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 dotamwater.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 10, 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. 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. Good morning, everyone, and welcome to American Water's Q3 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 are due to 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 Sarma, 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 hitting 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 6,000,000 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, but particularly to our customers in the area, our investors and our employees. We have 20 employees who lost their homes in the storm. We have many more who lost property, had damage under 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. So 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 5, 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. Now 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.
So if you tried to weather normalize, if you will, that operating efficiency ratio, it may be around 41.5%, still a substantive improvement from the 44.9%. Percent. As you know, we have a goal of 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 $160,000,000 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 $1,000,000,000 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 a gift that keeps on giving. That causes about 100 basis point drag on that return.
So based on where we are after the Q3 and what we see for the balance of the year, we're reaffirming our earnings guidance of $2.12 to $2.22 per share for continuing operations and the $0.13 to $0.16 per share range that is due to the increased sales from the abnormally hot and dry weather of the summer. So let me touch on a few other highlights on Slide 6. 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 Q1 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 2 more agreements. These are with XTO Energy to construct pipelines.
Each of them is roughly a mile. 1 is an 8 inches line, 1 is a 12 inches 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 REC Energy that we told you about last quarter And you'll continue to see more of this kind of expansion, particularly in our southern I mean our western systems, both Northwest and Southwest. On the regulated side, during the quarter October, we completed 3 more tuck ins with about 1200 new customers. That means for the year that we've had 8 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. But 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 1st of the year. So it remains next year at the 9.99 percent 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 5 month period, we filed a case, reached settlement and had the rates approved. 5 months is a remarkable kind of standard for a rate case proceeding. And it was settled at a 10% return. So while it's a fairly small territory, we see it as a growth potential territory and 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 $925,000,000 again with no new equity except for the very small drift that exists. And we're also pleased with the new credit facility that was priced at A minus 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. But I think what happened last week really proves that out during the hurricane and the follow on North Easter.
If you think about 85 mile an hour winds, 10 inches of rain and a couple of feet of snow in West Virginia, it that's impacted our service areas in New Jersey, New York, Pennsylvania, Maryland, Virginia and West Virginia. We serve about a total of 6,000,000 people in those areas. Through the execution of emergency plan, 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 6,000,000 people, we had less than 2,000 customers that lost water service for any period. Had only minimal damage sustained by our facilities.
And 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 damage. So 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, and 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. Now turning to slide 9. Let me describe the underlying factors that drove our Q3 results.
As Jeff has indicated, for the Q3, 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 and M efficiency ratio. For the Q3 ended September 30, 2012, we reported operating revenues of approximately $832,000,000 a $71,000,000 or 9% increase over the revenue reported for the Q3 of 2011. Net income from continuing operations for the Q3 was approximately $154,000,000 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 2nd 3rd quarters of this year. We believe the estimated impact of the weather continues to be in the range of $0.13 to $0.16 per share for the 9 months ended September 30, of which $0.06 to $0.09 represents the impact during the 1st 6 months of the year.
Net cash provided by operating activities for the 3 months ended September 30, 2012 was around $418,000,000 compared to $313,000,000 for the same period in 2011, primarily driven by the increases in operating revenues, changes in working capital and lower pension contributions. Now I'm going to discuss briefly the various components of our income from continuing operations starting from with revenues, But I'd like to remind you that our 10 Q for the Q3 is on file now with the SEC and it has a much more detailed analysis of both the revenues and expenses. Overall, revenues increased approximately $71,000,000 with the revenues from our regulated businesses increasing approximately $68,000,000 or around 10% from the Q3 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 Q3, the impact of the 2012 impact of these rate increases was approximately $35,000,000 increase in revenues associated with higher demand amounted to approximately $18,000,000 for the quarter.
In addition, in the Q3, revenue increases from acquisitions, primarily our New York acquisition, was approximately $12,000,000 For our market based businesses, revenues for the Q3 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 investment. 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 $118,000,000 of annualized rate increases. Additionally, we received another $15,000,000 of annualized rate increases related to infrastructure surcharges. To date, we have filed 2 of the 4 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 $2,600,000 is currently pending approval by the commission.
Also in July, our California cost of capital application was approved retroactive to January 1, 2012 and provided additional revenues of $4,400,000 And finally, our New Jersey subsidiary submitted a foundational filing for a distribution system improvement charge. The filing was approved on October 23. 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 3 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. The total company operating expenses for 20 12 Q3 increased by around $24,700,000 or 5.2 percent from the 2011 Q3 and 2.7% for the last 9 months. For our regulated business, O and M expenses increased $11,600,000 or by 4% from the 20 11 Q3.
However, it should be noted for the year, regulated O and M expenses are relatively flat versus prior year. Overall, we manage our expenses with an eye to total costs and at times cost increases in one area they will increase 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 $7,900,000 or 8.9% increase compared to the same period last year, due to additional utility plant placed in service of over $700,000,000 Based on our strong results for the year and attention to cost control, our regulated O and 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 and 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 investment. As Jeff mentioned, we are reaffirming our 20 12 earnings guidance to be in the range of $2.12 to $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. And with that, I'd like to turn the call back to Jeff for closing comments before opening it up for your questions.
Thanks, Ellen. 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 concerned will not be achieved by the end of the year. So with that, Ellen Walter Lynch, our regulatory 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. And our first question comes from the line of Kevin Cole with Credit Suisse. Please go ahead. Good
morning, guys.
Good morning. Good morning, Kevin.
So I guess first with like starting with trying to get to a clean 2012. And so we need to adjust the guidance for $0.13 to $0.16 for weather. And 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. And yes, when you look at 2013, you need to normalize for weather. And I put the word normal in quotes.
Yes. And that's why we gave you the information on the $0.13 to $0.17
Okay. There's nothing on the O and M side or anything else that we need to adjust?
No. No. Okay.
Then when do you expect to give 2013 guidance?
Well, we've given it in the the 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?
You're really going to have me do this. Yes. All right. So 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 those team guys.
We do have some concern about Ellen believing in the Mayan calendar and hopefully none of us are going to be the sacrificial lamb in Mayan culture. We just had to laugh.
Okay. Next question.
And 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 further, I guess, further tightened over the next 4 years?
I think there clearly will be I think and it really is not administrative dependent. There's going to be a continued focus on water. And I think rule of 316 on the power plant side, which is a direct impact on water, is still 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.
And the reality is it can't be done by the federal budget. So the more that I've talked to folks up there, the more that it seems to be well understood. They've got to do something on infrastructure and it can't be done by the federal government. So other than that, I honestly one good thing that is going to come out and in fact it already has come out of the EPA is finally going to allow water utility to give their the quality notices that we have to literally send to every customer. They're going to allow us to do that electronically.
And I in one sense that's small and in another sense it's big. It's recognizing that this is 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 contaminants.
Great. Thank you, guys.
Thank you.
Thank you. And our next question comes from the line of Michael Bloomberg with Ladenburg Thalmann. Please go ahead.
Hi, good morning.
Good morning, Mike.
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?
Yes. 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 their subdivisions of the state, some of which we've got interconnections with and good relations with. Walter, what 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. 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 kind of affected by weather. But we were encouraged to see that your commercial, your public and your industrial consumption were all up as well for the 2nd 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 perhaps it's some tied to some other dynamic the economy or otherwise?
There's really 2 pieces. 1 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 3 years or so. But this year, commercial customer growth has moved up well over 1% and residential customer growth is also up. So that's a positive sign.
Ellen on the use per customer side?
Yes. Again on the use per customer that continues to decline although this time it's been offset.
Residential customer.
So 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. So this is somewhat weather dependent.
And about 48% of our sales is commercial, industrial and public other.
Yes. Right. But 56% or so is from residential.
Got it. No, that's 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. And 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. But 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. And 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.
But 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 parts of the particularly Southwest Pennsylvania that will see long term economic growth in the areas that we currently don't serve. So with each of these, Michael, what we effectively do is we then we go into the commission with a to get a certificate of territory expansion. And that's the other hit I won't call it hidden, but that's the other locking up or long term value that we put development.
So the thing to know Michael is that 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. And our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.
Good morning. Good morning, Neil. 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?
Well, we filed the foundational filing back in July and we had it approved on October 23. So it took roughly the 90 days that we anticipated. And right now, we're investing for that foundational filing. And as Alan said, we're going to be recognizing the benefits of those sometime in 2013.
Okay. And Neil, just we've said that probably there's about roughly how much additional investment that will be made in this next year. In the filing yes,
in the filing it had a 3 year period of about $220,000,000
Got it. That is helpful. And then some more modeling specific questions. How do you think about long term tax rates? You've been tracking around 40%.
Is that the right number? And when is 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 $38,041,000,000 or $42,000,000 Right now we have NOLs of around $1,000,000,000 and we look at that lasting anywhere out 8 to 10 years.
The only thing I'd add on that Neil is who knows what gets done in the next set of years. But one of the areas where there is agreement between the parties is on corporate tax reduction rate reduction. And that would extend out the 8 to
10 years. Right. That's correct.
Got it. And then finally on pension here, how should we think about the drag of pension post-twenty 12 both from a cash perspective and then also from an income statement perspective?
A couple of 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. So we are taking a look at that. If you could predict the market for the next 2 months, I might be able to answer that question with a little more certainty. It was doing fine for a while, but we really don't know what's going to happen in the last 2 months and we do assume discount rates will continue to decline.
Got it. Thank you very much, Ellen.
Thanks.
You. Our next question comes from the line of Tim Winter with Gabelli and Company.
Please go ahead.
Really good quarter.
Thank you, Tim.
Helen, I didn't really understand the 13 guidance. Do you plan on giving guidance at some point for 20 13?
Sorry, Kim. We will be giving guidance in probably the same in February as we've done historically.
Okay, great. And then I was wondering if you could talk a little bit about your military base business, the non regulated part. If you could give us is that business currently profitable? Do you see opportunities? Or where are you there?
Yes. That business is profitable. It's a very disciplined business that frankly creates some ideas that we are over the last couple of years for base privatization and we are seeing that dramatically turn. The number of notifications for potential privatizations has increased. There are bids outstanding at this But remember these are fairly long processes.
They take 16, 18, 24 months from the time that the RFP is left until the time that an award is made. One of the things that slowed that business down was that in the law, the original law, there has 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. And so the way it had been developed was it was 10% from what they were spending. Well, they weren't doing they weren't spending appropriately and so that was not a good baseline.
We got that law changed in December of last year and that's what has helped now move forward a new round of RFPs. So we're very bullish on that business. It will be a growth piece for us. There are we're the largest provider at this stage with 10 basis. But there's obviously others that are in that space and it's 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 like construction of projects there that
Oh, yes. Oh, yes. And what you typically see is that when a base comes online and is awarded, you have a pretty big chunk of catch up because of things that just haven't done and they need to be done and so you end up with capital dollars. So we operate the facilities, but we also manage all of the construction that's done. And so 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 based on where those bases stand. And again, the biggest amount of construction that you'll see will be in the first 3 to 5 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. And then did we have I know this will be my last question. Did we have a earnings bottom line impact from that business for either the 3 or 9 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. And our next question comes from the line of Gerry Sweeney with Boenning and Scattergood. Please go ahead.
Good morning, everybody.
Good morning, Gerry.
Quick question on the rate cases that are pending and you 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 Border. Any type of thoughts on how many rate cases you plan to file in 2013? Or is it going be are you shifting more towards some of the DISC mechanism so we can see may see a little bit more of a lag between rate cases in certain states? Any type of granularity on that would be great.
Yes. Jerry, let me make a few comments and Ellen or Walter may add something that remember that one of our big focuses has been to move to single tariff pricing. And so as we have had success and really what that means is that as we used to have to file individual cases for certain territories and states. As we move to single tariff pricing that has collapsed those into one filing per state. So that reduces the number of cases that may actually be filed.
The second thing is the DISC mechanisms, which is the major focus because obviously it reduces regulatory lag etcetera. So you're seeing more focus on those kinds of mechanisms on those the disc type mechanisms. And then the rate cases may they may be need to be less frequent, a little more time in between.
Yes. Let me to further Jeff's point, in California, for example, we now do one rate filing, where historically we would do about 3 a year. Now we do one every 3 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 15,000,000 more in DISC. So probably about 12% or 13% of our rate increases are now coming through this DISC mechanism.
Okay. That's generally what I thought. Then one other quick question on the New York service line protection program. I apologize. I'm not sure how much granularity you have in the on the Q.
I didn't get a chance to get into it. But I think there was 600,000 customers that or 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?
We look at it as it's basically another New Jersey.
Okay.
Because 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. And 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. And then finally one last question in terms of Sandy. North New Jersey and I think Long Island probably 2 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 in the 2013? Or any thoughts on that? Or is that still just way too early?
Yes. Hi, Gerry, Walter. We're not seeing any long term issues there with the supply to our customers. And as Jeff said during his prepared comments, our employees did a tremendous job moving generators around to make sure that we continue with their service. So but
we don't see any impact really long term in any water supply issue. The one area Walter maybe like the barrier island, but that's such a small
Yes. On the barrier island, we do believe we may have lost a few customers. Their homes were probably wiped out. But that's a very, very small percentage of our total customer base.
Okay. That's that was my assumption. So that's all I have. Appreciate it. Great quarter.
Thanks, Jerry.
Thank you. And our next question is from the line of David Piazza with Bank of America Merrill Lynch. Please go ahead.
Good morning, Dave.
Good morning.
Hi, David.
Hey, how are you doing? Just a question actually just to follow-up on the previous question regarding rate cases. So should we kind of think about the incremental revenue in 2013 being effectively from what you were awarded in 2012 and of course the disks?
Well, remember, first, we'll go into detail when we give guidance in February. We've got rate cases. So we've said there'll be 2 more filed this year and there will be some rate case activity next year, but most of them take a bit of time to get
processed.
Right. So I think as you look at that you can kind of time out. Because any case it's going to be filed in April or May next year. Not you're going to have minimal if any impact on 2013.
And also to remind you, we will continue to do the DISC filings, which we will have Pennsylvania, Missouri and other states as well as for the first time we will have that filing in New Jersey.
Okay. And speaking of this, how it relates to CapEx, I think in your maybe in your release you said for 'twelve you expect $925,000,000 of CapEx, but in 'thirteen it's still your typical $800,000,000 to $1,000,000,000 range. Is that correct?
That's correct. And we'll give more guidance on that number when we do our guidance for 2013, but it will be within that range.
It will be in that range. Okay. And 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? So if we're just looking year over year particularly residential?
Yes. 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.
And that's all
of New
York? That's
all of New York. Yes.
Okay. So then weather adjusted sales in the residential?
It's not that much. It wouldn't impact that percentage increase by very much at all.
Okay. But I'm sorry. So what is the actual percentage increase weather adjusted at the residential level?
We talk about it on a total. And if you'll remember what we talked about was the impact on EPS is between $0.13 to $0.16
Okay. And so you're and in terms of customer usage, it's still excluding weather still about 0.5 to 1.5 annual decrease. Is that fair?
Yes. It varies by state, but that's correct. That's what I'm average.
Okay, great. Thank you.
Thank you. And our next question comes from the line of Heiko Dore with Robert W. Baird. Please go ahead.
Thanks. I wanted to go back to this topic of 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? And as you look out into 2013, 2014, are there states that you have targeted
filed in virtually every proceeding and in some 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. So I think by and large, there's always hesitancy about doing something that they haven't done before even if it's being done somewhere else. We seeing improvements 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 it's I think most commissions are moving in the right direction. Let me put it that way. And are there certain jurisdictions that we have targeted for different things? Yes.
That's something that we talk to the commissioners about first. But that's we certainly have a plan about the next set of things that we want to get done.
Okay. That's helpful. And 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? I mean that's the problem.
Can't hurt to ask, right?
Yes. I wish that we knew the answer. I mean 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 that we 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. So but it's a very difficult one to
predict. That's all I have. Thanks. Thanks.
Thank you. Our next question is a follow-up from Michael Rupert. Please go ahead.
Hi, thanks. I just wanted to touch on the Allentown contract. You guys were recently approved as bidders and I think that they've now gone ahead and are allowing bids to be submitted. I'm just wondering, first of all, when the kind of time line that you expect this to play out? Obviously, it's not exactly clear, I'm sure even to you.
And then secondly, I just wanted to kind of pick your 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, if you'd ask them. It's the schedule. They have there's a form of contract, but they haven't issued the RFP on the qualification stage. So 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 upfront for the system for someone to operate those systems. We see some opportunity to improve operations in those systems, but they're not terrible systems. They've done a reasonable job. They've got a capital constraint. So I think prices as you would expect is going to be a significant issue.
But 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. I mean just not to belabor it, I mean, 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 kind of be a factor?
I have no doubt that other criteria will be taken into account. I don't think these decisions are you can they 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. But I do believe that they will be cognizant of the other factors. And we're trade guys.
Right, right. Okay. I mean from a bigger picture perspective, does this represent a potential model if you will? Of course, if it's successful to kind of realize the long elusive dream of the water utility industry to kind of grow the privatized footprint?
Well, yes, Michael, it is a model. It is one of a couple that we are seeing more frequently in the market. And I really think that's 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. So I think that changes a little bit of the emphasis about who will play and who's got what just because of business strategies. So it will vary by state to state, But I think it clearly is a model that will have some legs.
Okay. Thanks, Jeff.
Thank you. And I'm showing no further questions. I'll turn the call back to Mr. Serba for closing remarks.
Well, I just thank you all again for joining us. And I know you join us in Boston concerns for the folks affected by the hurricane. And 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.