Operator: Good morning and welcome to American Water's Year-End 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 March 6, 2013, by dialing 303-590-3030 for U.S. and international callers. The access code for the replay is 4593380. The online archive of the webcast will be available through April 17, 2013, by accessing the Investor Relations page of the Company's website located at www.amwater.com. At this time, all participants have been placed in a listen-only mode. Following the management's prepared remarks, we will 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.
Edward D. Vallejo - VP, IR: Good morning everyone and welcome to American Water's 2012 year end conference call. As usual, we'll keep our call to about an hour. At the end of our prepared remarks, we will have time for questions.
But before we begin, I'd like to remind everyone that during the course of this conference call, both in our prepared remarks and in answers to your questions, we may make statements related to our future performance. Our statements represent our most reasonable estimates. However, since these estimates 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.
Now I'd like to turn the call over to American Water's President and CEO, Jeff Sterba.
Jeffry Sterba - President and CEO: Thanks, Ed. Good morning to you all and thank you for joining us today. I'll be joined in the presentation by Ellen Wolf our Chief Financial Officer and in addition Walter Lynch who heads our Regulated Operations is here to help with your good questions that I'm sure you will have.
Before delving into the results of 2012 let me just make an opening comment. As you know Ellen announced her retirement from our Company in January and I just want to take this opportunity to thank her for her tremendous dedication, expertise and leadership, during the 12 years that she has served our Company.
On a personal basis, it's been a true pleasure to work with you and to really see the caliber and commitment that she has brought. Her direction of our financial objectives and obligations has helped us deliver strong results year-over-year and she is about as red as the shirt that she is wearing right now. I also want to thank her for helping to ensure a smooth transition. As you know, Susan Story will join us on April 1st as our new CFO. I believe a number of you know her and personally I am thrilled to bring someone with her diverse background to our Company. Her experience and breadth of skills make her an excellent fit for this position and for American Water and we look forward to introducing her to those of you who may not have had a chance to get to know her in the past at our next earnings call in May.
So today we are pleased to present the very strong results that we achieved in 2012, really the outcome of sound execution of our business plan on many fronts. So if you go to Slide 5, for 2012 we reported an 8% increase in revenue, an 18% improvement in cash flow from operations, a 22% increase in net income and a 20% increase in diluted earnings per share from continuing ops.
Our return on equity, adjusted for the abnormally hot and dry summer, improved about 49 basis points over 2011. Remember that we've got about $1.2 billion of debt at the parent and given the cost of that, when you take that into account that means that our Regulated operations earned a return on equity of just about 9% last year. In the midst of this strong year of performance, our Board authorized an 8.7% increase for the dividend in 2012.
So, as a company the challenge we laid out for ourselves in 2010 to build a culture of continuous improvement in excellence is firmly taking root and providing a pathway to sustainable and profitable growth.
Now let's turn to Slide 6 and let me talk about the other goals that we accomplished in 2012 that that lead to the strong prospects that I believe we have for the future. 2012 was the year of optimizing and enhancing our business portfolio to ensure that we're operating in areas that maximize value to our customers and shareholders. We acquired a total of 16 water and wastewater systems through accretive transaction, adding more than 55,000 customers to our base. We also closed on the sale of our regulated operations in the Mexico, Arizona, and Ohio, which generated over $560 million in cash proceeds. That cash is now being more effectively deployed in our other regulated operations.
We also saw growth through agreements with shale gas developers to build pipelines to support drilling operations in the Marcellus shale area, which also enable us to provide the public with much-needed clean treated water service. In 2012, we doubled the revenue from hydraulic fracturing contracts to about $3 million with a 74% increase in sales in excess of 430 million gallons.
Our Homeowner Services business expanded into 10 more states and has partnered with New York City to provide service line protection program to its 650,000 eligible homeowners. This program, which was just launched last month, has seen a very strong response rate already in excess of 7%. Now in recognition of the investments we make in infrastructure and our regulated operations to ensure our quality service to customers. During 2012, we resolved 10 rate cases bringing in annualized revenue increases of over $120 million and we also filed for rate requests. An important regulatory tool the DSIC mechanism was approved in New Jersey. We responded by putting forward a plan to incrementally invest $220 million over the next three years in New Jersey and that's in addition to the base level of about $20 million a year or $60 million for that three year period.
With the inclusion of DSIC in New Jersey we now have six states with such an infrastructure recovery mechanism and that includes all of our five largest states enabling the timely recovery of about 30% of our total CapEx spend. The Regulated business continued to increase efficiency and manage costs resulting in an on O&M efficiency ratio adjusted for the midpoint of the estimated weather impact of 40.7% for 2012. So even adjusting for the weather we drove 170 basis point improvement in this ratio, approximately the same reduction we saw in 2011 from 2010.
The investments we make into our infrastructure and systems, which have amounted to over $1.8 billion in the last two years is key to our commitment to provide safe and reliable service. If you think back about 2012 extreme weather highlighted the importance of long-term planning and appropriate investment to ensure sustainability and resiliency of our operations. During the summer drought for example we saw the benefits of our water supply investments in our Southern and Midwest service areas and when Hurricane Sandy slammed into the East Coast our dedicated employees, the preparation that they had done and our system enhancements kept the water flowing even through widespread and sustained power outages.
It is also worth noting that as we build resiliency into our systems to help withstand weather volatility. One of the key tools that we use is the leveraging of technology and innovation. Let me just give you an example. As you know, most utilities use GIS systems to locate on maps their facilities relative to other pieces of infrastructure, roads, curbs, gutters, those kinds of things, say, have a sense of where your equipment is relative to other equipment that may exist in the right-of-way.
We've expanded beyond that to – in some of our areas, we are starting to use GPS facility mapping, which means that we have the ability to locate it just through GPS coordinates and the satellites. Let me tell how handy that came in, when Hurricane Sandy hit and the New Jersey Barrier Island was in the midst of devastation and you have two feet to four feet of sand and piles of debris and moved houses, some moved as many as seven blocks, and boats littered every place, you couldn’t find traditional landmarks, you couldn't find a curb, you couldn't even find the street. So with our GPS coordinates, we are able to locate every one of our facilities, our valves, be able to control our valves so we could bring water back safely; and we are also able to help communities to find their equipment that they could not find like roads. So when they are trying to clear a road, they don't know where does – how the piles go. So we were able to base on finding our equipment then be able to map for them what the boundaries for those rooms. This will help – this is the kind of tool that will help us with resiliency as we move forward.
In 2012, we also took Phase 1 of our conversion to SAP and this was – included the financial and human resource modules. We took it live. While there are always struggles in implementing these complex systems, as I am sure you've talked to many companies that have been through this, an independent review we had done concluded that this was an above average implementation compared to more than 100 similar projects. At this stage, we are on the schedule and budget that was established almost four years ago for this project. While we did incur some higher O&M cost at the end of last year with implementation these costs were relatively small compared to the overall $320 million project cost and that number includes AFUDC you may recall.
Turning to Slide 7; our long-term EPS growth target has been and continues to be 7% to 10%. Our history over the last three years demonstrates our capacity to achieve that long term target. Given our past performance and the strategy we are implementing for the future, we're confident we will continue to meet that long-term goal.
For 2013, we announced our guidance range of $2.15 to $2.25 per share, which puts our annual growth from weather adjusted 2012 between 8% and 13%. Interestingly, our EPS in 2008 was $1.10 per share. So at the midpoint of our guidance range for '13 of $2.20 per share and a five-year period through 2013 we will have doubled earnings.
With that I'll now turn the call over to Ellen who will provide details on our financial performance.
Ellen C. Wolf - SVP and CFO: Thank you very much Jeff and good morning to those of you who are listening to our earnings conference call. Let me take a few moments now to describe the underlying factors that drove our 2012 results. More details will be available when our 10-K is filed. Turning now to Slide 9; as Jeff indicated 2012 was another year of solid financial results with continued increases in revenues, net income and cash flow. For 2012, we reported operating revenues of approximately $2.9 billion, $211 million increase over the revenue reported for 2011. Net income from continuing operations for '12 was approximately $374 million or $2.11 per common share an approximate 23% growth rate over the prior year. This is driven mainly by higher revenues in our regulated businesses of around $196 million and our continued focus on expense control.
As we have mentioned previously we believe the estimated impact of the hot, dry weather in the summer of '12 was around $0.13 to $0.16 per share for the year. Net cash provided by operating activities for '12 was around $956 million compared to approximately $808 million for 2011, primarily driven by the increase in operating revenues, changes in working capital, lower pension and postretirement healthcare contributions and long-term tax planning.
Now I would like to discuss briefly the various components of our income from continuing operations, starting of course with revenue. Turning to Slide 10, overall revenues increased approximately $211 million with the Regulated business increasing around $196 million or 8.3% from 2011. The increase in revenues was primarily driven by rate authorizations related to the needed maintenance and updating our water systems and higher customer demand in our Midwest and Eastern states over the prior year.
For 2012 the impact of these rate authorizations including investment surcharges was approximately $129 million. The increase in revenues associated with higher demand over the prior year amounted to approximately $39 million. Also, in 2012, revenue increases from acquisitions was approximately $27 million, primarily driven by the acquisition of systems in New York in the second quarter. For our Market-Based businesses, revenues increased approximately $3 million with continued growth in homeowner services and our military contracts.
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 are granted by the applicable regulatory authorities varies.
This slide shows rate cases that have been filed and we are awaiting final orders on, as well as rate cases and infrastructure charges that have been recently granted. Annualized revenues from general rate cases affected in 2012 were $120.5 million. After year-end, an additional $4.9 million in step increases authorized in previous rate cases became effective. For 2013 through February 26, we were granted $24.9 million or about $25 million of annualized revenues related to infrastructure surcharges.
We are currently awaiting final orders for general rate cases in two states where we're requesting around $37 million in total additional annual revenues. As Jeff mentioned, in 2012, our New Jersey subsidiary submitted and had approved a foundational filing for a distribution system improvement charge. The benefit of this filing for our customers and our shareholders is not expected until later in 2013 as we ramp-up our infrastructure investment spend in New Jersey.
Turning our attention now to water sales volumes, total sales volumes increased 4.1% for 2012. As you can see this increase in water sales volume was mainly driven by our residential customer cliff, which is up 5% from 2011, mainly as a result of warmer, dryer weather in our eastern states through July and Midwestern states into September, and also our commercial customer class which was up 4.1% for the year. Also contributing to the increased sales volume was our increasing customers mainly from our New York acquisition.
Turning now to Slide 13; total operating expenses for 2012 increased approximately $89 million from 2011, driven by our increased consumption, acquisition, and $7 million donations to the American Water Charitable Foundation.
Let me take a minute and discuss the main categories on this chart. Production cost in the Regulated business increased $12.2 million, driven mainly by an increase in purchase water cost, particularly in California and Illinois, which was a result of higher consumption. Our employee related cost decreased almost $18 million, primarily due to higher capitalization and reduced headcount as a result of vacancy. Conversely operating supplies and services did increase around $23.7 million for the year, primarily due to incremental contractor cost related to backfilling the vacancies that I just mentioned and incremental cost relating to the stabilization of our ERP conversion.
Additionally, in 2012 there were also costs in borrowing the projects to improve processes and operating efficiencies over the long term. As we've discussed previously for 2013, our business transformation projects will be rolling out the enterprise asset management system which will manage an asset's lifecycle and our customer information system to better serve our customers. We will continue to keep you posted on our progress in these areas.
Maintenance materials and services, which includes, emergency repairs as well as cost for preventive maintenance increased $8 million. This is mainly attributable to increased preventive maintenance expenses through our Regulated subsidiaries, including tank painting; meter testing, pump, tank and well maintenance and paving costs. Operating expenses for our market based business decreased slightly in 2012. This combines with the revenue growth produced an over 16% increase in our market based pretax income from continuing operations.
Lastly we also experienced higher depreciation of around $30 million compared to the same period last year. This is due to our continued investment in needed infrastructure for our utilities. Finally based on these strong results for the year and attention to cost controls our regulated O&M efficiency ratio continues to improve. For 2012 stripping out the weather impact the ratio stands at 40.7% compared to 42.7% for 2011. This is due to the great efforts of the employees throughout all of American Water.
With that I would like to turn the call back to Jeff for any closing comments before we open it up for your questions.
Jeffry Sterba - President and CEO: Thanks, Ellen. Going to Slide 15, so besides EPS of $2.15 to $2.25 per share what can you expect from us in this next year. First and foremost, we will maintain the same customer centric dedication to providing safe, reliable water and wastewater services. We will also continue to stay very active on the public policy and regulatory front, promoting constructive regulatory frameworks and continuing to address regulatory lag that impacts our return on investment. We plan to resolve three rate cases in the course of the year and file up to four general rate cases as well as infrastructure surcharge filings.
We will also continue our focus on operational efficiency and bolstering our culture of continuous improvement, effectively managing costs and leveraging processes and technology to create value. So the implementation of the SAP platform is an example. That is going to provide us greater transparency into our cost drivers and the impact of the best practices that we will be able to study and understand that we have in one state and be able to transfer that to the rest of our operations.
This will help us approve our regulated O&M efficiency ratio and meet our five year goal of having it below 40% in 2015, one or two years early. You can expect that we will also continue to invest approximately $900 million to upgrade our systems with the goal always being to balance these needed investments to ensure reliability with the (concomitted) rate impacts.
Realizing savings and efficiencies from our supply chain initiatives will help us achieve greater efficiency of capital spend so we generate more value for each dollar invested. There's just a fascinating array of examples that we have on the supply chain side that where we are binding opportunities.
On our Market-Based Businesses, we are focused on new offerings in existing markets and product and market line extensions. For example we have now successfully piloted a program to provide gas and electric line protection programs and we will be rolling these out to existing customers of our water and service line production products. We've also expanded homeowner services into more states and expect to have operations in 39 states by the end of the year and we have a growing pipeline of additional military bases slated for privatization, although we recognize that this is not a vast process as it usually takes 18 to 20 months for anyone to go from bid to contracting stage.
Finally, we also anticipate additional extensions in our regionalization strategy to help serve shale gas developments in the Marcellus area. We will also continue to leverage technology and innovation through our Innovation Development Process, which we've talked about in the past and we'll look to commercialize these offerings. Recall that this Innovation Development Process effectively creates a test bed where we can look at taking emerging technologies; allow them to be demonstrated in that hands-on environment of an operating utility, and return for doing that and obviously we control it through its process, we will have the opportunity to take an interest in that business and also to help insure that we can deploy that technology effectively through our Regulated and Market-Based Operations.
So in 2012, we did a lot of work leveraging the interdependency between water and energy. Earlier this year, we signed a joint development arrangement with a company that develop the standardized communications platform that creates interoperability among any meter manufacturers.
In addition to seamlessly integrating different types of meters, this platform is able to receive many kinds of data from the water distribution network including pressure, water quality, leak detection and flow and not just meter data. This creates a powerful tool for meter reading and billing, but also for the collection of real-time system data so that we can better manage and operate the distribution network, detect leaks and the like. This is just an example of a prospects we see coming from the Innovation Development Process. We will also continue to offer the scale, scope and efficiency of American Water's operational water resource, environmental, supply chain and capital management expertise to other utilities through tuck-ins and acquisitions as well as well-structured long-term market-based arrangements.
All of our 2013 targets will anchor our long-term EPS growth range goal of 7% to 10%. We are pleased with the performance that we achieved in 2012 coming on the heels of also another great year in 2011 and we look to continue that momentum in 2013.
With that we would be happy to take any questions you may have.
Operator: Kevin Cole, Credit Suisse.
Kevin Cole - Credit Suisse: I guess Jeff just on I guess DSIC process, I guess given your Holdco structure you obviously had an abundance of qualified internal candidates. If so what new skills that you believe that Susan will bring to the organization and how do you expect her to evolve the CFO position?
Jeffry Sterba - President and CEO: Yes. What Susan brings to the table is one, senior roles in a much larger company that has strong multistate experience and her breadth of experience goes from everything from all of the fundamental services that have financial impacts like supply chain and IT, et cetera, to the running of a business and the reporting of a CFO to her through that process and being part of that management team and the financial acumen that she developed both through her schooling as well as through the roles that she had which included oversight over a number of different functions, everything from the marketing and the derivative issues associated with that to rates. One of the things you will find with Susan is that she is a very well-known commodity in the regulatory community with exceptionally high marks. So it's that breadth that she brings, and I will say that that breadth we are able to utilize because of the strength of the financial team that we have inside the Company. Bill Rogers and Mark Chesla, to highlight, really the – our two key folks bring enormous capacity and capability in the controller's function and Mark is moving to being the Principal Accounting Officer. In Bill's case, not just capital markets but also because that's second nature to him because of his background, but he also brings a strategic acumen. So I don't think about finance as a functional narrow silo. I think about finance as a resource that enables the business to be the best that it can be, and the broader-based the experience of the people that are in that area, the better abled they are able that they can provide that value. While we also make sure that, we've got the necessary and appropriate controls, accounting mechanisms and visibility, transparency into the financials of the Company.
Kevin Cole - Credit Suisse: Should I also view this as, its CFO position today, but likely evolving into maybe succession plans for you as well? Just your successor, sorry.
Jeffry Sterba - President and CEO: My succession plans are not even my subject, that's the boards. So, my objective is, is to ensure that when we have the opportunities to expand our skill sets, strengthen our bench that we exercise those opportunity because they don't come around very often. I think through a number of the hiring's that we've done in the last year and a half, two years, probably with the exception of maybe them – exciting to hire me, we've had great success from Bill Rogers coming in as Treasurer to a person that we hired, brought in recently to head supply chain who has got a wealth of experiences, VP of supply chain in many companies from Pharma to telecom to the individual we've got running our continuous improvement and process excellence Lean Six Sigma, to a new Head of HR. In each of these cases, we have I believe enhanced our bench strength that gives us the ability to look at succession in a different way for a lot of positions. So, I have the luxury of never being able to hold a job for about more than 18 months because I just kept getting moved to different things, and the result was I learned a lot about a lot of different pieces, that makes an executive much more effective I think, particularly at the senior-level, so to have people that have that broad based experience, for Walter that have operated in the competitive world and now operate in the regulated world, that gives great exposure and experience to both of those markets, which are different. So any time we have the opportunity to enhance and strengthen our bench.
Operator: Andrew Weisel, Macquarie Capital.
Andrew Weisel - Macquarie Capital: Just one question on behalf of Angie Storozynski. Regarding the flow-through tax accounting for repair costs in Pennsylvania why haven't you changed your tax accounting for that?
Ellen C. Wolf - SVP and CFO: Let me – if I could just step back and give a little history on this, let me start with the fact that we adopted this in 2008 on a system-wide total Company-wide basis. So we have had and will continue to have the cash benefit of this since 2008.
Jeffry Sterba - President and CEO: Really that goes back to 2005.
Ellen C. Wolf - SVP and CFO: To the extent we could identify any of those generated losses to prior years we were able to do that. We have created out of this plus other things that have happened over the years that is bonus depreciation. We have an NOL on our books of about $1 billion and our goal is around maximizing cash. So what we wanted to do and run to the normalization is really match when the benefit is given to our customer with when we actually receive the benefit on our taxes and because we have NOLs and most of that benefit will be in the future and that's when we are matching it when we give the benefit to our customer.
Jeffry Sterba - President and CEO: Let me add just one thing. If you think about the way I look at it, obviously I wasn’t around when they had the foresight this action as early as they did. So we have picked up the benefit of this for our customers for now really going back to 2005, so eight years. If you think about it when you flow-through something, yes, it flows through your income statement but it also flows through the rate making treatment for that year. When you normalize it, it goes over time to the shareholder and to the customer. So it links the two. But for us given that NOL position, if we flowed through, yeah, you may get a bump in earnings in one year, but then you're going to reduce in the following year when you have the rate case occur. For us, we operate in 16 states having a policy that works across all states has worked well. We will always take a look at new approaches, but what doesn't sound very attractive to me is to give the cash back to customers when we can't get the cash from the IRS for another 10 years because we've got the NOL carryforwards that are already keeping us from being a cash taxpayer except for AMT. So as for me, that's the real issue. If we are in a different tax position and didn't have the benefit of that NOL position, we may have a different approach to it.
Ellen C. Wolf - SVP and CFO: I'd also add. You can see the benefit of our doing, the repairs and maintenance in our cash flow; it continues to grow stronger every year. That's important to us as a Company. It's important to our customers because it allows us to invest more in the infrastructure, it's important to our shareholders and customers in the sense; it's very low cost financing.
Jeffry Sterba - President and CEO: That's what keeps us from having to issue other instruments that would be dilutive to your earnings.
Ellen C. Wolf - SVP and CFO: That's correct.
Operator: Leslie Rich, JPMorgan.
Leslie Rich - JPMorgan: I wondered if you could go into a bit more detail on the New Jersey DSIC spending. I think you said it was $220 million of spending. I'm just wondering over what period of time and how that actually rolls through the year rate in terms of the timing of the true-ups and things?
Jeffry Sterba - President and CEO: Let me ask Walter to...
Walter Lynch - President and COO of Regulated Operation: Yeah, in our foundational filing, we said we've spent up to $220 million that gets us to the 5% of revenue cap that we have and that's over and above the $20 million each year of base spending. So that $220 million we will invest and every six months we will do a filing and then the Commission wants 60 days to look at it and then allow us put it on the bills.
Jeffry Sterba - President and CEO: That's over three years and over.
Leslie Rich - JPMorgan: $220 million in over…
Walter Lynch - President and COO of Regulated Operation: That's over three years, that's right.
Jeffry Sterba - President and CEO: Now, we'll tell you we are looking at whether some of that should be advanced into a tighter period, but it will be $220 million over no more than three years.
Leslie Rich - JPMorgan: Then you, I'm sorry could you go through the timing of how that actually rolls through rates?
Ellen C. Wolf - SVP and CFO: What happens as you file a filings with the commission, so similar to New Jersey to Pennsylvania where you have a surcharge on the bill, you would have a surcharge on the bill for every six months for your filing and what you're authorized to spend and improve to spend. Then when you file your rate case that surcharge rolls up into the normal rates.
Operator: Michael Lapides, Goldman Sachs.
Michael Lapides - Goldman Sachs & Co.: Real quick, just question on the dividend. How are you thinking, I know you have talked about the dividend increase. But how are you thinking about long-term dividend payout ratio policies? Can you put that in conjunction with your view on credit metrics, target credit ratings and how you're thinking about managing capital overall over a multi-year period.
Jeffry Sterba - President and CEO: Let me address the dividends and have Ellen address that relative to the credit metrics. From the dividend side, our philosophy and belief is that because there is always a trade-off between how you can invest that cost and how you can return that cash and the balance between the two is that we have targeted a payout ratio in the 50% to 60% range and have dividend grow at something close to what our rate of increase in earnings per share is. If you look at the early years after the Company came back into the public markets, the dividend probably lagged a little bit and so we took a step of an additional increase last year. We are now frankly a little below the 50% payout ratio and the yield has gone down as our stock has been bid up. We view that positively but we also will look at that long-term philosophy of paying 50% to 60% relative to how we go about dividend decisions in 2013 and forward.
Ellen C. Wolf - SVP and CFO: A couple of things to know, our cash flow continues to get much stronger. That has helped contribute to covering our capital and also our dividend. Our shareholder base looks at a combination of both growth in the stock and growth in the dividend and we will continue to look at dividend growth in terms of the right balance for our shareholder as well as for the Company so that we can reinvest that money back into the business. I'd also like to add that because of the strong cash flow that we have had and our known dividend policy, both rating agencies have (cleared) on positive outlook. So we continue to see the benefit of our focus around this area.
Jeffry Sterba - President and CEO: Just to reinforce what Ellen said. Our focus there is on cash, not cap structure. It's not that we don’t look at cap structure, we do. but it used to be that you had to really focus on cap structure to think about getting to a 50-50 or what have you to be at the BBB+ or to move up into the A category. I think the rating agencies in one sense are more focused and smarter about what they really ought to be looking at is cash flow and the security of that cash flow. While you have boundaries around the cap structure that probably aren't as tight as they were before. So we're not focused on thickening the equity ratio for the sole purpose of getting an increase in rating. It's that -- there's just not value there, but all the things we are doing to drive cash flow improvements, those will have the same impact we believe with the rating agencies.
Ellen C. Wolf - SVP and CFO: If I could also add to Jeff, our equity ratio continues to strengthen based upon the strength of our earnings. So as of year-end, we are a little bit above 44% of equity where we started much lower three years ago.
Jeffry Sterba - President and CEO: Yeah, I think there used to be some analysts who are always nervous that we are going to issue equity, particularly within the equity ratio and that's just not – we see no need to do that.
Operator: Gerry Sweeney, Boenning & Scattergood.
Gerard Sweeney - Boenning & Scattergood: Quick question for you Jeff. Obviously with the hiring of Susan Story, she's got a lot of services experience and you've talked about in the past always looking for some regulated like programs, are we going to see a little bit more additional focus in coming years on this and maybe to rephrase it or to put it different way, what's your vision and strategy for this, the market-based opportunities? How is that going to develop? I sense there is stuff percolating under this surface, but I wanted to see what your thoughts where?
Jeffry Sterba - President and CEO: Relative to our market-based businesses it's a small, but important and growing part of our business. We demonstrated 16% increase year-over-year to '12, and I think it was higher than that in '10 to '11. So, it's an important part of the business, but it's not going to grow to be 30% of the business. It would have to grow exceptionally rapidly to just double its impact on our bottom line. We're focused on red light kinds of things. So certainly the businesses that we're in, which includes the military services, the homeowner services a revamped contract services group as we've talked about, how we are not going to participate in the old traditional kinds of short-term base contract services groups, plus doing more frankly on the waste management side. As we expand in wastewater, we see more opportunities in solid waste management, I don't mean trash, I mean the solids that come from wastewater as well as reuse which is effectively using the liquids that come from wastewater. So those – I think about it in terms of logical business line extension. At the same time one of the things that we went out and said very early on was we're going to make sure that we get very good inside before we ever try to take anything outside because otherwise it's a great recipe to get that bigger, better bad, and not get better. So as we increase for example our supply chain capability, is that something that we could also bring to the benefit of customers that are utilities – municipal utilities that don’t have access to the things we do? Does it open other doors for us? Those are things that we will explore but I wouldn’t – I don’t expect there to be any dramatic change in our risk profile, in the way that we think about the balance of our Regulated business versus our competitive business but do expect that that focus on excellence will give us, will open doors for what I will call business line expansions where you have adjacent opportunities rather than completely new opportunities.
Gerard Sweeney - Boenning & Scattergood: Any comments on the revamped contract business. Obviously there is always talk about 50,000 plus water systems in U.S. There is, pension issues. There is, healthcare issues, in terms of payment of liabilities. Another thing that's sort of percolating under the surface you see it now in town, thoughts on how that's developing?
Jeffry Sterba - President and CEO: I think from day one when at least when I came I kind of expressed the sentiment that a number of my senior-level cohorts here had which is this is a slow market to develop. It reminded me of the old fuel cell issue. The fuel cells will be here in five years, but it's always another five years. But I do believe that it is changed some because of the persistence of the financial issue and whether it is driven by pension whether it is just driven by the lack of revolving fund access from the Federal government, the shrinking of that pot, the almost dearth of grants from the Federal government and states being in the same situation, I think communities are having to face a different set of challenges. If they're interested in having someone like us operate their systems and be a part of their community, we are going to be very interested in doing that. Whether we do that under a acquisition, which is generally a preference on our side because it fits with what we do well or it's done under a longer-term contract, we are willing to look at that. So I think there are more cracks. Even in last year, we acquired some municipal systems. I expect that that will happen this year and so I think we will see more instead of the private tuck-ins, we will see a little more on the municipal side, but it's just – it's still not going to be bond gates get opened.
Gerard Sweeney - Boenning & Scattergood: Sure, I mean, from my perspective, I would look at it as an incremental growth avenue, one and a good year, something like that.
Jeffry Sterba - President and CEO: Absolutely.
Operator: Jonathan Reeder, Wells Fargo.
Jonathan Reeder - Wells Fargo: Hey Ellen, congrats on the upcoming retirement. I am truly jealous but you've done some great work and springing native you came back to the public market in 2008. So it's well deserved.
Ellen C. Wolf - SVP and CFO: Thank you. I also want to thank you and everyone on the phone for their continued support for American Water. It's a great Company.
Jeffry Sterba - President and CEO: Jonathan, I want to understand if you actually wore what you were to supposed to wear about a week ago, after the football game.
Jonathan Reeder - Wells Fargo: Yes, I am still paying off that debt unfortunately.
Jeffry Sterba - President and CEO: Okay. Just wanted to make sure. I told Paul I'd ask you.
Jonathan Reeder - Wells Fargo: Most of my questions have been asked already this morning, but Jeff, are you targeting any sort of improvement in the O&M ratio in 2013. I know the 2015 goal that you said you may even hit two years early, which should be by the end of this year, but do you have any sort of internal target that we might want to build into the model.
Jeffry Sterba - President and CEO: Until you said the last phrase, it was a one word answer. But so there is two, the answer is yes, but no I'm not going to tell you. I don't mean to be funny or flip about it, but we do have obviously have a number of targets that we focus on internally, they have caveats and they've got ties and so I think it's too complicated to try to explain all of those to the external market. So rest assured we do have targets and I feel good about the progress we'll continue to make on that front and that we will beat the 40% by the end of '15 by one or two years.
Jonathan Reeder - Wells Fargo: Then I don't know if you can talk about the usage that you saw in 2012, absent the weather, was it similar to what you're forecasting going into the year, which I think was decline of 0.7% to 0.8% on the residential side?
Ellen C. Wolf - SVP and CFO: Historically what we've seen in terms of decline is about 1.5% to 2.5%. It's difficult to pull that out in any time frame, but in the off months we do continue to see some decline.
Jeffry Sterba - President and CEO: Although it is less, it does -- we may see some leveling of that.
Jonathan Reeder - Wells Fargo: So your expectation for 2013?
Ellen C. Wolf - SVP and CFO: It builds into the '13 number.
Operator: Thank you. I show no further questions in the queue at this time. I'd like to turn it back to management for any closing remarks.
Jeffry Sterba - President and CEO: Well, let me just thank you all for joining us today. I want to thank Ellen again for everything that she has done for the Company. I am going to give her the last word.
Ellen C. Wolf - SVP and CFO: All right with that this is a first. I just – again I want to thank each and every one of you who are listening to this call for your continued support of the American Water for your in depth questions they have kept us on our toes and you are continuing to push us and as we become each year a better and better Company. So thank you.
Operator: Ladies and gentlemen, this concludes the American Water fourth quarter 2012 results conference call. We would like to thank you for your participation. You may now disconnect.