Good morning, and welcome to the American Water's third quarter 2012 earnings conference call. As a reminder, this call is being recorded and also being webcast with an accompanying slide presentation through the company's website, www.amwater.com. Following the earnings conference call, an audio archive of the call will be available through Thursday, November 15, 2012, by dialing 303-590-3030 for U.S. and international callers. The access code for the replay is 4,567,592. The online archive of the webcast will be available through December 10th, 2012, by accessing the investor relations page of the company's website located at www.amwater.com. At this time, all participants have been placed into a listen-only mode. Following the management's prepared remarks, we will then open the call for questions. If you have a question, please press the star followed by the one on your touch-tone phone.
If you'd like to withdraw your question, press the star followed by the two. If you're using speaker equipment, please lift the handset before making your selection. I would now like to introduce your host for today's call, Edward Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.
Thank you. Good morning, everyone, and welcome to American Water's third quarter 2012 conference call. As usual, we'll keep our call to about an hour, and at the end of our prepared remarks, we will have time for questions. Before we begin, I would like to remind everyone that during the course of this conference, both in our prepared remarks and answers to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimates. However, since these statements deal with future events, they are subject to numerous risks, uncertainties, and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the company's SEC filings, which are available to the public on the company's investor relations website.
With that, I'd now like to turn the call over to Jeff Sterba, our President and CEO.
Thanks, Ed. I appreciate you all joining us today, and I hope you're warm and dry after the nor'easter that's hit the eastern part of the country over the last 24 hours, particularly right along the coast. In fact, let me start by acknowledging the tremendous impact that Sandy had on most of the Northeast last week. As you all know, there's an unprecedented amount of damage and hardship to millions of people in large parts of our service territory, where we serve about six million folks. On a personal note, our hearts really go out to all of those folks that have been affected, and I'm going to talk about Sandy in a little more detail in a few minutes, particularly to our customers in the area, our investors, and our employees.
We have 20 employees who lost their homes in the storm, and we have many more who lost property, had damage done to their property or to their family members' property, and they're trying to deal with that, as I'm sure some of you all are too. Our hearts go out to that, and we're certainly committed to aiding the communities in the recovery from this damaging weather. On a brighter note, we again had very strong quarterly results driven by consistent execution of the strategy that we've laid out. How we invest capital, the drive for operational excellence through developing a culture of continuous improvement, and focused growth in the markets within and outside of our existing footprint. As we've talked about before, it's all about execution.
If you go to page five, you can see that revenues are up 9% or a little over 9% for the quarter. When you couple that with how we've managed our operating costs, the last 12-month regulated operating efficiency ratio is 40.9% compared to 44.9% for the prior 12 months. As you might imagine, this is impacted a bit by the abnormally hot and dry weather that we had in the summer that drove a greater increase in sales. That impact is probably about 60 basis points. If you tried to weather normalize, if you will, that operating efficiency ratio, it may be around 41 and a half. Still a substantive improvement from the 44.9. As you know, we have a goal of a 40% or being below 40% by 2015.
Walter and I and the rest of the team will go out on a little bit of a limb and say we're going to beat that date based on the performance that we've had so far. Earnings per share from continuing operations is up almost 20% for the quarter and more than 30% year to date over the same period in 2010. Very strong cash flow from operations, which as you know, feeds our ability to spend capital and reinvest in our system. We're up about $160 million today or about a 27% increase over 2011 year to date. Our return on equity is at the highest level since the IPO, and it's now a little about 8.15%. Recall that the $1 billion of debt that sits at the parent level that was left from the RWE ownership, where we got debt, they took cash.
It's kind of referred to as the gift that keeps on giving. That causes about 100 basis point drag on that return. Based on where we are after the third quarter and what we see for the balance of the year, we're reaffirming our earnings guidance of $2.12-$2.22 per share for continuing operations, and the $0.13-$0.16 per share range that is due to the increased sales from the abnormally hot and dry weather of the summer. Let me touch on a few other highlights on slide six. On growth, we continue to prepare for the introduction of our homeowner services to the New York City market. You'll remember from last quarter that we were selected by the New York City Water Board as the official service line protection provider, and that will be for about 600,000 homeowners.
That program will get launched in the first quarter because they are installing a new CIS system, and we want to make sure that that new system is up and running effectively before we start a launch, since it will be going on that bill. On the shale gas, let me remind you that we're really focused on what I'll call a regionalization strategy, and it is geared around meeting the needs of the gas industry while also bringing water to areas previously not served with clean, treated water. This provides for us the near-term value from sales to the drillers and the long-term value of expanding our retail base while supporting regional economic development without taking on volumetric risk. This quarter, we entered into two more agreements. These are with XTO Energy to construct pipelines. Each of them is roughly a mile.
One is an eight-inch line, one's a 12-inch line, to supply water for shale gas drilling, as well as to provide public water service to adjacent residential areas. This approach is similar to the contracts with Rex Energy that we told you about last quarter, and you'll continue to see more of this kind of expansion, particularly in our western systems, both northwest and southwest. On the regulated side, during the quarter and October, we completed three more tuck-ins with about 1,200 new customers. That means for the year that we've had eight tuck-ins for roughly about 8,000 people, not including the acquisitions that occurred in New York. On the regulatory front, you all know about the Illinois rate case decision.
While we were disappointed in the return on equity that was granted, frankly, the rest of the rate case addressed all of the issues that we wanted to see addressed and we're comfortable with those outcomes. We remain concerned about the return that was allowed in that state. Quite frankly, you have to look at the case as a totality, and the balance of that case came out reasonably well. You also know that we had the cost of capital decision in California. Remember that unlike many of the other utilities, the return that was granted in that case is not subject to the adjustment that other utilities are experiencing or will be experiencing as of the first of the year. It remains next year at the 9.99% rate with a thickened equity ratio.
While it's a small case, let me just mention one decision that came out subsequent to the end of the quarter, and that's Tennessee. I want to mention it not because of the dollar value, but because of the change in process. About a year ago, or a little over a year ago, we did some changes. Walter made some changes in the management of that state because there were things that we felt we could do better there. In addition, the governor of Tennessee took an active interest in the regulatory process and made changes. The result is that within a five-month period, we filed a case, reached settlement, and had the rates approved. Five months is a remarkable kind of standard for a rate case proceeding, and it was settled at a 10% return.
While it's a fairly small territory, we see it as a growth potential territory. The kind of approach that we saw and results that we saw in Tennessee give us good reason to think and recognize why we are in Tennessee and want to stay there. For the year, we're on pace for a capital spend of approximately $925 million, again, with no new equity except for the very small drip that exists. We're also pleased with the new credit facility that was priced at A- spreads which is above our current formal credit rating. Let me just close before turning it over to Ellen Wolf, our CEO, who's going to go in more detail on our financials, to just spend a second on Sandy. We talk about capital investments directly benefiting our customers through improved reliability and quality.
I think what happened last week really proves that out during the hurricane and the follow-on nor'easter. If you think about 85-mile-an-hour winds, 10 inches of rain, and a couple of feet of snow in West Virginia, this impacted our service areas in New Jersey, New York, Pennsylvania, Maryland, Virginia, and West Virginia. We serve about a total of 6 million people in those areas. Through the execution of emergency plans, the use of almost 200 generators due to the massive power losses, round-the-clock staffing, and really in-depth coordination with federal, state, and local agencies on both prep and recovery. Of those 6 million people, we had less than 2,000 customers that lost water service for any period. We had only minimal damage sustained by our facilities. Most importantly, there were no employee injuries.
Sometimes this stuff gets taken for granted, but to me, it speaks volumes about the strength and capabilities of our company. I really couldn't be more proud of the people that helped make this happen, particularly when many of those employees are dealing with damage and destruction of their own personal property and their families. Again, we had a really solid quarter. Things continue to move positively forward, and I want to turn it over to Ellen for some more detail.
Thank you very much, Jeff, welcome to those of you who are joining us on the call today. Let me also add my thanks and praise to those many American Water employees and many other individuals whose actions enabled us to keep the water running throughout the hurricane and its aftermath. Thank you. Turning to Slide nine, let me describe the underlying factors that drove our third quarter results. As Jeff has indicated, for the third quarter, we continued to deliver very strong financial results with increases in revenues, net income, and earnings per share, as well as continued improvement in our O&M efficiency ratio. For the third quarter ended September 30, 2012, we reported operating revenues of approximately $832 million, a $71 million or 9% increase over the revenue reported for the third quarter of 2011.
Net income from continuing operations for the third quarter was approximately $154 million or $0.87 per common share, an approximate 20% growth over the prior year. A portion of the increase in revenues is associated with higher demand, primarily related to the warmer, drier weather in the second and third quarters of this year. We believe the estimated impact of the weather continues to be in the range of $0.13-$0.16 per share for the nine months ended September 30, of which $0.06-$0.09 represents the impact during the first six months of the year. Net cash provided by operating activities for the three months ended September 30, 2012, was around $418 million, compared to $313 million for the same period in 2011, primarily driven by the increases in operating revenues, changes in working capital, and lower pension contributions.
I'm going to discuss briefly the various components of our income from continuing operations, starting with revenues. I'd like to remind you that our 10-Q for the third quarter is on file now with the SEC, it has a much more detailed analysis of both the revenues and expenses. Overall, revenues increased approximately $71 million, with the revenues from our regulated businesses increasing approximately $68 million or around 10% from the third quarter of 2011. The increase in revenues was primarily driven by rate increases related to our continued investment in infrastructure and higher customer demand in our Midwest and Eastern states over the prior year. For the third quarter, the 2012 impact of these rate increases was approximately $35 million. The increase in revenues associated with higher demand amounted to approximately $18 million for the quarter.
In addition, in the third quarter, revenue increases from acquisitions, primarily our New York acquisition, was approximately $12 million. For our market-based businesses, revenues for the third quarter of 2012 remained relatively flat compared to the same period in 2011. Turning to Slide 11, as you know, our ability to invest in our infrastructure is driven by our ability to earn an appropriate rate of return on our investments. The extent to which requested rate increases will be granted by the applicable regulatory agencies will vary. Slide 11 shows rate increases that have been filed and those that are awaiting final orders, as well as rate cases and infrastructure surcharges that have been recently granted. Year-to-date, we have been awarded through general rate cases approximately $118 million of annualized rate increases. Additionally, we received another $15 million of annualized rate increases related to infrastructure surcharges.
To date, we have filed two of the four rate cases which are scheduled to be filed in 2012, Tennessee and Virginia. As Jeff mentioned, Tennessee has been approved, and in Virginia, we are awaiting a final order for the general rate case. A proposed combined settlement of $2.6 million is currently pending approval by the Commission. Also in July, our California cost of capital application was approved retroactive to January 1st, 2012, and provided additional revenues of $4.4 million. Finally, our New Jersey subsidiary submitted a foundational filing for a Distribution System Improvement Charge. The filing was approved on October 23rd. The benefit from this filing, both for our customers and our shareholders, should begin sometime in 2013. Turning our attention to water sales volumes, total company sales increased approximately 8% for the three-month period ended September 30 from the prior year.
This increase in water sales volume was driven, as you can see, by our residential customer class, which is up 9.7%. Both for the current year and year-to-date, the historic decline we've been experiencing customer usage was offset by increased usage related to weather, primarily again in our Eastern states and our Midwestern states. Also contributing to the increased volume sold was the additional consumption resulting from our New York acquisition. Now total company operating expenses for 2012 third quarter increased by around $24.7 million, or 5.2% from the 2011 third quarter, and 2.7% for the last nine months. For our regulated business, O&M expenses increased $11.6 million or by 4% from the 2011 third quarter. However, it should be noted for the year, regulated O&M expenses are relatively flat versus prior year.
Overall, we manage our expenses with an eye to total cost, and at times cost increases in one area while decreasing in other areas. In fact, year-to-date regulated expenses versus prior year would have decreased if not for the increase in production and purchased water expenses related to the increase in system delivery, which we've discussed earlier. We also experienced higher depreciation expense of $7.9 million, or 8.9% increase compared to the same period last year, due to additional utility plant placed in service of over $700 million. Based on our strong results for the year and attention to cost control, our regulated O&M efficiency ratio continues to improve. For the last 12 months, stripping out the 2012 weather effect, the ratio stands at around 41.5%, a 230-basis point improvement over the year-end 2011 ratio.
Based on that, looking at our outlook for 2012 based on our year-to-date performance, our continued focus on expense control, and continuing to receive appropriate returns on our needed investments, as Jeff mentioned, we are reaffirming our 2012 earnings guidance to be in the range of $2.12-$2.22 per share. This estimate assumes a normal weather pattern for the balance of the year and does not include any impact from Hurricane Sandy. Based upon our initial review, we do believe the damages from the hurricane are not material to American Water, and therefore should not have a material adverse impact on our results of operations, financial position, or cash flow. Upon completion of the evaluation of the damages and any associated business interruption losses, claims will be submitted to our insurance carriers.
We anticipate that expenses which are not covered by insurance are likely recoverable through the rate-making process on a state-by-state basis. With that, I'd like to turn the call back to Jeff for closing comments before opening it up to your questions.
Well, thanks, Ellen. We always end on slide 16, which talks about the expectations you can hold us accountable for. I'm not going to go through these in any detail because frankly, they've either already been achieved, as you know, or significant progress has been made. There are none that I, at this time, have concern will not be achieved by the end of the year. With that, Ellen, Walter Lynch, our regulated operations head, and myself will be happy to stand for any questions you might have.
Thank you, sir. We will now begin the question and answer session. As a reminder, if you have a question, please press the star followed by the one on your touchtone phone. If you'd like to withdraw your question, press the star followed by the two. If you're using speaker equipment, you will need to lift the handset before making your selection. Our first question comes from the line of Kevin Cole with Credit Suisse. Please go ahead.
Good morning, guys.
Good morning.
Good morning, Kevin.
I guess first with starting with trying to get to a clean 2012, we need to adjust the guidance for $0.13-$0.16 for weather. Is there any other non-recurring items that we should put into our numbers when we think about the 2013 growth?
At this point in time, the only thing really is weather, which is driving the high results for 2012. Yes, when you look at 2013, you need to normalize for weather. I put the word normal in quotes.
Yeah. That's why we gave you the information on the $0.13-$0.16.
Right. Okay, there's nothing on the O&M side or anything else that we need to adjust?
No.
No.
Okay. When do you expect to give 2013 guidance?
Well, last year we gave it in mid-February, and we'll probably do it in the same time. Although I must say that Ellen has a different theory about when we should give guidance. Ellen, would you care to?
All right, well, you're really going to have me do this?
Yes.
All right. The theory is that the Mayan calendar has the destruction of the Earth in 2012, so at this point, we're not sure we need 13.
We do have some concern about Ellen believing in the Mayan calendar.
Yes
Hopefully none of us are going to be the sacrificial lambs.
Yes
as in Mayan culture, sorry, we just had to laugh.
Wait. Okay, next question.
Jeff, I guess given you spent a lot of time on policy in Washington, I guess under an Obama administration, do you expect any water rules to be expedited or I guess further tightened over the next four years?
I think there clearly will be, it really is not administrative-dependent. There's going to be a continued focus on water, I think Rule 316(b) on the power plant side, which is a direct impact on water, is still outstanding. It won't come out in a ruling until next year. There is going to be, again, a focus on infrastructure and the need for infrastructure. There was a great article in Bloomberg just yesterday, in fact, I think if you didn't see it, that raises this issue again, the reality is it can't be done by the federal budget. The more that I've talked to folks up there, the more that seems to be well understood. They've got to do something on infrastructure, it can't be done by the federal government.
Other than that, one good thing that is going to come out, in fact it already has come out, is the EPA is finally going to allow water utilities to give the quality notices that we have to literally send to every customer. They're going to allow us to do that electronically. In one sense, that's small, in another sense, it's big. It's recognizing that this just isn't a bureaucratic process. It's about giving customers information. I don't think you're going to see major impacts on addition of new contaminants. There's a fair amount of work already being done on the emerging contaminant facility.
Great. Thank you, guys.
Thank you.
Thank you. Our next question comes from the line of Michael Roomberg with Ladenburg Thalmann. Please go ahead.
Hi, good morning.
Good morning, Michael.
Jeff, I just want to start off, I was particularly interested in your comments on Tennessee. Can you just kind of give us an update or an overview of what the, I guess, the competitive landscape is there? Who are the purveyors of water services in the state? Just, I guess in the hopes of gaining a better understanding of the long-term opportunity for you guys there.
Yeah. The private water supplier is really us. All the rest of both water and wastewater is really done by municipalities, some of which are really starting to struggle, or they're subdivisions of the state, some of which we've got interconnections with and good relations with. Walter, where would you add?
Absolutely, Jeff, that's it. We're the largest by far. There's some smaller providers there, but we're the big player within Tennessee, and we do have a lot of interconnections, and we're looking to expand in that area.
Got it. Okay. Thank you. Just kind of some detail on the quarter, if I could. The volume was up, and that was encouraging. I'm aware that mostly residential consumers are the most susceptible or are kind of affected by weather. We were encouraged to see that your commercial, your public, and your industrial consumption were all up as well for the second consecutive quarter. I'm just wondering if you can kind of drill down into the factors that drive demand amongst those consumers, and whether we can kind of chalk that up to weather as well, or if perhaps, it's tied to some other dynamic, the economy or otherwise.
There's really two pieces. One is customer growth, and the other is consumption per customer. Frankly, we are seeing an uptick in customer growth, particularly in our commercial area, which is something we really haven't seen for the last three years or so. This year, commercial customer growth has moved up well over 1%, and residential customer growth is also up. That's a positive sign. Ellen, on the use per customer side?
Yeah. Again, on the use per customer, that continues to decline, although this time it's been offset by-
Residential customers
Residential offset. On the commercial, industrial, and public, most of that, other than customer growth, their use per customer in those three areas has stayed fairly flat. This is somewhat weather-dependent.
About 48% of our sales is commercial, industrial, and public.
Yes.
Other.
Other.
Right.
About 56 or so is from residential.
Got it. No, that's a very helpful color. Last question on the XTO contract and kind of just your overall strategy in the shale plays. My understanding is that's part of your regulated business. Is that correct?
That's correct.
Okay. Is that part of your rate base then, or is it customer advances? How do you kind of account for that?
Well, it ends up going into rate base, but customer advances obviously is applied against that, or it's a net to that. Yes, it goes through the regulatory process, and that's why under those transactions, frankly, we really aren't taking volumetric risk. As we add those customers or add those points of interconnection, the costs roll in. They're paying retail price for water. As I've told you all before, that doesn't mean we won't do things off on the unregulated side to serve those customers. We think we really get a double bang when we can do it under this kind of a structure because we'll get the long-term benefit of residential growth as well as overall economic development.
I mean, that's what's going to position us to serve a big area that's growing in parts of, particularly southwest Pennsylvania, that we'll see long-term economic growth and into areas that we currently don't serve. With each of these, Michael, what we effectively do is we go into the commission to get a certificate of territory expansion. That's the other hidden, I won't call it hidden, but that's the other locking up or long-term value that we develop.
The thing to note, Michael, is the pipe has two purposes. It supplies water to the drillers, but it also is supplying water to residents and customers that are there for the long term.
Got it. Thank you.
Thank you. Our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.
Good morning.
Good morning, Neil.
Can you refresh us on where you are with the DSIC mechanism in New Jersey? What's left from a regulatory perspective, and when should we assume this impacts?
We filed the foundational filing back in July, and we had it approved on October 23rd. It took roughly the 90 days that we anticipated, and right now we're investing per that foundational filing. As Ellen said, we're going to be recognizing the benefits of those sometime in 2013.
Okay.
Neil, we've said that there's about roughly how much additional investment that will be made in this next year.
In the filing. Yeah, in the filing, it had a three-year period of about $220 million.
Got it. That is helpful. Some more modeling-specific questions. How do you think about long-term tax rates? You've been tracking around 40%. If that's the right number, when's the earliest you would be paying cash taxes here?
Right now, we look at our effective rate around 40%. Probably, we've ranged historically between 38% and 41% or 42%. Right now, we have NOL of around $1 billion. We look at that lasting anywhere out eight to 10 years.
The only thing I'd add on that, Neil, is who knows what gets done-
Right
in the next set of years. One of the areas where there's agreement between the parties is on corporate tax rate reduction. That would extend out the eight to 10 years.
That's correct.
Got it. Finally, on pension years, how should we think about the drag of pension post 2012, both from a cash perspective and then also from an income statement perspective?
A couple things have happened. As you know, the ERISA rules are changing as it relates to calculating that liability, and therefore, will have an impact on that cash flow for us beginning in 2013. We are taking a look at that. If you could predict the market for the next two months, I might be able to answer that question
Right.
with a little more certainty. It was doing fine for a while, we really don't know what's going to happen in the last two months, we do assume discount rates will continue to decline.
Got it. Thank you very much, Ellen. Jeff.
Thanks.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask additional questions, please press star one at this time. Our next question comes from the line of Timothy Winter with Gabelli & Company. Please go ahead.
A really good quarter.
Thanks, Tim.
Thanks, Tim.
Ellen, I didn't really understand the comment about 2013 guidance. Do you plan on giving guidance at some point for 2013?
Sorry, Tim. We will be giving guidance in probably the same in February as we've done historically.
Okay, great. I was wondering if you could talk a little bit about your military base business, the non-regulated part. Is that business currently profitable? Do you see opportunities or where are you there?
Yeah, that business is profitable. It's a very disciplined business that frankly, creates some ideas that we are transplanting over into our regulated operations. There has been a slowdown in the issuance of RFPs over the last couple of years for base privatization. We are seeing that dramatically turn. The number of notifications for potential privatizations has increased. There are bids outstanding at this stage, remember, these are fairly long processes. They take 16, 18, 24 months from the time that the RFP is let until the time that an award is made. One of the things that slowed that business down was that in the original law, there had been a provision that basically said there had to be a 10% savings to the federal government. The problem is it's 10% from what?
The way it had been developed was it was 10% from what they were spending. Well, they weren't spending appropriately, that was not a good baseline. We got that law changed in December of last year, that's what has helped now move forward a new round of RFP. We're very bullish on that business. It will be a growth piece for us. We're the largest provider at this stage with 10 bases. There's obviously others that are in that space, which is a good thing. It keeps us all on our toes.
Jeff, just one follow-up question on that. Those 10 bases, do you participate in construction of projects there?
Oh, yes. What you typically see is that when a base comes online and is awarded, you have a pretty big chunk of catch-up because there's things that just haven't done, and they need to be done, you end up with capital dollars. We operate the facilities, but we also manage all of the construction that's done. You end up with annual awards for the construction as well as the operation and maintenance. The amount of construction will vary year to year based on budgets and based on where those bases stand. Again, the biggest amount of construction that you'll see will be in the first three to five years of the contract, because that's when you're playing catch-up, and then you're going into a more steady state construction environment.
Okay. This will be my last question. Did we have a earnings bottom line impact from that business for either the three or nine-month period?
Well, it's included in our earnings from the market-based businesses. We don't break them out separately between the businesses because quite frankly, they're fairly small across the board. They add up to a reasonable impact, but we don't give the individual business line detail.
Okay. Thank you.
Thank you. Our next question comes from the line of Jerry Sweeney with Boenning & Scattergood. Please go ahead.
Good morning, everybody.
Hi, Jerry.
Quick question on the rate cases that are pending and you expect to file. I know you can't necessarily go into specifics on states, but just taking a look at the number of pending rate cases, it's probably the smallest we've seen in several years from American Water. Any type of thoughts on how many rate cases you plan to file in 2013? Are you shifting more towards some of the DSIC mechanisms so we may see a little bit more of a lag between rate cases in certain states? Any type of granularity on that would be great.
Yeah, Jerry, let me make a few comments, and Ellen or Walter may add something to that. Remember that one of our big focuses has been to move to single-rate tariff. As we have had success and really
Yes
what that means is that as we used to have to file individual cases for certain territories and states. As we move to single-rate tariff, that has collapsed those into one filing per state. That reduces the number of cases that may actually be filed. The second thing is the DSIC mechanisms, which is the major focus, because obviously it reduces regulatory lag, et cetera. You're seeing more focus on those kinds of mechanisms, on the DSIC-type mechanisms. The rate cases may need to be less frequent, a little more time in between.
Yeah. Let me, to further Jeff's point, in California, for example, we now do one rate filing, where historically we would do about three a year. Now we do one every three years. In addition, on the infrastructure surcharge, the power of that can be seen in particular this quarter, where year-to-date, we've had 118 in general rate case awards, but $15 million more in DSIC. Probably about 12% or 13% of our rate increases are now coming through this DSIC mechanism.
Okay. That's generally what I thought. One other quick question on the New York service line protection program. Apologize, I'm not sure how much granularity you have on the 10-Q. I didn't get a chance to get into it, but I think there were 600,000 customers that are potential customers, I should say. How big of a market is this compared to the rest of the service line protection that you're currently involved with?
Well, we look at it as it's basically another New Jersey.
Okay.
In New Jersey, we have service line protection on the bill. It's about the same number of customers, or territory, if you will, and fairly similar characteristics. New Jersey is one of our very attractive markets for service line protection. We've got a lot of customers that take multiple services: water, sewer, indoor plumbing, and we're also rolling out electric and water.
Okay.
Electric and gas, sorry.
Got it. Finally, one last question, in terms of Sandy. North New Jersey, and I think Long Island, probably two hardest hit areas. Obviously, I haven't necessarily seen it. You only see it on the news, but I'm not sure how much damage there was to maybe some of your operating areas. Any potential for some long-term damage that may reduce consumption into 2013? Any thoughts on matters that still just way too early?
Hi, Jerry, Walter. Yeah, we're not seeing any long-term issues there with the supply to our customers. As Jeff said during his prepared comment, our employees did a tremendous job moving generators around to make sure that we continue with their service. We don't see any impact really long term in any water supply issue.
The one area, Walter, may be like the Barrier Island, that's such a small-
Yeah.
On the Barrier Island, we do believe we may have lost a few customers. Their homes were probably wiped out.
Yeah.
That's a very small percentage of our total customer base.
Okay. That was my assumption. That's all I have. Appreciate it. Great quarter.
Thanks.
Thanks, Gerry.
Thank you. Our next question is from the line of David Pas with Bank of America Merrill Lynch. Please go ahead.
Morning, David.
Good morning.
Hi, David.
Hey, how you doing? Just a question, actually, just to follow up on the previous question regarding rate cases. Should we think about the incremental revenue in 2013 being effectively from what you were awarded in 2012, and of course, the DSIC?
Well, remember, first, we'll go into detail when we give guidance in February. We've got rate cases, as we've said, there'll be two more filed this year, and there will be some rate activity next year, but most of them take a bit of time to get processed.
Right.
I think, as you look at that, you can time out, because any case that's going to be filed in April or May next year, you're going to have minimal, if any, impact on 2013.
Also to remind you, we will continue to do the DSIC filings.
Right
Which we will have in Pennsylvania, Missouri, and other states, as well as for the first time, we will have that filing in New Jersey.
Great. Okay. Speaking of the DSIC, how it relates to CapEx, I think maybe in your release, you said for 2012, you expect $925 million of CapEx, but in 2013, it's still your typical $800 million-$1 billion range. Is that correct?
That's correct. We'll give more guidance on that number when we do our guidance for 2013. It will be within that range.
It will be in that range. Okay. Last question, just on sales I apologize if you gave this earlier, but do you have a sense of how weather-adjusted sales were on a percentage basis, excluding the New York acquisition? If we were just looking year-over-year, particularly residential.
Yeah. The New York acquisition would not have impacted that by quite a bit. New York as a whole is in that other category when you look at somewhere below probably 3% or even less of our revenue as a company.
That's all of New York.
That's all of New York.
Yeah.
Okay.
It's not that much. It wouldn't impact that percentage increase by very much at all.
Okay. I'm sorry. What is the actual % increase, weather-adjusted, residential level?
We talk about it on a total, if you'll remember, what we talked about was the impact on EPS is between $0.13-$0.16.
Okay. In terms of customer usage, excluding weather, still about 0.5%-1.5% annual decrease? Is that fair?
Yeah. It varies by state, that's correct. That's on average.
Okay, great. Thank you.
Our next question comes from the line of Heike Dorer with Robert W. Baird. Please go ahead.
Thanks. I wanted to go back to this topic of regulation. Jeff, when you first joined American Water, you had talked about, on a more macro level, changing kind of the fundamental structure. I wondered if you could give us an update on how you see the receptiveness of commissions regarding some of these mechanisms, like addressing declining consumption. As you look out into 2013, 2014, are there states that you have targeted to expand things like DSIC?
I think by and large, there has been receptivity, and it's to different kinds of things. We've filed in virtually every proceeding, and in some cases, it shouldn't be in a rate case, it needs to be in a different type of proceeding to address declining use, or to address mechanisms to encourage the investment of capital without a regulatory lag so that we can do the thing that's needed on the infrastructure side. I think by and large, there's hesitancy about doing something that they haven't done before, even if it's being done somewhere else. We are seeing improvement in people thinking about future test years. We had legislation passed, so that's facilitated in Pennsylvania. We had good success in that in Illinois. It's never what you want it to be, Heike, but I think most commissions are moving in the right direction.
Let me put it that way. Are there certain jurisdictions that we have targeted for different things? Yes. That's something that we talk to the commissioners about first. We certainly have a plan about the next set of things that we want to get done.
Okay, that's helpful. Is there any way for you to quantify for us what kind of opportunity exists in the Marcellus for additional projects like the one you announced this quarter?
What gas price?
Yep, that's true.
That's the problem.
Can't hurt to ask, right?
Yeah. I wish that we knew the answer. What we're pleased about is that we have not one, but multiple drillers that are interested in working with us on the kind of approaches, these regionalization approaches, as well as ongoing discussions on more directed, specific kinds of projects that will either be associated with cleanup of produced water or on the provision of significant water for drilling. It's a very difficult one to predict.
That's all I have. Thanks.
Thanks.
Thank you. As a reminder, to ask further questions, please press star 1 at this time. Our next question is a follow-up from Michael Roomberg. Please go ahead.
Hi, thanks. I just wanted to touch on the Allentown contract. You guys were recently approved as bidders, I think that they've now gone ahead and are allowing bids to be submitted. I'm just wondering, first of all, the kind of timeline that you expect this to play out. Obviously, it's not exactly clear, I'm sure even to you. Then secondly, I just wanted to kind of get your thoughts a bit about what will be the key criteria that you think the city will be looking at, and how you are competitively positioned to win that bid.
Well, frankly, those are great questions, Michael, for you to ask them. There's a form of contract, they haven't issued the RFP on the qualification stage. Until you get that, it's a little difficult to understand the schedule. I think in their eyes, it's a value question. It's what are they going to get as cash up front for the system, for someone to operate those systems. We see some opportunity to improve operations in those systems, they're not terrible systems. They've done a reasonable job. They've got a capital constraint. I think price is, as you would expect, is going to be a significant issue. That's about all I can say at this stage, as we're still working through our strategy, part of it depending on what the criteria are that are in the RFP.
Right. Not to belabor it, do you think that other criteria, being a public company or having a certain credit quality or capitalization structure or even just your local regulated footprint will be a factor?
I have no doubt that other criteria will be taken into account. These decisions are multifaceted because it's a long-term decision. How they will weigh those factors, we can't really judge or comment on because it's their weighting. I do believe that they will be cognizant of the other factors, and we're great guys.
Right. Okay. From a bigger picture perspective, does this represent a potential model, if you will, of course, if it's successful, to realize the long elusive dream of the water utility industry to grow the privatized footprint?
Well, Michael, it is a model. It is one of a couple that we are seeing more frequently in the market, I really think we're going to see some diversity in the models that can be applied to the municipal side. This is one that we do believe in. We think it's got some power. I think there's been some challenges. For example, the city originally felt that the state was going to regulate price. They've now been advised by the general counsel that the state will not do that because the ownership of the system is still with the city. I think that changes a little bit of the emphasis about who will play and who's got what, just because of business strategies. It'll vary by state to state, I think it clearly is a model that will have some legs.
Okay. Thanks, Jeff.
Thank you. I'm showing no further questions. I'll turn the call back to Sterba for closing remarks.
Well, I just thank you all again for joining us, and I know you join us in thoughts and concerns for the folks affected by the hurricane. We look forward to seeing you. If we don't see you before Thanksgiving, have a great holiday.
Ladies and gentlemen, this concludes our conference for today. We thank you for your participation.