Good morning, and welcome to American Water's Second Quarter 2014 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with 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 August 15, 2014, by dialing 1 (412) 317-0088 for U.S. and international callers. The access code for replay is 10049534. The online archive of the webcast will be available through September 7, 2014, 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.

Thank you, and 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. 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 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. And such risk factors are set forth in the company's SEC filings. With that, now I'd like to turn the call over to American Water's President and CEO, Susan Story.

Thanks, Ed. Good morning to everyone and thanks for joining us on this call. As you know, this is the first earnings call with our new leadership team in place. I'm joined today by Linda Sullivan, our Senior VP and CFO, who will be going over the second quarter financials; and Walter Lynch, our President and COO of Regulated Operations, who will give us updates on key matters in our Regulated Business. We're very fortunate to have such a talented management team, and I'm also glad to report that through the hard work of all of our employees at American Water, we've once again delivered a quarter of strong performance. Before I go any further on our results for the quarter, I do want to touch on 2 recent events. It's not often that water makes national headlines, but it did twice last week. One event centered on the major water main break on the campus of UCLA, and the other event was an algae bloom that impacted the drinking water of over 400,000 people in Toledo, Ohio. While neither event impacted American Water directly, both of these events highlight the importance of water supply sources and infrastructure. For many years, American Water and folks throughout our water industry had been raising the challenges that our country faces when it comes to our water systems and supply. Later in the call, I'm going to mention several efforts that we've got underway at American Water so that we can find solutions to these challenges. It's our hope that in the near future, it will be the solutions that are making the headlines and not the problems. Last week's events show the risks in our industry, but they also open the door to increased collaboration among all sectors to improve our nation's…

Thanks, Susan. You mentioned weather, so we'll start there. We've mentioned in the past our geographic diversity mitigates the impact of regional weather. We saw that clearly in the second quarter. The map on Slide 10 provides the precipitation for the second quarter in the states where we operate, with our service areas indicated here as well. You'll note that this map does not include the West Coast, which is making the news with record drought. I'll get to that in a moment, but for now, I want to focus on the weather in the Northeast and Central states. As you know, Pennsylvania and New Jersey are our 2 largest states, and you can see while Pennsylvania had above normal precipitation for the quarter, a good part of New Jersey had normal precipitation, as well as parts of Missouri, which is also one of our larger states. This geographic diversity contributed to the second quarter not having a significant weather impact on our operations. Having said that, we've seen some cool and wet weather in July, specifically in our New Jersey service areas. We'll update you on any weather effects in the third quarter earnings call. On the next slide, let me start with an update on California. As we moved into summer and drought conditions continued across the state, California American issued a call for a 20% reduction in usage in accordance with the governor's emergency drought declaration. In June, we're able to report that our Sacramento District reduced usage by 23% compared to 2012 and 2013 levels. We thank our customers there for successfully conserving water. Also, I want to mention here that thanks to constructive regulatory treatment during this drought, we've been able to maintain revenue stability during a period of decreasing sales through the various regulatory…

Thank you, Walter, and good morning, everyone. I'm excited to be here, and I look forward to working with all of you. Let me now walk through the second quarter financial results in more detail. Turning to Slide 14, second quarter 2014 was yet another quarter of strong financial results with increasing revenues and continued progress on improving operating efficiency. For the 3 months ending June 30, 2014, we reported operating revenues of $759.2 million, which is a $35 million or about 5% higher than the second quarter of last year. Operating income rose to $253.8 million or about $12 million higher than the same period last year. We reported second quarter net income of $109.3 million or diluted earnings per share of $0.61. This compares to net income of $101.3 million or diluted EPS of $0.57 for second quarter of 2013. As Susan mentioned previously, included in the $0.61 is a $0.02 charge for the quarter related to the Freedom Industries chemical spill in West Virginia. Excluding this impact, our adjusted EPS for second quarter 2014 was $0.63 per share. We also paid a dividend of $0.31 per share during the quarter, which represents an approximate 11% increase over the $0.28 per share payment in the second quarter of 2013. For the 3 months ended June 30, 2014, we reported cash flow from operating activities of $205.7 million compared to $140.6 million in 2013 or a $65.1 million increase. This increase in cash flow from operations was primarily due to 3 things: first, stronger cash flow from core growth in the business; second, a decrease in pension and postretirement benefit contributions; and third, changes in working capital driven by higher cash collections this quarter, as earlier this year, we largely caught up on the delayed billings that resulted from…

Thanks, Linda. We'd like to conclude each of our earnings calls going forward by giving you expanded color on some of our initiatives and efforts outside of what we might typically cover in an earnings call. It's our hope that you'll find this information useful in understanding how we are moving forward as a company. Just let Ed know if you think it's helpful. This quarter, I want to speak very briefly in the topic of water energy and innovation. I spoke a little bit about innovation earlier. In the past, we briefly discussed the critical dependency between water and energy. In recent months, we've seen the level of national discussion on this topic increase dramatically, and we're excited about it. Why are we excited? Well first, we see it as a way to improve efficiencies in both water and energy usage and address key water challenges in energy production. Second, it plays to one of the strengths of our management team, which reflects a mix of seasoned water professionals and experienced professionals from the electricity and energy industry. The Department of Energy issued a report last month on the water-energy nexus. As we all know, water is essential for human survival, prosperity, and whether that's for drinking, sanitation, industrial use, irrigation or power generation. For example, for every gallon of gasoline that you put in your car, it took 13 gallons of water to produce it. Each shale well requires from 3 million to 7 million gallons of water in the hydraulic fracturing process. Thermal electric plants require substantial water for cooling, although the majority can be returned to its source. And in turn, electricity plays a critical role in producing, treating and delivering clean water. For example, about 4% of the electricity consumed in the United States is…

[Operator Instructions] The first question will come from Ryan Connors from Janney Montgomery Scott.

I wanted to talk about kind of rate strategy a little bit. I mean, obviously, we've seen a pretty big shift in where the top line gains are coming from, from base rates over to kind of DSIC and otherwise. And especially, I guess, that looks particularly acute in New Jersey. So I wonder if you could talk about your CapEx and rate strategy in New Jersey in particular, given that obviously, the recent peer rate cases suggest we're looking at lower returns on equity there going forward. You're leveraging DSIC to the extent you can, but that only goes so far. Can you just give us your thoughts on how you manage through the challenge of capital allocation going forward in New Jersey, given that the environment seems to have shifted in terms of ROEs?

Brian, it's Walter. Thanks for the question. What we're doing in New Jersey, as in other states, we're maximizing use of DSIC and other mechanisms. So that we continue to invest and addressing infrastructure challenges and we get recovery in the shortest period of time without going through a rate case. And as you know, our focus on cost, we've been able to keep our costs flat over a number of years. So the real focus for us is where do we invest and the timing of our investment. And we just think the DSIC mechanisms are the perfect mechanisms in each of the states, particularly New Jersey, to invest in our infrastructure.

And Brian, if I could add to that. This is Linda. So when we look at the DSIC mechanisms, they really provide us additional flexibility in terms of the timing of filing our rate cases. And in New Jersey in particular, we're also looking at, from the lower ROE issue, the impact of the consolidated tax adjustment. So if that were to be final, there'd be somewhat of an offset from that as well.

So one thing to kind of overall like what Walter and Linda said, Ryan, I think it's a great question for any utility in today's market, where we have interest rates continue to be pretty much artificially held low, is that through all of the alternative mechanisms we've worked so hard to get in the past few years, it provides us more flexibility and optionality and ensures that when we do go in for rate cases, we don't have the bigger rate increases or rate shocks.

Okay. And I mean, I guess, boiling that all down to kind of the target growth rate, so I guess you don't believe that having to achieve growth through alternative methods like DSIC will have a negative impact on your ability to meet the 7% to 10% kind of target range over the long term -- over the intermediate term, let's say.

No. In fact, our growth triangle we shared last year, we looked at the CapEx investment, and again, as Walter mentioned earlier, we look in all of our states. We look at where we need to invest. We look at the ROEs. We always provide a level of funding to ensure that we're able to provide the clean, safe, affordable and reliable service. And then we look at other capital that's a little more discretionary and where that goes. But also, when we look at that on top of the CapEx, you have the regulated acquisitions, you've got the market-based. So we have a diversified portfolio for growth, just as Walter said, we benefit from the geographic diversity we have with our states.

The next question will come from Dan Eggers of Crédit Suisse. Daniel L. Eggers - Crédit Suisse AG, Research Division: Listen, good job again on the improvement in the operating and efficiency ratios. Can you just maybe give your thoughts on what the trajectory of improvement looks like from here to '18 to get to your 35% goal? And are you now, as you've succeeded and moving in that pretty fast, are you reevaluating maybe where you could ultimately get to?

Well, Dan, if you looked at the O&M efficiency ratio as a straight line for improvement, that might be the case. But we've gone from 44.2% in 2010 to the 37.7% in the last 12 months. But really, the O&M efficiency ratio is more like an exponential curve as opposed to a linear line. And the further along that curve you get, the harder it is to make even smaller increments of change. So I don't think you can look into a straight line rate and think that, that's going to hold. We've been very successful. We have other opportunities, especially through automation and technology, but we stand to our stretch goal in 2018 of 35%. Daniel L. Eggers - Crédit Suisse AG, Research Division: Well, I could try at least.

And that was a night nice try, also. Daniel L. Eggers - Crédit Suisse AG, Research Division: How much -- if you flip around the other way, how much of the improvement in earned ROEs this year versus last is a function of efficiency gains relative to maybe kind of the regulatory relief and mechanisms helping to put some revenues back in the business?

We know the calculation is basically O&M over revenues. And you can look at our revenue growth and you can look at our expenses and know that we've made significant improvements on expense management. You all ask us frequently, "Well, do you think there's more to get?" And the fact is that as Linda mentioned earlier, we're just now stabilizing our SAP system, the implementation from last year. We see opportunities there, and the innovation and technologies I talk about, we think will provide us even more opportunities in the future. So we have done a lot of things. What we do in the future may be a little bit more of that, but also some new areas.

And I can say that our drive for efficiency throughout our business has really taken hold. We've got, as I said on prior calls, we have a number of yellow belts that are looking at improving processes and eliminating errors. We have a supply chain that's so engaged with the business on looking to reduce the materials that we purchase. And our entire team is really focused on driving our cost down because they understand the why. The why is so that we can continue to invest in our infrastructure and do so with minimizing our customer impact. So we've made great progress. And as Susan said, we're going to continue to make progress to get below the 35%. Daniel L. Eggers - Crédit Suisse AG, Research Division: And I guess just kind of one last question just to put in context your kind of -- from a weather expectation for the rest of this year. What conditions would you like to see in August and September to help you shore up the upper end of guidance range? And what is the risk as you look at the forecast today? Seemingly mild temperatures most places.

Well, what we'd like is hot and dry weather. But our business is based on normal weather. So as long as we have -- and it's hard to determine what normal weather is, but as long as we have normal weather, that's what we're looking for. Daniel L. Eggers - Crédit Suisse AG, Research Division: So a little more heat and a little less wet from here would be good?

Through at least December.

Yes.

Through at least December.

[Operator Instructions] The next question will come from Walter Liptak of Global Hunter.

I wanted to ask about the O&M expenses. And I understand that it's not going to be linear and all that. But I wonder, as you go work -- as you work with your ERP system and on projects, if you can better pinpoint the timing of any step change in expenses?

So let me start there. So as you implement an ERP system, it takes a little bit of time to go through stabilization and then optimizing the system and then being able to really drive the improvement and get the efficiency out of the system. We are seeing, this year, we implemented our ERP system in 2012. We're seeing that efficiency coming through. This year, we implemented in 2 phases the customer information system as well as our work management system in 2013. So we would expect to move through those same stages through time and begin to continuously drive improvements and optimization.

Okay. So it sounds like you got some projects that are going to start bearing some fruit as we get into next year.

Yes. I mean, the SAP, and also, as I mentioned, the NPXpress. Again, labor and power and chemicals are our largest cost drivers. So the more we can find ways to save on the power cost, which, by the way, just 3 years ago, our power costs were $110 million last year. For 2013, they were $94 million. So we're finding ways to reduce those large cost drivers, including the NPXpress also reduces the need for chemicals, that's up to 100% of the carbon additive. So and as Walter mentioned, the SAP system is allowing us much more visibility into inventory. For example, where we at one time could not see between state, what we had an inventory. Now we can do more inventory sharing, which is making us much more cost effective. Now those things, as Linda mentioned, don't happen overnight, but we see a steady building of the ability to do this. Some will be over the next year, some the next 2 to 3 years, but we see a path forward for continual improvement.

Okay, great. Sounds good. I wanted to ask an unrelated question, but going back to the DSIC. Can you help us review just on which states are -- have that mechanism in place and where we are with DSIC for some of the other states that you operate in?

Yes. We have DSIC in a number of states. But our top 5 states: New Jersey, Pennsylvania, Missouri, Illinois and Indiana all have DSIC. So again, a significant amount of our investment moves through those mechanisms to get recovery in the quickest amount of time.

Okay. And what does the pipeline look like for the rest of the states?

Well, we're always -- we look at several alternative mechanisms. We look at DSIC, we look at future test year. We're looking at mechanisms to address declining usage. So for all of our states, we're constantly evaluating the regulatory construct and which variations of these type of mechanisms could work best in every state. So we're always looking at all of our states and ways to address these issues.

Okay, great. And I may have missed this, did you publish CapEx for this year?

We did. We said that we would spend around $1.1 billion.

The next question will come from Jonathan Reeder of Wells Fargo.

Just building on Ryan's first question. Is there a specific timeline for the BPU to finalize the CTA issue? And how does that affect the timing of your next New Jersey rate filing? Or more specifically, when do you expect to file next in the state?

Well, as I said in my prepared remarks, the comments are due back in August 18. And then there's no published timeline, but we'd expect something maybe by the end of the year. No guarantee, but that's what we think.

And Jonathan, to the second part of your question, we constantly evaluate in all of our states the appropriate timing for any rate cases.

Okay. I mean, do you need, I guess, the BPU to finalize that before you can file the case and actually get the implementation of the new CTA treatment?

Once the BPU makes the decision, then it will be effective in your next rate case filing.

Okay. Are you at liberty to say how much that would increase New Jersey's underlying rate base value if the staff proposal is adopted?

No, we're not. We had -- our last rate case was a black box settlement. And so each of those components are confidential.

Okay. Moving on to the O&M. Is the run rate of 37.7%, is that indicative of where you think the full year will come in?

We believe that we will continue to make progress on the O&M efficiency ratio from now through 2018 and get it to the stretch goal of 35%.

Okay. I'll leave that one alone. So I think Q2, based on what you're saying that weather was normal when you kind of balance your university of regulatory jurisdictions, is that correct?

Yes, that's correct.

Okay, so the trend towards the upper end of guidance range is no way weather driven?

When we look at a range, there is some degree of weather variability that we build in there, but does not account for any extreme weather variability, which is why just in water, just as you see in electrics, the third quarter has such a big impact on our year that we just like to see what happens in the third quarter before we're able to address the range again. And I will tell you that again, we expect some weather variability. That's why you have a range in the first place, that's one of the components, but we need to look and see what happens. We're getting preliminary numbers for July, but that's not final. We've got to look at August and September to kind of see where we end up.

Okay. So I guess just continuing with the weather theme a little bit and looking at your consumption numbers. It looks like, I guess, the residential and commercial are maybe down a little more than I would expect, specifically if Q2 last year was slightly negative due to weather. Is there anything you're seeing there that's exacerbating the decline from just the normal, I guess, 1% to 1.5% we've seen annually over the years in the industry?

There's really nothing there. We have to remember, too, what we put out is billed and unbilled revenue and then billed sales volume. So what you're looking at is the billed sales volume piece of it, but we're seeing what would be expected from a usage decline.

Yes, Jonathan. We're still seeing the 1% to 2% decline as we have over the last several years, nothing out of the ordinary there.

Okay. And then last question on the military base side, one of your competitors recently has indicated a desire to perhaps pursue contracts on the electric side of bases, not just the water and wastewater. Is that something that you're interested in as well?

The 10 bases that we serve, we are partners with those bases. And we know our business is water and wastewater, but we also, as I mentioned earlier, have a lot of opportunities and projects at our plants that do look at the whole water-energy connection. So we are not planning that specifically for any base, but we are open to options in the future based on what we think we can deliver in a cost effective and performance, superior performance standpoint, to our partners.

[Operator Instructions] The next question will come from Tim Winter of Gabelli.

I was wondering if you could talk a little bit more about the $700 million placeholder for acquisitions and development. Maybe, are there any specific opportunities out there? Is there a particular region you're focused on? Is the environment for municipal acquisitions improving? And why $700 million? Just any color there would be helpful.

When we set up the capital budget for this year, for the first time, we wanted to say, here is the amount that we want to look at regulated CapEx investment in our plant, pipes. And the other part was we said for regulated acquisitions, we want to make sure that we plan for a budget, and then we had the strategic initiative for those opportunities that might arise so that we didn't have to then scramble if something came up. So for example, for this year, as we look at regulated acquisitions, and as we've talked in the past before, Tim, they're very spiky and they don't happen overnight and they're in the pipeline and things come up, referendums, different things that may change the timing of some things. So for us, it's a placeholder. And then we got the strategic initiatives. As we've said before, there are things that we look at. Walter mentioned all of our work in the shale play, for example, is all regulated, but we continue to have discussions if we can find a nonregulated shale play that will not require us to take a risk or change our risk profile because we're not going to take a risk on invested capital in the ground. We want to have a return of at a minimum for any of those ventures. So it was a placeholder, but what we also have the ability to do is as we go into a year, we have the ability to shift some of those funds from one place to the other. For example, if we see one area we may not spend as much, we have the opportunity, if we have a need, for example, in the state for additional investment, we can shift it over there. So that's why Walter mentioned, and I and Linda all, we still see a path to the $1.1 billion this year. At the end of the year, it may not be quite in the buckets that we talked about at the first of the year.

Okay. And then are the -- so you say the drought conditions in the West -- are just the economic conditions leaning to an easier environment for acquisitions? Or are things sort of status quo?

Well, we're -- we do discuss with municipalities and others out in California the opportunity to become part of American Water. We'll continue to do that. I think that would probably play into it long term.

One of the benefits that we've got, Tim, to that point is, we have the ability to raise capital. We are -- as Linda mentioned, we have a strong credit rating. We have a strong balance sheet. So where, regardless of the state, there are opportunities for systems that have huge demands on their resources and choose to not deploy them in water or wastewater, we provide an option for those folks.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to American Water's President and CEO, Susan Story for closing remarks.

Well, thank you all so much. I have to tell you, this is an interesting call, as you heard different voices on here. It has -- I don't think there's ever more an exciting time to be part of American Water. We have an amazing team of people. We've got 6,600 employees that every day, their focus is on making sure that we deliver water and wastewater and all of our services in a way that's clean, safe, affordable and reliable. And we understand what our business is. We're going to stay true to our business with a risk profile you know but also find ways to grow. So thank you for being part of this, and I just want to say that I'm just thrilled to death with the team we've got. Our new CFO is just doing a terrific job, much better than her predecessor. And again, Walter and the continuity we have, with the tremendous expertise we have through our state and our Market-Based business. I'm just proud to be part of this team, and we appreciate you all as investors and analysts.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.