Good morning, and welcome to the American Water's Second Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded and it is also being webcast within an accompanying slide presentation through the Company's Investor Relations website. Following the earnings conference call, an audio archive of the call will be available through August 10, 2017. U.S. callers may access the audio archive toll free by dialing 1-877-344-7529. International callers may listen by dialing 1-412-317-0088. The access code for replay is 10110707. The online webcast will be available at American Waters Investor Relations home page at ir.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 begin.

Thank you, Ben, and good morning, everyone and thank you for joining us for today's call. We will keep the call to about an hour and at the end of our prepared remarks we will open the call up to questions. During the course of this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based upon our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our June, 30, 2017, Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information discussed on this conference call, including adjusted return on equity and our adjusted O&M efficiency ratio can be found in the appendix of the slide deck for this call. Also this slide deck has been posted to our Investor Relations page of our website. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share. And now, I'll turn the call over to American Water's, President and CEO, Susan Story.

Thanks, Ed. Good morning, everyone, and thanks for joining us. Today, our CFO, Linda Sullivan, will cover our second quarter financial results and COO, Walter Lynch, will give key updates on our operations. I'll start with what I'm sure are your two main questions today, why our earnings were down $0.04 for the quarter and why we're affirming our 2017 earnings guidance of $2.98 to $3.08. A key fact is that our Regulated Businesses continues to execute and deliver solid results. Second quarter 2017 results were impacted by several items some of which we've noted in earlier call. The primary negatives for the quarter were two key 2017 items and two favorable items in the second quarter of 2016 which did not recur this year. $0.02 of our earnings were down quarter-over-quarter from lower capital upgrades in our Military Services Group. We've covered this on past calls and it's related to reduce military budgets combined with the completion of the large wastewater project at Fort Polk in the first half of 2016. Additionally, we had a onetime $0.02 tax adjustment from a state income tax change in New York that Linda mentioned on our last quarter call. She'll discuss this in more detail as well as another state income tax change in Illinois. The quarter was also impacted by last year's favorable weather of $0.02 per share compared to a more normal second quarter this year and a 2016 onetime $0.01 benefit from an AWE contract settlement. However, even including these items in our range, we continue to affirm our $2.98 to $3.08 EPS guidance for 2017. Our regulated core business continues solid growth, delivering a 3.7% increase in net income for the quarter. During the first half of 2017, we added approximately 15,000 customers through closed acquisitions and 7,000…

Thanks and good morning, everyone. As Susan mentioned, our Regulated Business is delivered year-over-year second quarter growth by continuing capital investments and driving operating efficiencies the benefit our customers. Let's walk through some highlights of this quarter. On July 21, after a strong show of support in the New Jersey Legislature, Governor Christie signed a Water Quality Accountability Act. In fact, in New Jersey State Assembly in a Bipartisan show of support passed the legislation 76 to 0 which was followed by the State Senate vote of 39 to 0. This legislation calls for such things like regular testing of valves and hydrants a 150 year pipe replacement rate, the implementation of the cyber security program, and action plans for notices of violation. We see this is a good thing because first and foremost it ensures that all citizens in New Jersey have safe secure and clean water, it's also a great model for future legislation across the nation. American Water stands ready to be a solution provider as other systems looks to make needed investments. This quarter two states received the orders to adjust rates. The New York Public Service Commission issued an order that will add $3.6 million in annualized revenue to recover about $150 million in water system improvements. These investments made over the past five years include replacing over 33 miles of water mains and bringing one new iron removal treatment plant online while making improvements with three other treatment plants. We also reduced operating expenses by $2.7 million in the same time period. In Virginia, the State Corporation Commission issued an order that adds $5.2 million in annualized revenue to recover $53 million in infrastructure improvements made since 2102. Here too, we reduced operating expenses by 2% since our last rate case. This is a…

Thank you, Walter, and good morning, everyone. Today I will cover our second quarter results. Two legislative tax changes impacting us this year and our earnings guidance range. Turning to Slide 14, second quarter 2017 earnings were $0.73 per share down $0.04 from the second quarter last year. Susan outlined the primary drivers of the lower quarter-over-quarter results. So let me walk through the results by business segments. I'll start with our Regulated segment, for the quarter our Regulated Businesses were up $0.02 per share. Revenue was up $0.12 per share, included in that 12% increase was about $0.09 from authorized rate cases and infrastructure mechanisms to support capital growth and $0.04 from acquisitions and organic growth, partially offsetting this with $0.01 of lower demand. Next as Susan mentioned, we had favorable weather in the second quarter of last year, which negatively impacted the quarterly comparison by $0.02 per share. O&M expense was higher $0.04 per share from increased production cost mainly in California increased waste disposal costs driven by acquisition growth and higher customer uncollectable expense. Finally, we had higher depreciation and interest expense of $0.04 per share driven by our investment growth. I would like to point out that although the growth rate for the regulated businesses was lower this quarter their results are on plan for the year. Turning to the Market-based Businesses, we were down $0.02 per share compared to the same period last year. As anticipated, we continue to experience lower capital upgrades in the Military Services Group, which includes the quarter-over-quarter impact from completion of the major project at Fort Polk in mid-2016. In addition, as Susan mentioned in the second quarter of 2016 we had a $0.01 benefit from an AWE contract settlement. Homeowner Services came in relatively flat for the quarter as…

Thanks, Walter and Linda. Before taking your questions, I'd like to talk a few minutes about customer on lead service lines and American Waters efforts to address its growing national issues. With the problems of lead pipe highlighted in plant last year, we know that having confidence in the quality of their water is most critical to our customers. American Water has increased our communications and educational efforts to our customers about lead and we're taking through aggressive step up to help them with their own lead lines. Our scientists along with the EPA have determined that when we're replacing our water mains it's in the customer's best interest to replace their own lead service lines at the same time. So we're working with our states to develop plans to do just that, which includes a priority focus on low income customers. Pennsylvania American Water has filed a PUC request to replace customer on lead service lines when we're repairing or replacing company online. Customers there who believe they have a lead line may also contact the company and once verified we would replace them over a period of time. In New Jersey, we conducted a lead service line replacement pilot project in a financially distressed community and replaced the customer lead lines when we found them. We're working with our regulators at the BPU on recovery of these investments. We will continue to replace customer owned lead lines if they are encountered during our main renewal and replacement program. In Missouri, we have filed a plant and have already replaced around 60 customer lines in a pilot project. We expect to replace lead service lines of about 100 to 150 customer homes this year in Missouri. In fact, you can see a picture on the bottom left of an impressive hardworking crew with one light weight on the far right side in [indiscernible]. While in St Louis County last week I had the opportunity to watch our crews do a water main replacement and a didn't decide those homes with customer lead service lines for replacement. They said everyone was very positive and one customer even gave our guy a bear hug. In Indiana, enabling legislation passed for replacement of customer owned lead service lines. We're working with the Indiana Utility Regulatory Commission for approval for our plan under the new law including projects in financially distressed communities with higher lead line concentration. And finally, the Virginia Department of Health is funding a grant program for lead service line replacement and we're pleased the Virginia American with the proof for some of the funding. Our efforts are beyond anything that is required and are driven first and foremost about our commitment to the safety of our customers and our communities it is simply the right thing to do. So with that, operator we're happy to take the questions of any of our participants.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Lapides with Goldman Sachs. Please go ahead.

Hey guys just curious on two things. One on your Regulated Businesses, you've got some pretty big rate cases outstanding. Right, I mean Pennsylvania for example, I think Missouri the other both in the $8500 million range. Just curious what's embedded in the multi-year growth rate for outcomes in those and how much of those rate increases are tied to costs that you're not incurring today that you could pull back on if you get outcomes in those cases that turn to be out to be a good bit less than what you're seeking?

So Michael, as you know we've put together our five year financial plan. We look at what do we believe are going to be successful outcomes for us to continue to invest in our systems and make those rates affordable for our customers. So embedded in our 7% to 10% EPS growth range are those judgments that we use on an ongoing basis.

Got it. One other question. Can you talk a little bit about what you think there returns on invested capital are for your market based businesses these days? Are you earning utility like returns or something that are dramatically above or below that level?

Yeah, Michael, we look at that from the standpoint of risk adjusted returns and so when we look at each of the businesses in our Market-based Businesses, we can think a little bit differently based on the risk return profile of each of those businesses. So we've consistently said when we look at our military business it's kind of regulated like in risk profile, so you'd expect the returns to be somewhat commensurate with that. And then we look at Homeowner services and Keystone based on their risk adjusted returns. And also remember Michael, these are very much a margin business, I mean we invest very, very little capital, actual capital to the same point and it's not taking capital way from the Regulated Businesses because we do very little capital investment, and in fact when we talk about the capital projects or the fixed capital upgrades on our military bases that's working capital only because the way the Department of Defense operates is typically they like to own the asset that we basically get recovery plus a margin on that working capital. So another way to look at it is it's more of a margin business.

Got it. One follow-up on that just curious how is given results for the first half of the year. The earnings growth expectations for the market based businesses relative to what you laid out at the Analyst Day six or seven months ago?

Okay. Thank you, Michael for that question. This quarter is down we've talked about this year when we do our financial plan we look at a five year time period. We also talked today earlier about the fact that our growth triangle is intact. So we do planning on a five year cycle, if we ever sell a point at which we did not think that the market based business over the longer term would be able to deliver what we've outlined we would change it that is not the case right now.

Got it. Thank you guys, much appreciate it.

Thanks, Michael.

Our next question comes from Spencer Joyce with Hilliard & Lyons. Please go ahead.

Hi, good morning, thanks for taking the call. One quick one from me perhaps, Linda, I know we have two kind of discrete tax items to discuss this morning both in New York and Illinois. And my question is, if you are seeing any other measures in another state you operate and that could lead to some more of this type of item or if it really is just kind of a random event that we have a couple of these two to discuss this morning?

So we have seen these two from a legislative tax change position. We have also seen in Missouri several of our counties are looking at changing the way that they calculate some of the property taxes in those areas. So we are seeing that across three of our states this year. We continue to believe that the items on the Regulated Business will be recovered through our customer rates and so we're monitoring this very carefully so that we can to continue to drive down our customer rates as best we can.

Okay. And thank you for the clarity there on particularly giving that in rates. That's all I had. Thanks.

Thank you, Spencer.

Our next question comes from Jonathan Reeder with Wells Fargo.

Hey, good morning, Susan, Linda and Walter how are you all.

Good Jonathan, how are you.

I'm doing pretty good all things considered. Just wondering, Walter what the remaining prospects for the McKeesport approval I know you said you thought it could close later this year or early 2018?

Jonathan there are hearings actually today and tomorrow on McKeesport and they have a six months requirements, so we're looking at sometime in December to be able to get an order and then we've got to work through just some issues with the DEP before we take ownership. So that's really the process, six months were a good deal through that and hopefully we're going to take ownership at the end of this year or beginning of 2018.

Okay. Have that like third party evaluation systems have those come in already?

Yes, they've come in and the commission is actually working through those as part of the evaluation.

Okay. But from your end I mean no issues there?

Well, we just continue to work through the commission and any questions they have and it's just part of the process, Jonathan.

Okay. Just wondering, Susan any other state considering bill somewhat of the New Jersey Water Quality Accountability Act is that kind of model legislation that you're going to be pursuing another state or do you think it kind of opens up the door further for M&A opportunity?

I will start and then Walter can jump in. So we absolutely believe that it should be model legislation for all the states across the country. First and foremost because of the fact that the ability to ensure the safety and quality of water is something that every citizen should be able to expect, and it shouldn't matter who is running their water system as in terms of the quality of that water. So we think it is good model legislation, the fact as Walter mentioned that it was unanimously passed in the assembly the Senate is just really extraordinary in this they made. So we're very encouraged by that. We do believe it's model and Walter can talk about any efforts that we've got going across the rest of our state.

Yeah, just to emphasize it is model legislation, and I think Senator Sweeney and Governor Christie did a great job. Just promoting the benefits for the residents in New Jersey, we know that other states are looking at similar legislation primarily in the Midwest, and so we'll be working with them as we can in each of our states to make sure that we give our views of the benefits of about legislation and how again the purpose is to make the water safe in the communities that are in the States.

Right. And then last I know if you guys have any thoughts of California in the biggest subsidiary for you guys, but the cost of capital proceeding there, ORA came out their recommendation what's kind of your reaction to that do you think a settlement reasonable terms will be achievable from your end?

Yeah, Jonathan I think the ORA testimony was not unexpected, and as you know they put in there a lower ROA compared to our 10.8%, ROA request. They did come in also with a lower cost of equity just north of 54% where we requested 55%. So not unexpected on all of this, we will be filing rebuttal testimony later this month and then we would expect a final decision in the normal course by year end.

Okay. Great. Thanks for the color.

Thanks, Jonathan.

[Operator Instructions] Our next question comes from Angie Storozynski with Macquarie. Please go ahead.

Thank you. So I wanted to ask about your shale water business, I mean it's broke even last year and seems like we had some increase the drilling activity and the Appalachian region and yet - we haven't yet seen the have a pickup of earnings why - I mean no is there a basically a lag between when those activities pickup and when you record additional revenues?

Thanks, Angie. This is Susan. So you are absolutely right on all accounts, so what we are seeing in Appalachian is that we're seeing more active rigs, there's a timing issue there and one of the comments I made is that we schedule projects, we plan projects and schedule projects and we have a backlog scheduled for the second half of the year. What we found in Appalachian is that it did pick up, but it's not picked up as quickly. And the interesting thing that's happening in the Appalachian now, because things have been quite busy in the Permian that a lot of the E&Ps have actually had trouble keeping groups, keeping the crews on the rigs side, so now they're trying to get more people appears to it's been a little slower than they thought. So that's one of the things that we're hearing from our Keystone Clearwater. They are now trying to make sure that we're able to recruit enough people, I mean we have hired 75 people just this year and are trying to hire even more to staff our crew, so it's pretty competitive to get crews. Now with what's happening in the oil markets now, don't know if that's going to slow down in the Permian and release more for work in Appalachian we certainly hope so. But we do have active projects planned and interesting just from a statistic standpoint as of July 28, there were 192 active rigs in the U.S. and 75 in Appalachian Basin and just last year that was 86. So we do see an increase in a number of rigs, number completions and hopefully some of the labor shortage issues will be taken care of so we can see more of a buildup in Appalachian work more quickly.

Great. Thank you.

Thanks, Angie.

At this time, there are no more questions in the queue. I would now like to turn it back over to Susan Story for any closing remarks.

Thank you so much. First of all, we want to thank everyone for participating in our call today. We value you as our investor owners and as the financial analysts who research our company for the benefit of your clients. We will always be open and transparent in all of our discussions and dealings with you, so you can have complete confidence in your decisions around our company and investments in our stock. If we have not been able to address any of your questions or if you have additional questions please call and Ed and Ralph and they'll be happy to help you. Thanks again for listening and we hope you have a great week.

The conference is now concluded. Thank you for attending. You may now disconnect.