Good morning, everyone, and welcome to American Water's 2011 second quarter earnings conference call. As usual, we will keep our call to about an hour. At the end of our prepared statements, we will have time for questions.

But before we begin, I would like to remind everyone that during the course of the conference call, both in our prepared remarks and answers to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimates, however, since these estimates 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 would like to turn the call over to American Water's President and CEO, Jeff Sterba.

Jeffry Sterba

Thanks, Ed. Good morning to all of you, and I appreciate you joining us this morning. In the room with Ed and I is Ellen Wolf, our Chief Financial Officer who will join me in the presentation; Walter Lynch, the President of Regulated Operations; and Kellye Walker, our Chief Administrative Officer and General Counsel.

It's a pleasure to once again announce strong performance for the quarter from all of our lines of business, and this continues the trend of improving financial results that you've seen over the last year.

As you can see on Slide 5, total system revenues increased 6.2% quarter-over-quarter to just under $675 million. Adjusted net income and earnings per share increased by 11.8% and 9.5% respectively over the prior year to a little over $81 million and $0.46 a share. You'll recall that we are showing these results with an adjustment to our GAAP earnings to exclude the benefit from the cessation of depreciation for assets under agreements for sale. And remember last quarter, that included our Arizona and New Mexico properties. For the second quarter, it also includes Ohio. This adjustment that we make enables there to be an apples-to-apples comparison to our earnings guidance.

You'll note that cash flow from operations is the only one of the indicators that's slightly down from 2010. This is driven by a onetime tax refund received last year and an increase in pension investment this year. As you saw on our press release, we estimate that our earnings per share as adjusted will now be in the upper end of the guidance range of $1.65 to $1.75 per share based on our performance today. And then Ellen will go into more details on this and our financials. But let me first speak about our portfolio optimization efforts and some other highlights of the quarter.

Moving to Slide 6. You'll see that upon completion of the transactions we've previously announced as part of our rationalization process, our regulated footprint will be reduced from 20 to 16 states. Our scale and cost efficiency will be improved, as well our financial performance. And each and every one of these transactions, when you include the use of proceeds, is additive to the value of the company and will enable us to increase our earned ROE more rapidly.

Now these are all relatively small transactions when you compare them to our overall system size. So they don't move the needle dramatically, but they will improve our short and long-term performance. Our most recent news on this front was the announced agreement, the purchase of 7 regulated water systems in New York. This will about double our New York customer base, adding approximately 152,000 people in 4 counties, and it will make our operations in New York the largest investor on the water utility in that state. Not only does this agreement allow us to take advantage of economies of scale, it gives us a platform for growth in areas north of New York City. And the sale of our Ohio properties doesn't diminish our opportunity to continue to participate in the important growth of the Marcellus shale region, given our strategic positioning throughout many of the active drilling areas in Pennsylvania. As for the pending sale of our Arizona and New Mexico properties, regulatory hearings will occur later this month. We really haven't run into any opposition to the transaction at this stage, and so closing by year end remains feasible. We've also closed on both the Missouri acquisition, which added approximately 10,000 people to our service along with the sale of the small Texas properties.

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