Good morning, and welcome to American Water's Year-End 2012 Earnings Conference Call. As a reminder, this call is being recorded and also being webcast with 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 March 6, 2013, by dialing (303) 590-3030 for U.S. and international callers. The access code for the replay is 4593380. The online archive of the webcast will be available through April 17, 2013, by accessing the Investor Relations page of the company's website located at www.amwater.com. [Operator Instructions] I would now like to introduce our host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Good morning, everyone, and welcome to American Water's 2012 Year End Conference Call. As usual, we'll keep our call to about an hour and at the end of our prepared remarks, we will have time for questions. But 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 our future performance, and our statements represent our most reasonable estimates. However, since these estimates 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.

Thanks, Ed. Good morning to you, all, and thank you for joining us today. I'll be joined in the presentation by Ellen Wolf, our Chief Financial Officer; and in addition, Walter Lynch, who heads our Regulated Operations this year to help with your good questions that I'm sure you'll have. Before delving into the results of 2012, let me just make an opening comment. As you know, Ellen announced her retirement from our company in January. And I just want to take this opportunity to thank her for her tremendous dedication, expertise and leadership during the 12 years that she has served our company. On a personal basis, it's been a true pleasure to work with you and to really see the caliber and commitment that she has brought. Her direction of our financial objectives and obligations has helped us deliver strong results year-over-year, and she is about as red as the shirt that she's wearing right now. I also want to thank her for helping to ensure a smooth transition. As you know, Susan Story will join us on April 1 as our new CFO. I believe a number of you know her, and personally, I'm thrilled to bring someone with her diverse background to our company. Her experience and breadth of skills make her an excellent fit for this position and for American Water, and we look forward to introducing her to those of you who may not have had a chance to get to know her in the past at our next earnings call in May. So today, we are pleased to present the very strong results that we achieved in 2012, really the outcome of sound execution of our business plan on many fronts. So if you go to Slide 5, for 2012, we reported an…

Thank you very much, Jeff, and good morning to those of you who are listening to our earnings conference call. Let me take a few moments now to describe the underlying factors that drove our 2012 results. More details will be available when our 10-K is filed. Turning now to Slide 9. As Jeff indicated, 2012 was another year of solid financial results with continued increases in revenue, net income and cash flow. For 2012, we reported operating revenues of approximately $2.9 billion, a $211 million increase over the revenue reported for 2011. Net income from continuing operations for '12 was approximately $374 million or $2.11 per common share, an approximate 23% growth rate over the prior year. This is driven mainly by higher revenues in our Regulated Businesses of around $196 million and our continued focus on expense control. As we have mentioned previously, we believe the estimated impact of the hot, dry weather in the summer of '12 was around $0.13 to $0.16 per share for the year. Net cash provided by operating activities for '12 was around $956 million compared to approximately $808 million for 2011, primarily driven by the increase in operating revenues, changes in working capital, lower pension and postretirement health care contribution and long-term tax planning. Now I'd like to discuss briefly the various components of our income from continuing operations starting, of course, with revenues. Turning to Slide 10. Overall, revenues increased approximately $211 million, with the Regulated Business increasing around $196 million or 8.3% from 2011. The increase in revenues was primarily driven by rate authorizations related to the needed maintenance and updating of our water systems and higher customer demand in our Midwest and Eastern states over the prior year. For 2012, the impact of these rate authorizations, including investment surcharges,…

Thanks, Ellen. Going to Slide 15, so besides EPS of $2.15 to $2.25 per share, what can you expect from us in this next year? First and foremost, we will maintain the same customer-centric dedication to providing safe, reliable water and wastewater services. We'll also continue to stay very active on the public policy and regulatory front, promoting constructive regulatory frameworks and continuing to address regulatory lag that impacts our return on investment. We plan to resolve 3 rate cases in the course of the year and file up to 4 general rate cases, as well as infrastructure surcharge filings. We will also continue our focus on operational efficiency and bolstering a culture of continuous improvement, effectively managing costs and leveraging processes and technology to create value. So the implementation of the SAP platform is an example. That is going to provide us greater transparency into our cost drivers. And the impact of the best practices that we will be able to study and understand that we have in one state and be able to transfer that to the rest of our operations. This will help us approve our regulated O&M efficiency ratio and meet our 5-year goal of having it below 40% in 2015, 1 or 2 years early. You can expect that we'll also continue to invest approximately $900 million to upgrade our systems, with the goal always being to balance these needed investments to ensure reliability with our concomitant rate impacts. Realizing savings and efficiencies from our supply chain initiatives will help us achieve greater efficiency of capital spend so we generate more dollar for each -- more value for each dollar invested. And there's just a fascinating array of examples that we have on the supply chain side of where we're finding opportunities. On our market-based…

[Operator Instructions] And our first question comes from the line of Kevin Cole from Crédit Suisse. Kevin Cole - Crédit Suisse AG, Research Division: Ellen, congrats on your retirement and finding a worthy successor.

Thank you. Kevin Cole - Crédit Suisse AG, Research Division: I guess, Jeff, just on, I guess, this process. I guess given your holdco structure, you obviously had an abundance of qualified internal candidates. And so what new skill set do you believe that Susan will bring to the organization, and how do you expect her to evolve the CFO position?

Yes. Very good question. What Susan brings to the table is, one, senior roles in a much larger company that has strong multistate experience. And her breadth of experience goes from everything, from all of the fundamental services that have financial impacts like supply chain and IT, et cetera, to the running of a business and the reporting of a CFO to her through that process, to being part of that management team and the financial acumen that she developed both through her school, through schooling, as well as through the roles that she had, which included oversight over a number of different functions, everything from the marketing and the derivative issues associated with that to rates. And what I think you'll find with Susan is that she is a very well-known commodity in the regulatory community with exceptionally high marks. And so it's that breadth that she brings, and I would say that, that breadth we're able to utilize because of the strength of the financial team that we have inside the company. Bill Rogers and Mark Chesla highlight really that -- our 2 key folks, bring enormous capacity and capability in the controllers function, and Mark is moving to be the Principal Accounting Officer. And in Bill's case, not just capital markets but also -- because that's second nature to him because of his background, but he also brings a strategic acumen. So I don't think about finance as a functional, narrow silo. I think about finance as a resource that enables the business to be the best that it can be. And the broader base the experience of the people that are in that area, the better able they are able -- they can provide that value while we also make sure that we've got the necessary and appropriate controls, accounting mechanisms and visibility, transparency into the financials of the company. Kevin Cole - Crédit Suisse AG, Research Division: All right. That's actually a very good answer. And then should I also view this as it's CFO position today but likely evolving into maybe succession plans for you as well, your successor, sorry?

My succession plans are not even my subject, that's the board's. So what my objective is to ensure that when we have the opportunities to expand our skill sets, strengthen our bench, that we exercise those opportunities because they don't come around very often. And I think through a number of the hirings that we've done in the last 1.5 years, 2 years, probably with the exception of maybe them deciding to hire me, we've had great success. From Bill Rogers coming in as Treasurer, to a person that we hired, brought in recently to head supply chain who's got a wealth of experience as VP of supply chain in many companies from pharma to telecom, to the individual we've got running our continuous improvement in process excellence, Lean Six Sigma, to a new head of HR. In each of these cases, we have, I believe, enhanced our bench strength that gives us the ability to look at succession in a different way for a lot of positions. So I had the luxury of never being able to hold a job for about more than 18 months because I just kept getting moved to different things. And the result was I learned a lot about a lot of different pieces. That makes an executive much more effective, I think, particularly at the senior level. So to have people that have that broad-based experience, for Walter that have operated in the competitive world and now operate in the regulated world, that gives great exposure and experience to both of those markets which are different. So anytime we have the opportunity to enhance and strengthen our bench, I'm all for it.

And our next question comes from the line of Andrew Weisel from Macquarie Capital.

Just one question on behalf of Angie Storozynski. Regarding the flow through tax accounting for repair cost in Pennsylvania, why haven't you changed your tax accounting for that?

Thanks. Let me -- if I could just step back and give a little history on this. Let me start with the fact that we adopted this in 2008 on a system-wide, total company-wide basis. So we have had and will continue to have the cash benefit of this since 2008.

And really that goes back to 2005, right? Because...

Right, right. To the extent we could identify any of those generated losses to prior years, we were able to do that. We have created out of this, plus other things that have happened over the years such as bonus depreciation, we have an NOL on our books of about $1 billion. And our goal is around maximizing cash. So what we wanted to do, my run to the normalization is really match when the benefit is given to our customer with when we actually receive the benefit on our taxes. And because we have NOLs, most of that benefit will be in the future, and that's when we are matching it with when we give the benefit to our customer.

Let me add just one thing. If you think about -- the way I look at it, obviously, I weren't around, when they had the foresight to take this action as early as they did, so we've picked up the benefit of this for our customers for now really going back to 2005, so 8 years. If you think about it, when you flow through something, yes, it flows through your income statement but it also flows through the rate-making treatment for that year. When you normalize it, it goes over time to the shareholder and to the customer, so it links the 2. For us, given that NOL position, if we flowed through, yes, you may get a bump in earnings in 1 year, but then you're going to reduce in the following year when you have the rate case occur. And for us, we operate in 16 states having a policy that works across all states, has worked well. We'll always take a look at new approaches. But what doesn't sound very attractive to me is to give the cash back to customers when we can't get the cash from the IRS for another 10 years because we've got the NOL carryforwards that are already keeping us from being a cash tax payer except for AMT. So for me, that's the real issue. If we were in a different tax position and didn't have the benefit of that NOL position, I may have a different approach to it.

I'd also add, you can see the benefit of our doing the repairs and maintenance in our cash flow, it continues to grow stronger every year. And that's important to us as a company. It's important to our customers because it allows us to invest more in the infrastructure. It's important to our shareholders and customers in the sense of it's very low-cost financing.

Well, and it's what keeps us from having to issue other instrument that would be dilutive to your earnings.

And our next question comes from the line of Leslie Rich from JPMorgan.

I wondered if you could go into a bit more detail on the New Jersey DSIC spending. I think you said it was $220 million of spending, and I'm just wondering over what period of time and how that actually rolls through your rates in terms of the timing of the true-ups and things.

Yes, let me ask Walter to answer.

Yes. In our foundational filing, we said we'd spend up to $220 million, that gets us to the 5% of revenue cap that we have. And that's over and above the $20 million each year of base spending. So that $220 million, we'll invest, and every 6 months, we'll do a filing, and then the commission wants 60 days to look at it, and then allow us to put it on the bills.

And that's over 3 years.

The $220 million is over...

That's over 3 years, that's correct.

And I will tell you, we are looking at whether some of that should be advanced into a tighter period but it will be $220 million over no more than 3 years.

And then you -- I'm sorry, could you go through the timing of how that actually rolls through rate?

Sure, well, what happens is you file a filing with the commission, so similar to New Jersey where -- to Pennsylvania where you have a surcharge on the bill, you would have a surcharge on the bill for every 6 months for your filing and what you're authorized to spend and approved to spend. And then when you file your rate case, that surcharge rolls up into the normal rates.

And our next question comes from the line of Michael Lapides from Goldman Sachs.

Subbing in for Neil a little bit right now. Real quick, just a question on the dividend. How are you thinking -- I know you've kind of talked about the dividend increase, but how are you thinking about long-term dividend payout ratio policies? And can you put that in conjunction with your view on kind of credit metrics, target credit ratings and how you're thinking about managing capital overall over a multiyear period?

Let me address the dividends and have Ellen address that relative to the credit metrics. From the dividend side, our philosophy and belief is that -- because it's always a trade-off between what are you -- how you can invest that cash and how you can return that cash and the balance between the 2, is that we have targeted a payout ratio in the 50% to 60% range and to have the dividend grow at something close to what our rate of increase in earnings per share is. If you look at the early years after the company came back into the public markets, the dividend probably lagged a little bit. And so we took a step of an additional increase last year. We're now frankly a little below the 50% payout ratio and the yield has gone down as our stock has been bid up. We view that positively but we also will look at that long-term philosophy of paying 50% to 60% relative to how we go about dividend decisions in 2013 and forward.

A couple of things to note. Our cash flow continues to get much stronger. That has helped contribute to covering our capital and also our dividend. Our shareholder base looks at a combination of both growth in the stock and growth in the dividend, and we'll continue to look at dividend growth in terms of the right balance for our shareholders, as well as for the company so that we can reinvest that money back into the business. I'd also like to add that because of the strong cash flow that we've had and our known dividend policy, both rating agencies have put us on positive outlook. So we continue to see the benefit of our focus around this area.

And just to reinforce what Ellen said, our focus there is on cash, not cap structure. It's not that we don't look at cap structure, we do, but it used to be that you had to really focus on cap structure and think about getting to a 50-50 or what have you to be in the BBB+ or to move up into the A category. I think the rating agencies in one sense are more focused and smarter about what they really ought to be looking at is cash flow and the security of that cash flow, while you have boundaries around the cap structure that probably aren't as tight as they were before. So we're not focused on thickening the equity ratio for the sole purpose of getting an increase in rate. It's just that there's just not value there. But all the things we're doing to drive cash flow improvement, those will have the same impact, we believe, with the rating agencies.

And if I could also add, just our equity ratio continues to strengthen based upon the strength of our earnings. So as of year end, we're a little bit above 44% equity where we started much lower 3 years ago.

Yes. I think there used to be some analysts who are always nervous that we're going to issue equity to thicken the equity ratio, and that's just not -- we see no need to do that.

[Operator Instructions] Our next question comes from the line of Gerry Sweeney from Boenning.

[Audio Gap] on your retirement. A quick question for you, Jeff. Obviously, with the hiring of Susan Story, she's got a lot of services experience, and you've talked about in the past always looking for some regulated-like programs. Are we going to see a little bit more additional focus in coming years on this, and maybe to rephrase it or to put a different way, what's your vision and strategy for this, the market-based opportunities? How is that going to develop and I sense there's stuff percolating under the surface, but I wanted to see what your thoughts were.

Relative to our market-based businesses, it's a small but important and growing part of our business. We demonstrated 16% increase year-over-year to '12, and I think it was higher than that in '11 to '12 -- I mean '10 to '11. So it's an important part of the business but it's not going to grow to be 30% of the business. It would have to grow exceptionally rapidly to just double its impact on our bottom line. We're focused on red light kinds of things. So certainly the businesses that we're in, which include the military services, the homeowner services, a revamped contract services group as we've talked about how we are not going to participate in the old traditional kinds of short-term based contract services groups, plus doing more frankly on the waste management side. As we expand in wastewater, we see more opportunities in solid waste management, and I don't mean trash, I mean the solid that come from wastewater, as well as reuse, which is effectively using the liquids that come from wastewater. So those we view -- I think about it in terms of logical business line extensions. At the same time, one of the things that we went out and said very early on was we're going to make sure that we get very good inside before we ever try to take anything outside. Because otherwise, it's a great recipe to get bad bigger -- bigger bad, and not get better. And so as we've increased, for example, our supply chain capability, is that something that we could also bring to the benefit of customers that are utilities, municipal utilities, that don't have access to the things we do, does it open other doors for us? Those are things that we'll explore, but I wouldn't -- I don't expect there to be any dramatic change in our risk profile, in the way that we think about the balance of our Regulated Business versus our competitive business. But do expect that, that focus on excellence will give us -- will open doors for what I'll call business line extensions, where you have adjacent opportunities rather than completely new opportunities.

Okay. And any comments on the revamped contract business? Obviously, there's always talk about 50,000-plus water systems in the U.S. There's pension issues, there's health care issues, in terms of payment of liabilities. Another thing that's sort of percolating under the surface, you see it now in town, thoughts on how that's developing?

I think from day 1, or at least when I came, I kind of expressed the sentiment that a number of my senior level cohorts here had, which is this is a slow market to develop. It reminded me of the old fuel cell issue, that fuel cells will be here in 5 years, but it's always another 5 years. But I do believe that it's changed some because of the persistency -- the persistence of the financial issue. And whether it's driven by pension, whether it's just driven by the lack of revolving fund access from the federal government, the shrinking of that pot, the almost complete dearth of grants from the federal government, and states being in the same situation, I think communities are having to face a different set of challenges. And if they're interested in having someone like us operate their systems and be a part of their community, we're going to be very interested in doing that, whether we do that under a acquisition, which is generally a preference on our side because it fits with what we do well, or it's done under a longer-term contract, we're willing to look at that. So I think there are more cracks. I mean, even in last year, we acquired some municipal systems. I expect that, that will happen this year. And so I think we'll see more, instead of the private tuck-ins, we'll see a little more on the municipal side. But it's still not going to be farm gates get opened.

Sure. I mean from my perspective, I would look at it as an incremental growth avenue, 1%, 2% in a good year, or something like that.

Absolutely.

And our next question comes from the line of Jonathan Reeder from Wells Fargo.

Ellen, congrats on the upcoming retirement. I am truly jealous but you've done some great work, since [indiscernible] you came back to the public market in 2008, so it's well deserved.

Well, thank you, and I also want to thank you and everyone on the phone for their continued support for American Water. It's a great company.

Most of my questions have been asked already this morning but, Jeff, are you targeting any sort of improvement in the O&M ratio in 2013? I know you have the 2015 goal that you said you may even hit 2 years early, which would be by the end of this year. But do you have any sort of kind of internal target that we might want to build into the model?

Well, until you said the last phrase, it was a one-word answer. And so there's 2, the answer is yes, but no, I'm not going to tell you. Well, I don't mean to be funny or flip about it, but we do obviously have a number of targets that we focus on internally. They're not, they all -- they have caveats and they've got ties, and so it gets too complicated to try to explain all of those to the external market. But rest assured, we do have targets, and I feel good about the progress we'll continue to make on that front. And that we will beat the 40% by the end of '15 by 1 or 2 years.

Okay. And then I don't know if you can talk about the usage that you saw in 2012 absent the weather, was it similar to what you were forecasting going into the year, which I think was a decline of 0.7% to 0.8% on the residential side?

Historically, what we've seen in terms of decline is about 1.5% to 2.5%. It's difficult to pull that out in any time frame, but in the off months, we do continue to see some decline.

Although it is -- we may see some leveling of that.

Okay. So your expectation for 2013?

It builds into it.

It builds into the '13 number.

And I show no further questions in the queue at this time. I'd like to turn it back to management for any closing remarks.

Well, let me just thank you all for joining us today. I want to thank Ellen again for everything that she's done for the company. And I'm going to give her the last word.

All right. With that, this is a first. I just, again, I want to thank each and every one of you who are listening to this call for your continued support of American Water, for your in-depth questions -- they've kept us on our toes -- and your continuing to push us as we become each year a better and better company, so thank you.

Ladies and gentlemen, this concludes the American Water Fourth Quarter 2012 Results Conference Call. We would like to thank you for your participation, and you may now disconnect.