American Water Works (AWK)

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American Water Works (AWK)

Q3 2012 Earnings Call

November 08, 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

Michael G. Roomberg - Ladenburg Thalmann & Co. Inc., Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

Timothy M. Winter - Gabelli & Company, Inc.

Gerard J. Sweeney - Boenning and Scattergood, Inc., Research Division

David A. Paz - BofA Merrill Lynch, Research Division

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

Presentation

Operator

Good morning, and welcome to the American Water's Third 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, November 15, 2012, by dialing (303) 590-3030 for U.S. and international callers. The access code for the replay is 4567592. The online archive of the webcast will be available through December 10, 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 Third Quarter 2012 Conference Call. As usual, we'll keep our call to about 1 hour and at the end of our prepared remarks, we will have time for questions.

Before we begin, I would like to remind everyone that during the course of this conference, 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 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, which are available to the public on the company's Investor Relations website.

With that, I'd now like to turn the call over to Jeff Sterba, our President and CEO.

Jeffry E. Sterba

Thanks, Ed. I appreciate you all joining us today, and I hope you're warm and dry after the nor'easter that has hit the Eastern part of the country over the last 24 hours, particularly right along the Coast. In fact, let me start by acknowledging the tremendous impact that Sandy had on most of the Northeast last week. As you all know, there's an unprecedented amount of damage and hardship to millions of people in large parts of our service territory, where we serve about 6 million folks. On a personal note, our hearts really go out to all of those folks that have been affected, and I'm going to talk about Sandy in a little more detail in a few minutes. But, particularly to our customers in the area, our investors and our employees, we have 20 employees who lost their homes in the storm. And we have many more who lost property, had damage done to their property or to their family members' property, and they're trying to deal with that as I'm sure some of you all are, too. So our hearts go out to that, and we're certainly committed to aiding the communities in the recovery from this damaging weather.

On a brighter note, we again had very strong quarterly results, driven by consistent execution of the strategy that we've laid out. How we invest capital, the drive for operational excellence through developing a culture of continuous improvement, and focused growth in the markets within and outside of our existing footprint, as we've talked about before, it's all about execution.

If you go to Page 5, you can see that revenues are up 9% or a little over 9% for the quarter. When you couple that with how we've managed our operating costs, for the last 12-month, regulated operating efficiency ratio is 40.9% compared to 44.9% for the prior 12 months. Now as you might imagine, this is impacted a bit by the abnormally hot and dry weather that we had in the summer that drove a greater increase in sales. That impact is probably about 60 basis points. So if you tried to weather normalize, if you will, that operating efficiency ratio, it may be around 41.5%, still a substantive improvement from the 44.9%.

As you know, we have a goal of a 40% or being below 40% by 2015. Walter and I and the rest of the team will go out on a little bit of a limb and say we're going to beat that date based on the performance that we've had so far.

Earnings per share from continuing operations is up almost 20% for the quarter and more than 30% year-to-date over the same period in 2010. Very strong cash flow from operations, which as you know, feeds our ability to spend capital and reinvest in our system. We're up about $160 million today or about a 27% increase over 2011 year-to-date.

Our return on equity is at the highest level since the IPO, and it's now a little -- about 8.15%. Recall that the $1 billion of debt that sits at the parent level that was left from the RWE ownership where we got that, they took cash. That's kind of referred to as the gift that keeps on giving, that causes about a 100-basis-point drag on that return. So based on where we are after the third quarter and what we see for the balance of the year, we're reaffirming our earnings guidance of $2.12 to $2.22 per share for continuing operations, and the $0.13 to $0.16 per share range that is due to the increased sales from the abnormally hot and dry weather of the summer.

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