Good morning, and welcome to American Water's Year-End 2013 Earnings Conference Call. As a reminder, this call is being recorded and also has a webcast with accompanying slide presentation through the company's website at www.amwater.com. Following the earnings call, an audio archive of the call will be available through to the 6th of March 2014, by dialing (303) 590-3030 for U.S. and international callers. The access code for the replay is 4662798. The online archive of the webcast will be available through to the 28th of March 2014, by accessing the Investor Relations page of the company's website located at www.amwater.com. I would now like to introduce your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may now begin.

Thank you. Good morning, everyone, and thank you for joining us for today's 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. 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 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. And now I would like to turn the call over to American Water's President and CEO, Jeff Sterba.

Thanks, Ed, and good morning to you all, and appreciate you joining us this morning. Before going into the main topic for our call today, which is to discuss 2013 results, it could be useful to provide you some summary information on the Freedom Industries chemical spill into the Elk River in West Virginia. So let me ask Walter Lynch here, President of Regulated Operations, to provide a brief summary of what happened, how West Virginia American Water responded and the current state of the system. Walter?

Okay. Thank you, Jeff, and good morning, everyone. As most of you have found this event over the last month, I'm not going to go into the timeline and details of the Freedom Industries spill. I'd rather want to provide you a brief overview, as Jeff said, of how West Virginia American Water responded and where we currently stand. And as you may know, this is a very complex system with over 175 pressure zones, while the average water system has about 2 to 5 different zones. We're extremely proud of how our people responded in a difficult situation. Throughout the period following the Freedom spill where federal and state emergency declarations were in effect, we provided our approximately 95,000 customers or about 300,000 people in 9 counties with water for basic sanitation and fire protection. And this was done while dealing with the impacts of the spill. Being able to provide this critical services our customers was one of the reasons that it was necessary to keep the plant up and running during the event. On January 9, the date of the Freedom Industries chemical spill, we consulted with the West Virginia Bureau for Public Health, and together, reached a joint decision to issue a Do Not Use order for drinking, cooking or washing to our customers in the Kanawha Valley system, again, affecting approximately 95,000 customers or about 300,000 people. During this time, West Virginia American Water also consulted with state and local public health officials and the Centers for Disease Control. This quickly led to an interagency team being formed in West Virginia, comprised of West Virginia American Water employees, National Guard members and representatives from the West Virginia Bureau for Public Health, the Department of Environmental Protection and Kanawha County officials. Now internally in American Water,…

The Freedom Industries chemical spill, as you all know, is a serious event, and it placed the water supply to almost 300,000 people at risk. And as Walter said, we're very proud of our folks at the West Virginia American Water and how they responded to help ensure fire protection and basic sanitation, as well as bottled and bulk water for consumption starting the next morning and through the recovery period. This incident should be used as a catalyst for public policy discussion about protecting source waters from contamination from fixed and mobile sites. As a water utility, we take our responsibilities to meet or exceed all regulations very seriously, and we're proud of our record doing such. It is not our role to establish those regulations. That belongs to governmental agencies. But we do hope that constructive engagement can occur on increased tank safety, provision of greater information to water utilities on tank contents and stronger communication linkages between regulators, tank operators and water utilities. As you may know, there's over 100 known contaminants that are regulated and that we protect customers from, and about the same number of what are called emerging contaminants, which are being evaluated and we are actively studying. But there are also about 85,000 unregulated chemicals in the EPA's toxic inventory and hundreds of thousands of other compounds not registered, including ones stored in fixed and mobile tanks like the MCHM and PPH involved in the Freedom Industries chemical spill. Water systems cannot detect, much less protect, customers from all of these. That protection must come from ensuring such leaks, if they ever do occur, cannot enter source water. So with that as a kind of a brief summary, let's turn to our 2013 year-end results. And if you go to Slide 6, you…

Thank you, Jeff, and good morning to you all. It's a pleasure to be here with you today to review the year-end 2013 results. Jeff has already reviewed many of the key highlights. So I'll just now take a few minutes discuss the drivers of our 2013 results in more detail. Turning to Slide 10. As Jeff mentioned, our 2013 results reflect the wetter, cooler weather conditions in 2013 as contrasted to the hot and dry weather we had in 2012. Despite the unfavorable weather conditions, 2013 was another year of solid financial results, with increasing revenues, as well as continued progress in operating efficiency. For the year ended December 31, 2013, we reported operating revenues of just over $2.9 billion, which is approximately $25 million higher than in 2012. The increase was mainly a result of rate case resolutions and infrastructure mechanisms in place, which allow more timely recovery of capital investment in infrastructure. As we mentioned previously, this was partially offset by decreased consumption, which was significantly driven by the wet, cool weather of the year. This past year, we recorded net income from continuing operations of $369.3 million or diluted earnings per share from continuing operations of $2.06. This compares with net income from continuing operations of a little over $374 million or diluted EPS from continuing operations of $2.11 in 2012. As Jeff mentioned previously, net income for 2013 included a charge recorded in the fourth quarter for the execution of a debt tender offer that we had announced in September of 2013 and that we closed on in October. Excluding this $24.8 million or $0.14 loss per diluted share for the tender, our adjusted EPS for 2013 was $2.20. The main drivers for our growth in 2013 were increased revenues due to rate increases, including…

Thank you much, Susan. On Slide 17, you'll recognize the growth triangle that we introduced at the Analyst Day event at December to give you a sense of the components of our growth and their approximate size. The triangle components, as we discussed then, will change over time, and what you see here is our projected 2014 earnings that achieved our estimated guidance of $2.35 to $2.45 per share, excluding the impact of the Freedom Industries spill. The impact of that spill, as we talked about, is estimated to be about $0.02 per share through February 26 of this year. So this is roughly a 7% to 10% growth rate from 2013 results. We also are reiterating our comfort level with the guided 7% to 10% long-term earnings per share growth rate. As we've done more detail in our planning and progress the way we have, we can see the pathway much more clearly about what where we'll be able to generate that kind of growth, provide better service our customers at an average annual rate increase across all of our states of about or below 2% per year. Slide 18 was also in the Analyst Day presentation and provides the identification of specific things that you can hold us accountable for achieving during the year and that we will report progress on. At this early date in the year, all things listed there are moving forward on schedule. Last, for those of you who may not yet have talked with him let me take the opportunity to introduce Durgesh Chopra, who is now working with Ed in Investor Relations. Durgesh came out of our New Jersey Rates group, and I know he will do a great job working with all of you over the next set of years. And so with that, we'll be happy to take any questions you may have.

[Operator Instructions] The first question comes from Shivangi Tipnis from Global Hunter Securities.

My first question is there was nice growth for your industrial volume in Q4 sequentially, as well as year-over-year. What are the drivers for the industrial volume growth in quarter 4? And do we expect to see kind of the same positive growth even in 2014?

I'm sorry. We're having real trouble hearing your question.

Okay. So there was a nice growth in your industrial volumes in Q4 sequentially, as well as year-over-year. So what are the drivers for the volume growth in industrial? And do we expect to see the trend ahead in 2014 as well?

So if I understand your question correctly, you said the quarter-over-quarter fourth quarter, the growth, what was driving the growth and do we expect to see that to continue, is that what you're asking?

Yes, I mean, I'm talking about the industrial volume growth.

Yes. So what happened with the industrial volume, I mentioned the customer information system implementation. We held several of the more complex sales, and it impacted industrial and the public sales more than it did commercial and residential. So what we do is if you look at our 10-K, while we looked at billed and unbilled revenue on water volume, we just report billed water volume. So as we were holding bills, we had somewhat of a delay in terms of the amount of industrial volumes that we were able to bill. So that's where you might see a little bit of a disconnect. So we do expect that to normalize through the year. We have gone through those sales that are complex, ensured that the new system was generating accurate bills, and we've released the majority of those. Now we had 2 waves of implementation. The first wave was in May. Those bills, we released those, we're on the normal billing cycle. Our second wave was on October 20. That's when we implemented it. So after the first quarter, we should see more normalization there.

Okay, okay, that sounds helpful. So my second question is on the O&M side. You did a great job lowering it down some 40.1% to 38.7%, the expense ratio. So I mean, the run rate of 35% is already -- which is expected on 2015, was already achieved. So do we expect to see kind of like a gradual slowdown in the run rate going ahead? Or if you look at the same run rate, then I think we can expect you to achieve the 35% run rate even before 2018? So can you provide some color here?

Yes. I guess the way to answer that is we have established the goal of 35% by 2018. We're not driven by that metric so much as by doing the right thing in managing our cost structure. That may enable us to get there earlier, but we certainly wouldn't forecast that at this stage. As you move up the tree collecting fruit, it does become a little more challenged and difficult, but that's why our whole process is around continuous improvement and process excellence and the reason why we are trying to engage as many of our folks as possible so that this becomes self-sustaining. So yes, I think we've had great progress. I think when I came here it was about almost 48%. So we've cut it actually by 10 basis -- 10 percentage points or over 20%, almost 25%. But going forward, we probably won't see it go down at nearly the rate that it has over the last 5 years. But we're still going to stay focused on it. Walter, you've got anything you want to add?

So we're addressing is, as we know, on multiple fronts. And Jeff, you talked about the yellow belt programs and the savings they're driving there. But we continue to look at our costs. The biggest costs we have are power, chemicals, fuel. And we continue to address those. And one with labor cost. So as you said, we're geared towards 2018 at 35%, and we're working right now to get there.

So my next question would be in case you get this 35% quite earlier to 2018, so what would be -- what would you say would be a sustainable ratio? I mean, you would definitely not keep looking at lowering the ratio in terms of cost. So what would be a ratio that makes you happy and you would say, "This is the ratio that I would like to maintain"?

One of the things that you get when you really go through all the data that we, from the management side, look at, you see that there are differences by state. So for example, California has a higher ratio just by operating in California because, well, it's an extended process to operate in California and so every utility that operates there has higher ratios. We happen to be very good in California, and so we have a lower ratio than others. But it's higher than it is in many other states. So a lot of what is the right ratio will depend on where our growth occurs. So if we have -- if we see growth occurring in some states that are -- have higher cost structures because of the way they operate or their regulatory approach, then we think about it in that way. We look at the 35% on the basis of where we expect to see growth but also in the basis of our current business. So I don't think you can say here's the optimal percentage.

But Shivangi, I think I get your point though. There is a point at which it's very difficult because remember, when we talk about cost efficiencies, these are long-term efforts to take cost out of the business. These aren't quarter-to-quarter, year-to-year cuts. So as we look at more automation, more innovation, there are levels that you could sustain. But you're right, at some point, you look and say, "Are we doing all we can do?" But then there's usually a step change in something we can do in technology that maybe will help us further, but we don't know what that is.

Okay, okay. And maybe my last question, and then I'll get back in line. So the estimated costs that you're expecting out of the Freedom chemical spill would be about $0.02 at this point in time. So I hope, as Walter mentioned, you have been doing a smooth execution, and it was really great. But then are there any headwinds that can still drive the costs ahead? And when we get a clear understanding if it's not just $0.02 and maybe a little more over $0.02?

Susan can maybe give you a little more detail about what's included in the $0.02 in the costs we have incurred so far. Going forward, it's really dependent on how the legal process goes because that's really the thing that will continue for some period of time. And that's really hard to estimates. We think a lot of the claims that have been made are easily dismissible. Other claims will have -- may have to go a little further before we can get free from them. But that's what's probably the biggest unknown is how the legal process will go forward. So for example, we recently filed on some of the claims to have them move into federal court. We won't know whether that's successful for a while because people will try to get them -- may try to get them back into the state court. Those kind of things can help drive what those legal costs will be. So that's why there's uncertainty around that.

But you are correct, this is a first quarter event. And when then we look at the charge for the credit that we mentioned earlier, when you look at the extra production costs, the labor, you look at O&M, you look at the cost of the tankers, bottled water, the legal expenses, the $0.02 that we reported reflects the expenses through February 26. So going forward, as Jeff said, we see the predominant being mostly the legal. Now because it's a first quarter event, we will have more information at the first quarter earnings call where we should be able to be a little more specific.

The next question comes from Neil Mehta from Goldman Sachs.

I have a couple of easy questions here. So at the Analyst Day, you outlined several wastewater acquisition targets. I just want to get a status update in terms of how that process has fared.

Well, I think we're moving forward on a number of fronts in acquisitions and discussions and negotiations, which obviously we can't talk about who or where they are, both in the wastewater and water arenas. And as we get to a point of any of those being signed, we will obviously let you know. So that's probably about all I could say, Neil, at this stage.

Except for, as you know, we really benefit the following year from the acquisitions we made in previous year. We mentioned in our acquisition increase revenue a large part of that was from New York that we had the full year and not just 8 months. So for '14, we'll be benefiting from acquisitions we made in '13.

All right, fair enough. And as you think about your dividend, you've got a payout that's below your long-term target, and you've got above-average EPS growth. So can you talk through your dividend growth expectations as you look at '14 but then also beyond that?

Well, yes, Neil, as we've talked about before, we have a series of criteria that have been what we've established as our dividend philosophy, which is the target of 50% to 60% payout ratio and have a growth rate in dividends that's more in line with our earnings growth rates. So we are still -- we are slightly below the 50% to 60%. So in one sense, that gives us some flexibility. And we still believe in the long-term growth rate of 7% to 10%. That's really kind of the guidance that we have relative to dividends. Obviously, we just announced the last one. The next one is, if you follow our track record, is typically the one where we have announced an increase. So we'll let you know what that will be when we announce it.

Okay. And in California, the Monterey Peninsula, you've got a couple of big projects out there. Can you give us a status update on those?

Yes. Let me ask Walter to do that.

Okay. First, on the dam, we're working through our timeline of the dam, and we expect to have that torn down and the river rerouted sometime in 2015, according to our schedule. So that's progressing on time. The team has done a great job out there. Also, on the Monterey Peninsula Water Supply Project, we're working through the issues out there, and we're working cooperatively with the municipalities and with the commission. And we're working with the commission to look at the environmental impact report, which we expect now in the first quarter of 2015, and things are going according to plan.

The next question comes from Mike Gaugler from Brean Capital.

Jeff, you spoke about total contaminants, those you test for, those EPA has under consideration and some others. Given that it wouldn't be cost effective to test for all contaminants as a company, has AWK ever attempted or proposed to regulators to expand testing beyond state, federal guidelines to encompass all contaminants in a region within a specific radius of a watershed? On the surface, it would seem possible by scanning MS Data Sheets in the region, and my thought behind the question is that would appear to be a win-win scenario, greater public safety and also an additional avenue for CapEx investment.

Very good question, Mike. Let me raise a couple of points with you. There are -- for example, on the Ohio River, there is, as a result of the, I think it was the Ashland spill back in the '80s, there has been a network of testing. And some of it's automated. Some of it's still not automated. But a network of testing over, I think it was over 200 miles of the Ohio River, where each of the entities plus some federal monitoring that's being done is checking. But now it is not checking all elements. Part of the problem is that even if you have the sheets, every -- what they put in these tanks changes. And so we even once we can get to a point of having the required disclosures of what are in these tanks, then it's also a matter of keeping up with any changes that occur. Today, the -- take the tank in West Virginia. When I was meeting with the governor of West Virginia and also with the former governor who's now the senator, Manchin, one of the things that they said is, "Look, this tank, this is a material that was deemed nonhazardous. They don't even have to tell us what's in that tank." So the first thing we got to do is get more transparency on what the heck is in the tank. Then it's a question of, okay, how, for all of these other compounds, can you develop or can you develop readily testing mechanism. And you also have to establish a standard. So take for example arsenic or mercury. We know those are contaminants, but they're naturally occurring. And so the regulations say you can't have more than x in water. It doesn't say 0 because frankly, you can't -- it's been naturally occurring for thousands of years. But they are concerned about it going above a certain level because there's been epidemiological study to determine what's the level at which it can create harm for people. So the first thing you've got into these 86,000 toxic chemicals and all the others is figure out what the heck a standard is. So I think we are -- there's quite a ways to go, Mike, in -- before we even can think about testing. That's because you don't have a standard and you don't even know what all the compounds are. I agree with your point that there needs to be examination of what other kinds of testing can be done for broad-based contaminants that you know may be upstream, but it's a bit more complicated just because we don't even have standards for most of these chemicals.

The next question comes from Andrew Weisel from Macquarie Capital.

I'm filling in for Angie. The only question we have is wondering about the warranty business you have on water pipes given the deep freeze that's winter in so many of your states. Have you seen any increase in the activity in terms of people either requesting to add warranties in protection or in terms of actual claims filed?

This is Susan, Andrew. We have -- when we talk about the warranties, we offer water sewer and in-home. We have seen an increase in, in-home, not so much on the water-sewer because they're buried deeper in the ground. But the in-home is such a small part of our warranty business. It may be 6% of the Homeowner Services revenue. So really, yes, we've seen an increased incident in in-home, not necessarily the others, so we have been able to manage through that. And in terms of offering it again, we have a robust disciplined process before we ever bring on a new contract. We have a system of contractors. We have a master contractor who coordinates that. We go out to ensure before we institute a contract that there's not preexisting conditions. We also look for any indication that there could be, if a week later, there's a problem. So yes, we saw an increase in it, and it's one small part of the business. We've been able to manage it, but we have a robust process to ensure that when we do take on new contracts, that they are actuarially sound.

The next question comes from Heike Doerr from Robert W. Baird. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: Wondering if we could talk about New Jersey and if there's any update on pending CTA decision?

It is still in process. I think New Jersey has had a number of other things occurring that may have taken a little bit of a focus off this. We do continue to expect that it will occur, that we'll get some clarification out of the commission. We don't have control of the timeline. And again, at this stage, Heike, we don't have a good sense. I would hope that it will be in the next 3 months. Heike M. Doerr - Robert W. Baird & Co. Incorporated, Research Division: And assuming that we would get some kind of a favorable ruling that makes the way that the commission treats this a little bit is more fair, is that something that you would recognize in the next rate case cycle? Or what would be the process once we have a decision?

It will be recognized in the next rate case cycle, absolutely.

The next question comes from Jonathan Reeder from Wells Fargo.

Susan, if I could. Would you, I guess, talk about some of those regulated O&M expenses of the drivers? It sounded like 2 of the increases, there was a lot of unsustainable components to it that we'll see probably drop off in 2014. But more importantly, the 2 accounts that dropped by wider margin and employee-related costs and the maintenance, materials and supplies, how sustainable are those decreases going forward?

First of all, in the increase, you're right, the 2 big increase areas were the billing and the uncollectible. And the majority of that was due to the implementation of the new system, which as of '13, we stabilized ERP. We see '14 as the year to stabilize even further CIS and EAM. Also, the other increase, as you noted, that was temporary labor that we used and leveraging efficiencies of ERP. In terms of the decreases, we continue to look at preventative maintenance. We continue in terms of the implementation of automation, for example, across our system, looking at our -- the fastest and smartest technology for communication protocol of ensuring that we can commoditize the purchase of meters. We can tie it into reading pressure flows, et cetera. So in terms of decreases, we're working on all of those. Let me back up a little bit though. Remember the goal, the chart we showed at Investor Day. It's to hold O&M as flat as we can, and in order to offset the increased depreciation and amortization, which was $26.2 million incrementally higher in '13 and '12, and because we're investing, the capital significantly in '14 will also increase, we're having to look at all of the O&M expenses. So if I look at each category, there are certain things we can do in each category, but all of our employees and our teams have the goal of trying to keep O&M flat so that we can have experiences like I described in Indiana in the rate case. And we have the implementation of CIS, EAM. We have not seen the efficiencies yet from that because the implementation was in '13. This year, in '14, we will be looking to leverage those systems the way we are looking to leverage ERP and start seeing some of those over the next 1, 2, 3, 4 and 5 years. So we're just at the beginning of that process.

Okay. And so the overall goal was to just hold O&M flat and I guess grow the revenue side, and that's what's going to cause the decrease in the efficiency ratio?

Yes.

Okay. And then just a point of clarity, the 7% to 10% growth rate, is that now off of the $2.25 weather-adjusted 2013?

No, the wedge starts at $1.99, and the wedge will $1.99 for the rest of this year also. And next year and in '16.

Got you. Anticipating future questions. I like it. And then lastly, congrats on getting that military base contract. Do you know what the timing might be on the next determination from the military? Is there a few more decisions that we might see in 2014? Or do you have any clarity there?

Well, it's the last question really said it clearly. Do we have any clarity? The answer is no. We never really know when they're going to go forward. We know what are typical schedules, and they seem to be moving forward on the more typical schedule now. And because we've said we have about 6 or so bids that are currently outstanding, we would hope to see 1 or 2 of those come out as decision this year. On Fort Hill, it's an 8-month transition, which is a pretty quick transition. And it has already started, so we'll start to see the revenues from that transaction this year. And we would hope to see a couple more decisions this year. But if I can't tell you, we have intelligence that, that's going to occur.

The final question comes from Steven Fleishman from Wolfe Research.

Just on the West Virginia, Jeff, could you give us a sense of do you expect to see additional costs throughout this year from that? Or you're just not sure?

Well, Steve, I think as Susan said, the lion's share of our system-related costs are a first quarter occurrence. And a lot of that, I think, has already been incurred in January and February in terms of chemicals, overtime, bottled water, tankers, all the things that go along with -- plus the revenue credits that we're providing customers. I think beyond that, beyond the first quarter, frankly, it would largely be legal costs associated with working through the suits that have been filed that name us, working with our customers because we're going to aggressively work to have them not just understand but get comfortable with the water. One of the learnings out of this is -- and it's different than a lot of other chemicals. In this instance, it isn't what is -- how much can someone drink without putting themselves at risk. It really is can they smell it. And so what we're finding is there's so much lower concentration that someone can smell way below 200x, 300x below what's been determined as the acceptable level by the CDC. And that's a different challenge, and that's both in people's homes, as well as within our system. So we're contributed to do flushing, and you have that cost that will push in water, treated water, through systems. But I'd say the lion's share of operating cost impacts, the onetime operating cost impacts, will really just be in the first quarter.

Okay. And just any, I mean, any bigger picture kind of thought in terms of highlighting more of the -- obviously, this is not directly related to something with the water system, but just did this kind of refocus on the story you push about needing to replace and upgrade the system that we have overall?

I think it absolutely does. I mean, one of the challenges that we had in West Virginia, Steve, when it occurred is, if you'll remember, this was right after the polar vortex, so we had that enormously cold period and then warm. And when happens, you get line breaks. We had a lot of line breaks in our West Virginia system, which is an old system that's under a lot of duress because of the elevation changes within the system. And so pipes -- what we find is the pipes in West Virginia, frankly, don't last as long as they do elsewhere because of the stress that's placed on them. At the same time, our West Virginia customers have higher bills than most of our other systems because of density of population and the -- which is very low, and the cost associated with operating such a complex system. That is probably the most -- well, it is the most complex system we have anywhere in our 30 states, regulated and unregulated. So I think one of the things that does speak to is the costs that can be incurred with aged infrastructure. On the water plant side, our folks have done a great job operating that plant. We're going to continue to look at ways to help improve that plant. One of the issues that's been raised is whether there should be a second intake off another water source. If we look about that across our systems, some 20%, 25% of our systems, water treatment systems only have a single intake. That's something that has to be looked at in the context of what's the cost. So I think what it does is it opens the door for good conversation with all of our regulators about the trade-off between cost and the greater levels of investments, how can we manage that so that we don't push rates up too high. But we recognize that these systems are old, and that's really separate from the issue of how do we protect against the, hopefully, not bad actors like I think we had in this situation but potential contaminants dumped into a river or other water body.

There are no further questions. I'd now like to hand back to the management team. Thank you.

Well, let me thank you all for joining us today, and we look forward to talking with you at our next quarterly call. We welcome Durgesh into our -- these quarterly calls, and we look forward to talking to you all down the road. Bye-bye.