Nov 6, 2008
Executives
Edward Vallejo - VP, IR Donald L. Correll - President and CEO Ellen C.
Wolf - Sr. VP and CFO
Analysts
Ryan M. Connors - Boenning & Scattergood, Inc.
Debra Coy - Janney Montgomery Scott, LLC
Operator
Good morning and welcome to American Water's 2008 Third Quarter Earnings Conference Call. As a remainder, this call is being recorded and also being webcast with companying slide presentation through the company's website www.amwater.com.
Following the earnings call, an audio archive of the call will be available at 11:00 AM Eastern Time today, by dialing 1-800-475-6701 for within the United States or Canada and 320-365-3844 from outside the U.S. or Canada.
The pass code for replay participants is 955087. The call replay and online archive of the webcast will be available through November 7, 2008 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 managements prepared remarks we will then open the call for question.
[Operator Instructions]. Today's call is scheduled for one hour and including the question-and-answer session.
Participating on today's call from American Water are Donald L. Correll, President and Chief Executive Officer, Ellen C.
Wolf, Senior Vice President and Chief Financial Officer and Edward Vallejo, Vice President of Investor Relations. 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 Vallejo - Vice President, Investor Relations
Thank you. Good morning and welcome to American Water's 2008 third quarter earnings conference call.
If you did not receive a copy of the earnings press release, you can find it by visiting our website at www.amwater.com. Before we begin, let me remind you that in accordance with the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, we are advising you that certain matters to be discussed by members of management during this call may constitute forward-looking statements.
Such statements 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 company's SEC filing.
Today American Water's President and Chief Executive Officer Don Correll and Ellen Wolf, our Senior Vice President and Chief Financial Officer will be discussing our third quarter and year-to-date results. Following the presentation, we'll have our question-and answer-session.
Now I'd like to turn the call over to Don Correll.
Donald L. Correll - President and Chief Executive Officer
Thank you Ed and good morning everyone. Today we are going to be commenting on our third quarter as well as our year-to-date results reviewing some of the highlights and discussing important news for the quarter.
Before I begin with an overview of our key financial results, I'd like to address the recent market conditions. Although the country has seen fallout from the continuing economic downturn and resulting credit and investment scarcity, water utility like American Waters still need to provide a critical and basic service, while continuing to invest capital in the nation's water infrastructure.
As such, American Water continuously monitors the availability of capital in the financial markets, maintains an open dialogue with our banking advisors and regulators and is prepared to implement alternatives should credit scarcity or higher capital cost issues persist. I'd also point out that as many municipalities across the country face amounting pressures also, forced to choose between funding for education, and safety and other local priorities or replacing water and waste water infrastructure.
American Water may realize opportunities to assist them continuing to grow through tuck-in acquisitions or public/private partnerships as the capital market stabilize. When you consider our size our national put print and the success we've had in the past helping communities, this is a relevant time for American Water to offer our expertise and experience to municipalities facing huge financial and infrastructure challenges.
Although Ellen will cover this in greater detail, I want to reiterate that we have adequate credit facilities in place today to continue to prudently invest in our infrastructure. That our credit ratings are stable and that our geographic diversity gives us the flexibility to plan prudent capital spending programs that enable us to deliver quality service to our customers and grow as the country works to ride its economic shift.
And despite the harsh stock market conditions, the American Water share prices outperformed both the Dow Jones and the S&P 500 industries since our IPO in April this sell through the third quarter and through the month of October as well. Since RWE announced its intention to divest almost three years ago, we have been focused on improving our operating performance and our earnings.
As a result, since that time, American Water has been methodically re-establishing the co-relation between net utility plan and net income that exist to prior RWE ownership. Moving to the financial results; for the quarter, the company reported an operating revenue increase of 6.2% to approximately $672 million.
Net income was $88.2 million or $0.55 per share, compared with a loss of $160 million in the third quarter of 2007. Excluding the goodwill impairment charge, the third quarter 2007 net income would have been $79.5 million, showing approximately an 11% growth quarter-over-quarter.
The third quarter 2007 earnings per share would have been $0.50, showing a 10% growth quarter-over-quarter. The increase in operating revenues is predominantly a result of successful rate cases.
For the quarter, we received authorizations for additional annualized revenues from general rate cases of approximately $27 million which brings the total for the year to $73.9 million. As of September 30, 2008 we have filed general rate cases in nine additional states that would provide approximately $268 million of additional revenues if approved as filed.
The extent to which these rate increase requests will be granted by the various regulatory agencies will vary. Again the increase in revenue reflects our regulators recognition of our commitment to prudently invest in infrastructure and our ability to achieve an appropriate rate of return on those investments.
We also had some exciting growth news during the quarter on the non-regulated side of our business. Our Military Services Group was awarded a contract for operation and maintenance that the water distribution system and the wastewater collection system at Fort Hood Army installation in Texas.
Ford Hood serves a population of 218,000. According to the agreement, the award of this contract is estimated at approximately $329 million over a 50 year period and is also subject to price re-determination.
We were also awarded a similar contract for the Water and Wastewater systems at Fort Polk on the installation in Louisiana. The award of this contract is estimated at approximately $348 million over a 50 year period and is also subject to price re-determination.
American Water also currently operates and maintains the water and/or wastewater networks at Forth A.P. Hill in Virginia, Fort Bragg, North Carolina, Fort Chill [ph] Oklahoma, Fort Leavenworth Kansas and Scott Air Force base in Illinois and Fort Rucker in Alabama.
This type of growth in our non-regulated business complements are regulated business and our capabilities. American Water continues to look for opportunities to grow our regulated business as well.
And for the quarter, we acquire four systems adding approximately 2,500 water customers and 1,700 wastewater customers to our overall customer count with a combined purchase price and acquisition cost of approximately $7.8 million. These acquisitions took place in Pennsylvania, West Virginia and New Jersey and we are aligned with our strategy to grow our regulated footprint to tuck-in acquisitions of small water and/or wastewater systems.
I should also mention that just last week American Water announced that it had acquired the assets of the Clarion Area Authority wastewater system in Pennsylvania. The newly acquired system provides wastewater treatment services to a population of approximately 6,600 people and at a purchase price of approximately $4 million.
All of these successes demonstrate American Water's capability to provide water resource solutions to the communities in need. Other recent news for American Water includes the August 27th appointment of our newest independent board member, Richard R.
Grey. Dick currently serves as Executive Vice President of FirstEnergy Corp.
and President of FirstEnergy Utilities Group. FirstEnergy is a diversified energy company head quartered in Akron, Ohio is the vast amount of experience in the utility industry and brings the wealth of knowledge to our board that will help strengthen our company as we move forward.
His appointment follows the August 1st appointment of Julia Johnson, our former Commissioner of the Florida Public Service Commission to our board as also an independent member. American Water's nine member board now has a total of five independent members.
And on October 17th, we also declared our second dividend payment of $0.20 per share since going public this past April. The tradition of consistently paying dividends to our shareholders is part of American Water's long history and one we're proud to reinitiate and continue in our new public life.
Earlier this year in January of 2008 in Tampa Bay, American Water cut the ribbon on what is the nation's largest seawater desalination plant in the United States. The 25 million gallons per day, the plant provides about 10% of the Tampa Bay region's drinking water supply and it continues to earn awards.
Already named the desalination plant of the Year by Global Water Intelligence, the Tampa Bay plant was recently selected as 2008 Trendsetter by Public Works magazine. This list which appears in the magazine's November issue, names of 50 people, places and events that have the greatest impact from a nation infrastructure over the year.
The Tampa Bay plant was also selected by the National Council for Public Private Partnerships for 2008 Annual Public Private Partnerships Award in the Innovation category. This is the second time American Water was recognized by the MCPPP.
We also earned an award for our work with the city of Buffalo. And finally this quarter we also announced that American has joint forces with the U.S.
Environmental Protection Agency's Water Sense program. The goal of this program is to use water resources more efficiently, to preserve them for future generations.
As new challenges in the water industry arise, so will the opportunities to leverage sustainable water solution and American Water intends to play an important role in that arena. We're proud of the progress the company has made over the last three quarters and we are truly excited about the potential of our future success.
And with that, I'll turn the call over to Ellen Wolf to discuss the third quarter and the year-to-date financial results in more detail.
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Thank you very much Don and good morning everyone. Before I begin, I'd first like to take a moment to acknowledge Don for recently being named a 2008 Trendsetter by Public Works Magazine.
He was recognized for his many accomplishments leading up to one of the largest initial public offerings in 2008 when he efficiently took American Water Public. Congratulations, Don.
Moving on to the quarter, American Water's strategy to divest... to invest prudently in our infrastructure, a five, four and received appropriate rates of return of and on that investments and to make continuous improvement in all areas of customer service with the key drivers in our results for third quarter.
In addition, as we saw in the second quarter, very wet weather continued to be a factor in limiting our revenue growth. For the third quarter ended on September 30th, 2008 American Water reported net income of $88.2 million or $0.55 earnings per share compared with a loss of $160.1 million or $1 loss per common share for comparable quarter of 2007.
Excluding the goodwill impairment charge, the third quarter 2007 earnings would have been $79.5 million or $0.50 per share, representing an earnings per share growth of 10% quarter-over-quarter. For the nine month period, we reported a loss of $598.8 million or $3.74 per common share, compared to net loss of $108.3 million or $0.68 per common share in the first nine months of 2007.
After adjusting for the goodwill impairment charge in 2008 and 2007, net income for the nine months ended September '08 was $139.6 million versus $131.4 million in the same period in '07, resulting in an approximate 6.3% increase in net income or a 6.1% growth in earnings per share. Factors contributing to net income growth for the third quarter after adjusting for the goodwill impairment charge were our growth and revenue from rate awards, non-regulated activities and higher allowance for funds used during construction.
The full benefit of these achievements were offset by adverse weather in certain parts of our service areas, a slight decline in normal consumption and higher employee expenses due mainly to our continued focus on enhancing customer service. The following two slides provide a bridge from revenues and expenses in the third quarter of '07 to the third quarter of '08.
For the third quarter of 2008, American Water reported an increase in revenues of 6.2% to $672.2 million from $633.1 million reported in the third quarter of '07 or about $39 million increase. $31.6 million of the increase came from our regulated business and $7.5 million of the increase from our non-regulated business.
The increase in our regulated revenues was driven mainly by awards of rate increases of approximately $33 million related to our infrastructure investments and recovery of prudent expenses. Today, we have received great awards during '08 in Iowa, West Virginia, Arizona, Long Island, California, Illinois, Tennessee and Virginia.
Offsetting the increases in regulated revenue was a decline in overall usage. While we do continue to see a slight downward trend in water usage, the declining usage for this third quarter is driven mainly by the continuance of the extremely wet weather in our central regions that we'd seen in the second quarter.
Historically, this has been one of the wettest summers in the last 100 years in Illinois, Missouri and Ohio. Further evidence of this can be seen in our water sales volume.
For the company as a whole, sales volume decreased by almost 6 billion gallons or 5.4%. Our residential customer usage decreased 5.3%.
Volume of water sold to commercial customers decreased by 3.5% and the volume of water for our industrial customers decreased 8.5%, resulting in an overall $11.4 million revenue decrease or approximately $5.8 million of net income or $0.04 per earnings per share. And non regulated business increase in revenue comes principally from our Contract Operations Group and Homeowner Services Group.
For the third quarter of '08, revenue from our Contract Operations Group increased $7.6 million, mainly from design to operate contracts and military contracts. Our Homeowner Services Group increased revenues by $1.7 million due to expansion into new markets.
These increases were partially offset by decreased revenues in other areas of our non regulated businesses, primarily our Applied Water Management Group which continues to be impacted by the slowdown in the housing market. Operating expenses for the three month period decreased $227 million, compared to same period in '07.
However, adjusting for the 2007 goodwill impairment charge of $243 million, operating expenses increased $16 million. Our regulated business increased their overall operations and maintenance expenses by $11.2 million and our non regulated businesses increased their operating expenses by $3.50 million.
Employee-related expenses increased $14.6 million or approximately 13% for the three months ended September '08, compared to same period in the prior year. A significant portion of this increase was on the regulated side of our business.
Our employee-related expenses increased by approximately $13 million. The overall increase in employee-related expenses was primarily due to n increase in the number of employees to continue to enhance customer service and to meet regulatory requirements as well as a stock based compensation expenses did not exist in the prior year.
Also included in the increase of employee related expenses is the $1.8 million increase in regulated pension expense. As mentioned on the last earnings call, we are seeing an increase in our production cost particularly related to fuel, purchase water and chemicals.
For this third quarter, the increase was approximately $600,000 of the same quarter last year. Based upon these increases, we have updated our rate cases in states such as New Jersey, Missouri, West Virginia and others for these none and measurable increases.
Offering supply for services decreased 11.8 million or 14% for the three months period ended September 2008. The majority of the decreases due to lower immediation expenses incurred to insure our compliance with the Sarbanes-Oxley and to remedy any material weaknesses.
These cost decrease by $8.5 million in the third quarter of 2008 resulting in an approximately $5.1 million and added net income for $0.03 per common share. The server all decrease in stand year-over-year demonstrates our success in moving towards resolving any and or material weaknesses.
And I will address this further in a minute. Other factors contributing to the decrease of operating supplies and services include lower divestiture related cost of $2.6 million.
There is also a $3.2 million increase in our non-regulated operations associated with several operating contracts which is offset by lower contracted services cost and the applied water management group again due to the down turn in New home construction. Maintenance, materials and services which include emergency repairs as well as cost for preventative maintenance increased $4.4 million or 15.9% for the three months ended September 2008 compared to the same period in the prior year.
Regulated businesses maintenance expenses increased by $3 million primarily due to higher cost of removal expenses. Non regulated businesses maintenance increased $1.4 million, primarily due to increased cost in the contract operations group mainly attributable to the cost associated with the new military projects and higher frequency service line protection contract usage by the customers of our homeowner services group.
Customer billing and accounting expense increased by $4.8 million primarily due to an increase of uncollectible accounts in our regulated business. Because of changes in the economy, we have begun to implement stricter and earlier shut-off practices which has resulted in acceleration and the recognition of bad debt expense.
There have also been expenses increased in our non-regulated business, again primarily as a result of the downturn in the construction market. Depreciation and amortization expense decreased by $1.3 million or 1.9% for the three months ended September 30, '08.
This decrease was primarily due to the depreciation rate adjustments resulting from rate orders particularly in our Pennsylvania subsidiary. This was offset by increased expenses due to additional utility plant placed in [ph] service.
On a weighted average composite depreciation rate is 2.2%. General taxes expense which include taxes for property, payroll, gross receipts and other miscellaneous items increased by $2.3 million or 4.9% in the three months ended September 30, '08 compared to the three months ended September 30, '07.
This increase is primarily due to increased gross receipt taxes in New Jersey of $1.9 million. Our consolidated provision for income taxes increased $17.8 million or 44.8% to $57.5 million for the three months ended September 30, '08.
The effective tax rate for the three months ended September 30, 2008 was 39.5%. Our effective tax rate in '07 was 33%, adjusted for the goodwill impairment charge as we consider that's an infrequently occurring or unusual event.
During the third quarter of 2008, American Water continued to prudently invest in the water and wastewater infrastructure of our system. Recently, we achieved two milestones for major projects in Missouri and New Jersey.
In Missouri the Joplin Blengo [ph] water treatment plant was successfully placed into service on September 26. The $44.5 million rehabilitation project improves plant reliability and expands the plant from 16 to 21 million gallons per day with the capability to expand to 26 million gallons per day.
In New Jersey, the canal road expansion project which is a plant expansion from 60 million gallons per day to 80 million gallons per day is on-schedule for completion this year. The project is expected to be completed at a cost of approximately $49 million.
Another major project underway is the construction of a 20 million gallon a day water treatment plant and a 31 mile water transmission line in Kentucky. This project will address a long standing water supply deficit in Central Kentucky.
Our capital expenditures for the nine month period ended September 30, 2008 were $714.6 million. To fund these investments, we relied our access to the capital markets and our cash flow from operations which was $393 million approximately for the nine month period ended.
This represents a $63 million increase over the prior year. As Don mentioned earlier, we continuously monitor the capital markets, both debt and equity to most efficiently fund our capital needs.
Interest expense, the primary component of our other income or deductions, increased by $3.9 million or 5.7% for the three months ended September 30, 2008 compared to the same period in the prior year. The increase is primarily due to the increased borrowing associated with capital expenditures.
We usually access the commercial paper market to fund our working capital needs. However, like other companies, we witnessed in the last quarter, the lack of available financing at reasonable rates and specifically on September 15, we were not able to fund our short term financing needs using commercial paper.
However, we were able to access our $810 million of unsecured back-up credit lines with out a problem. As of September 30, 2008, American Water had approximately $596 million of available capacity under its credit facility and approximately $132 million of outstanding commercial paper.
And recently, we have begin to see improved access to the commercial paper market, improvement in LIBOR rates and the strengthening of the U.S. dollar, science continue to point to the availability of these options again.
One of our key strategies is ensuring that we receive an appropriate return on and of our prudently invested capital. During the three months ended September 30, 2008, we received authorizations for additional annualized revenues from general rate cases in Eleanor, Virginia and Tennessee amounting to approximately $27 million.
In the first nine months of 2008, we received authorizations for additional annualized revenues from general rate cases of approximately $74 million assuming constant sales volumes. Our allowed return on equities for the rate cases finalized during 2008 continue to generally be in the range of 10 to 10.5%.
In the first nine months of 2008, we filed general rate cases in 10 additional states to assure of corporate return on an up the capital we have prudently invested in the infrastructure as well as a recovery of any increase in cost or decreases in demand. Several of these rate cases remain outstanding.
As of September 30, our subsidiaries are awaiting final order on rate cases that would provide approximately $268 million and additional annual revenue if approved this file. There is assurance that the filed amount on any portion there of our requested increases will be granted.
We are proud to have recently announced our second quarterly dividend since our return to becoming a public company. As we noted in our S1, I want to reiterate that our policy subject of course to approval by a board of directors is to declare and pay a dividend on a quarterly basis of $0.20 per share.
And in the long run, we expect to have a payout ratio in the 50% to 70% range of net income. I'd now like to take a few minutes to address our policy as it relates to goodwill that is on our balance sheet and again as a reminder, this goodwill relates to the premium that RWE paid for American Water in 2003 and for Eichan Corporation [ph] in 2001.
Over the past few years, we have written off approximately half of that goodwill and we now have a balance of $1.7 billion remaining on our balance sheet as of the end of September. The company's policy is to reassess the value of that goodwill on an annual basis in the fourth quarter of every year and we expect to conduct that test at that time.
As you may recall in light of the initial public offering price, we did perform an interim impairment test and based on that assessment, we have recorded an impairment charge to goodwill related to our regulated businesses of $750 million in our first quarter financial statements. Since the IPO, there have been no triggering events that would have warranted our performing another in our interim test.
As part of our continued remediation efforts to address the material weaknesses that we have mentioned in the past quarters, we have established numerous policies and procedures and have taken management actions that we believe address the areas of material weakness and we have tested for their effectiveness. Based on these actions, the length of time these controls have now been in place and tested, we believe that certain controls have been operating effectively as of September 30, 2008.
We no longer consider that inadequate internal staffing and skills and inadequate controls over month-end closing prophesies are material weaknesses. While we believe that remediation procedures related to the other identified material weaknesses are substantially complete, our testing procedures have not been fully completed, and therefore we can make no assurances as till the success of our remediation efforts at this time.
As of September 30th, the company had incurred $57.8 million to remediate these material weaknesses and to document and test key financial reporting controls. Based upon our current adjustment, we expect to complete our remediation procedures related to identified material weaknesses during '08 with an estimated additional cost of under $1 million.
With that, I want to thank you for your continued interest in American Water and this concludes our prepared statements on American Water's third quarter financial results. And I would like to turn the call back to the operator for any questions and answers you may have.
Thank you. Question And Answer
Operator
[Operator Instructions]. And our first question comes from the line of Ryan Connors with Boenning and Scattergood.
Please go ahead.
Ryan M. Connors - Boenning & Scattergood, Inc.
Hey, good morning and thanks for the prepared remarks. They're very thorough.
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
You're welcome.
Donald L. Correll - President and Chief Executive Officer
Thank you.
Ryan M. Connors - Boenning & Scattergood, Inc.
I had a question on current economic situation. Obviously to a large extent, things are still evolving but I'm just curious, what you expect the reactions of the regulators to be in terms of rate awards?
I mean it seems reasonable to expect that the consumer advocates [ph] would get, a little bit more aggressive and say, hey, consumers are under enough stress right now, they don't need a rate hike for water as well. So, in your interactions with the regulators and with the regulatory process, and now you're just coming off a major industry event, are you seeing any evidence of that and in if so, to what extent do you think regulators would be receptive to those arguments and how would that, how might that impact to your business?
Donald L. Correll - President and Chief Executive Officer
Well thank you for the question and you're right, we did just have a... an industry conference with all of the investor owned companies and with more than a handful, we had quite a representation of regulators and staff from across the country.
To your first point, there weren't a large number of advocate types if you will, at the meeting. But there were a fair amount of regulators and whether it was the regulator, the commissioners or the staff [ph], I think there was a clear balancing that they recognized that their responsibility to make sure that we have the capacity to continue to provide the service to make sure that we have the financial profile and the flexibility to fund our infrastructure to cover our cost and that we have access to the capital markets and I think to that point they all recognized that the market is what it is.
There was a fair amount of discussion about the increase in interest cost at the moment and that there was probably a corresponding increase in the cost of equity. They recognized it, they recognized their responsibilities.
They also, they understand their responsibility to balance between the investors and the consumers. But I didn't sense any overwhelming sentiment that they suddenly needed to shift in one direction or other.
They understand the need for the deal with customers that suddenly find themselves with an increased difficulty to pay their bills and they understand we have policies, procedures and practices in place to deal with a lot of those things. But as it relates to the financial markets and our ability to continue to serve and they're willingness or ability to give us the necessary rates to cover our capital cost, I didn't sense any hesitation on their part to continue to understand the nature of our business and that we need to invest for the long term.
Ryan M. Connors - Boenning & Scattergood, Inc.
Okay. And Don you have been in this business a long time.
Is that consistent with what you have seen in the past whether in past recessions and economic downturns is not a real change in how regulators treat these rate cases.
Donald L. Correll - President and Chief Executive Officer
Well I appreciate you reminding everyone that I have been in the business for a long time. I think in the...
I can recall the rate shock that we were all dealing with as an industry in the late 70s and early 80s. Both when we had very high inflation and high interest rates and at that point high on top of that a whole out of new regulations that were coming out of the then the relatively new EPA requiring filtration for a lot of the water companies across the country.
That was a triple hammer. And there was a bit more apprehension and push-back back then.
I think if anything our industry has done a credible job in the last decade or two in explaining this to the regulators because back then we were the step child and we really didn't have the same kind of air time that the electric companies, the gas companies and then back then the telephone companies had. And we've done I think a better job in explaining to the regulators the need for continuous investments in our infrastructure and the need for us to have the financial flexibility to be able to deal with this.
So I can't compare this to what we were seeing back in the 1980s and I think there is a general reception and a general understanding of the need to maintain the financial flexibility and the financial profile that all of us in the industry need to have.
Ryan M. Connors - Boenning & Scattergood, Inc.
Okay. And you mentioned in your prepared remarks that these capital market condition were to persist and obviously that's not necessarily your or any one else's base case but if these conditions did persist, what would be the alternatives.
I know that normally you like to operate and then most your peers like to operate around the 50-50 somewhere near 50-50 debt equity split. I mean if you have flexibility to stray from that and if so would that be the way the route that you would go or would you have to sort of dial back your plans in terms of the magnitude of your capital spending?
Donald L. Correll - President and Chief Executive Officer
I'll let Ellen speak more in a minute about our capital structure. I mean we have some flexibility but we've also set some targets and I think it's our goal to maintain those targets we set at the time of the IPO that we want to have a 45% to 50% equity ratio.
We acknowledged that we're on the low end of that, we'd like to bring that up but we also acknowledged that if in the short run we needed to for variety of a reasons go a little bit below that, we could do that also but that's not a long-term sustainable proposition and its not one that we would really want to get ourselves into. I think what we did immediately following the market crash so to speak couple of months ago, the credit market ceasing, we promptly looked at a number of scenarios of how we might be financing, when we would be financing, how much capital we would be spending and that's part of what I think any prudent organization, any organization that prudently manages itself, but I would be doing, I'm sure a lot of other did the same thing.
So we have a number of alternatives that we will pursue but at the moment we're not planning to alter our long-term deal that we're going to continue to invest in our infrastructure for the long-term and we're all watching closely and we're managing slightly differently than we were two months ago and we're all hopeful that the credit markets begin to come back as they appear to be doing now.
Ryan M. Connors - Boenning & Scattergood, Inc.
Okay, well that's great thanks. Thanks for your time and congratulations to you and all your employees on a great performance.
Donald L. Correll - President and Chief Executive Officer
Thank you.
Operator
Great. Thanks, and your next question comes from the line of Debra Coy with Janney.
Please go ahead.
Debra Coy - Janney Montgomery Scott, LLC
Good morning Don and Ellen.
Donald L. Correll - President and Chief Executive Officer
Good morning.
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Good morning.
Debra Coy - Janney Montgomery Scott, LLC
Looking at continuing on the kind of the rate outlook discussion and where you are on your elaborate turns. Ellen you mentioned that a lot of returns that coming in 10, 10.5 we're actually seeing some rate cases coming in more like 11 that does seem that the regulators are better understanding the need to attract capital into this industry.
Can you tell us first of all about where you are on your actual returns? Obviously we have to back out the portion of goodwill that's not covered in rate base if there was of course for charging the first quarter.
But on a normalized net income basis for this year where you would say you are in terms of the natural earned ROE? Somewhere around 5.5 may be?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Yes and Debra I think let me talk a couple of things. We have seen our return on equities as high as 10.8.
Most of our rate cases that we have gotten have been prior couple small and prior to what we're seeing in economic downturn right now. Although the ones we just we recently got us still staying within that range.
And I guess I've only seen one that's come in at 11% and so far but again I am feeling confident that regulators are acknowledging and starting to understand what's happening in the market as Don mentioned earlier. We are seeing a slight improvement on our return on equity which I have to say we have to offset that against what we're seeing in the way revenue decreased because of the weather.
And so if you put that into the calculation, we are seeing a slight increase on that return on equity. As we've mentioned before, we expect that increase to get up to the normal coloration is three or four year process because we're putting a lot of new capital in today and need to get that into rates as well.
But we are beginning to see an increase taking into account the fact that we've had some lower revenue because of the weather.
Debra Coy - Janney Montgomery Scott, LLC
Is my back of the envelope calculation of where you are currently in 5%, 5.5% range is that right?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
I would say, we're probably a little bit higher than that, again taking into account the unusual item.
Debra Coy - Janney Montgomery Scott, LLC
Okay. And then lastly your comments on the weather, leaves me to my second question.
We doesn't seem that you've had more dramatic weather swings likely, I don't know it's climate change or what but it does seem to have become a bigger issue across the country. Obviously they are moving forward with the decoupling mechanism in California, what is your general thought that we are seeing conservation and weather impacts having a bigger impact across the rest of our territories in terms of pursuing potential adjustment...
mechanisms in other states?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
The largest area we're seeing it right now as you mentioned is California and very much the Western states. And in those states, our goal is to work with the regulators on the decoupling mechanism, so that conservation...
we still have to recover the appropriate return on and off our capital. And regulators recognize that and are willing to work with us to find the right decoupling mechanism.
So that we are not punished for conservation and also we want to encourage conservation as well from our customers. We're not seeing that as much of an issue here in the East, although occasionally a regulator may talk to us about doing some sort of trail on decoupling to see what its impact would be.
Decoupling as you know it's a long way away for the water industry, we're slow to move. We recognized the issue but there will be a lot of thought and discussion around how to appropriate reflect it in our rates.
Debra Coy - Janney Montgomery Scott, LLC
Okay. Because it certainly does seem that those issues are not having impact on earned ROEs in the interim.
My last question is, you mentioned industrial use being down significantly relative to residential and commercial. Does that seem like an economic factor to you rather than a weather or some other extraneous factor?
And then leading to the broader question of how are you seeing economic slowdown either in the industrial sector or elsewhere impacting your business now and over the next few quarters?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Sure. The industrial customer decrease in usage is mainly due to weather.
There is some but very few of our businesses that we're seeing our industrial customers are going out of this, as we have not seen that in any of the service territories that we have. Where we are seeing a slight impact as I mentioned earlier of what's happening in the economy, is along the lines of our bad debt and the way we have approached that is by moving up on our time frame to do shutoffs and notifications all within regulatory rules as it relates to that but trying to ahead of the game for people who are in foreclosure...
maybe in foreclosure or who have moved trying to find them before they move to pay the bills. So we are accelerating and looking a lot harder at our collections policies and as you saw, we did see some impact in the third quarter and again part of that is our trying to get ahead of the curve on that.
Debra Coy - Janney Montgomery Scott, LLC
Alright. Thanks.
Operator
Great, thank you. And our next question then comes from the line of Maria Karahalis with Goldman Sachs.
Please go ahead.
Unidentified Analyst
Good morning this is Debra Basin [ph] for Maria.
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Good morning.
Donald L. Correll - President and Chief Executive Officer
Good morning.
Unidentified Analyst
My main question stands from your tuck-in acquisitions and the opportunities you have there. You've been very successful in acquiring small water systems despite this current economic environment.
But I was wondering whether because of this economic environment you have actually seen an increase for municipalities to present through out by their systems? And are you being more aggressive and trying to search for these opportunities?
Donald L. Correll - President and Chief Executive Officer
Its fair to say that we have compared to where we were at the company three or four years that over the last two to three years we've ramp up our efforts aggressive's probably too strong a term. But we've ramped up our efforts and the way we have been organizes the people we have on the ground, to make sure that the market place knew to with the municipalities that we were in business and that we had this as one of our priorities once again.
So I think it took a little while for us to get the word out that in fact it was an option for municipalities cause frankly we had dropped the ball about five years ago on that regard and it wasn't a priority and it is a natural thing that we should be doing and it was something that we had done through out American Water's history and so we have gotten back out into the marketplace. We have had some successes.
You've seen some of the statistics compared to where we were from 2003 to 2005. We've increased the last three years successfully and successively in the number of acquisitions and tuck-ins that we have done.
And I think it's fair to say that as a result of our advancing marketing efforts that a lot more municipalities know today that they do have some choices rather than just the way they had always done it. I can say that in the last six months, we have certainly seen far more interest in that.
Even before the recent crises in the financial markets. And I think that was both a recognition of the fact that they knew they had choices, that we were there educating them of their choices.
And that fact that many of the municipalities were ahead of the curve if you will and having to deal with their own budgetary issues. They...
I won't say that they necessarily solve the seizure coming that happened in September and October. But all of the municipalities and the state governments have to plan and budget on annual basis and they saw what was looming.
So there was an early indication. We have had I would say scores of inquiries over the last several months and I would say it is accelerating.
But I would also caution that things that we closed in this quarter are things that we started working on over a year ago and we've talked quite a bit in the past about our acquisition that is pending for municipalities and trend New Jersey or outside the trend in New Jersey. At something that we started working on over two years ago and it took that long to get it through the approval process and ultimately to file with the regulators and it's been pending there for the better part of the year.
So we are optimistic, we do see that more municipalities are beginning to question whether or not water and wastewater services are something that they necessarily need to continue to have as something that they are providing in addition to providing education and safety and other things and we are optimistic that we'll be able to turn more of these inquiries into opportunities over the next year or two.
Unidentified Analyst
Okay. And to kind of follow-up on that question, are you seeing increased competition some other larger water utilities especially in the overlapping regions that you guys are in?
Donald L. Correll - President and Chief Executive Officer
No.
Unidentified Analyst
Okay. Thank you very much.
Operator
Thanks. And our next question then comes from the line of Bill Apichally [ph] with Citigroup.
Please go ahead.
Unidentified Analyst
Hi, good morning.
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Good morning.
Unidentified Analyst
Going back to the point that Ryan brought up earlier about kind of financing your continuing growth, the CapEx number we've kind of got working here is part of $850 to $870 million for next year, is that still in the ballpark? I mean have you guys looked to cut that back at all or is that still that the working number?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
As Don mentioned what we've done is a working number and as Don mentioned we've done I am sure as every other utility out there scenario planning around the economic markets, the financial markets. So that we are prepared for whatever may happen here in terms of cash flow.
But right now our working assumption is that we are continuing to spend as we've talked about and that again is based off as Don mentioned the regulators... really acknowledging and recognizing that, we need to continue to invest in the infrastructure.
Unidentified Analyst
Okay. So any time, like you'll willing to maintain that level, may be issue more debt and a little of equity in the near term and as conditions may be improved down the road and may be if you need to issue equity kind of in 2010 or just more down there...
may be provide an opportunity to do that then?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
We don't want to harm, one, the infrastructure of this company and what we're investing for the customers and two, the value of this company and we need to make sure we continue to position ourselves for the future and we will watch the capital markets and raise either debt or equity, as is most appropriate.
Unidentified Analyst
Okay. So basically, those options are still on the table then?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Yes, they are still on the table, but again, we're going to do what's right in terms of... in the short term but as Don mentioned our long-term balance is always around the 45% equity ratio.
Unidentified Analyst
Okay. Alright thank you.
Operator
Thanks. And we do have a question then from the line of Heike Doerr [ph] with Janney.
Please go ahead
Unidentified Analyst
Good morning. Wanted to follow-up on Don's comments about Trenton.
We have seen an article back in mid-October that headquarter Trenton official is saying that the deal was all by dead. I was wondering if you could comment on what the status of this approval is from the commission.
And if this falls into 2009 and doesn't get completed here at the end of 2008, does that throw off the timing of your pending New Jersey rate case?
Donald L. Correll - President and Chief Executive Officer
I think there were four questions there. But you gave a rapid succession.
So let me see if... I'll deal with Trenton first.
To paraphrase some one the reports of something that was a bit premature or the report of someone's early demise. We have had opposition voiced by a variety of people to whether or not these systems should be sold by the city Trenton going back to before the time when Trenton actually put them on the market.
So there are always accounts of opposition and I think there was a report that you are referring to that one of the officials said that perhaps it was dead or perhaps it had hit some snag and that is an unfortunate quote that was out there because our petition is still alive and well and we are still having discussions and it is still active before the commission and with all of the interveners actively engaged. We...
working regularly with the commissions, I think it's fair to say that we are a bit more tuned into the process than perhaps someone who is going before a PUC for the first time may be and it is a process that you have to go through and you have to take all of the interveners opinions and suggestions and that's why we built some of the protections that we did into the contract for us that we knew that this hinged on what the ultimate rate recovery allowance would be by the regulators and what the rate base would be allowed. And we fully expected and had spoken with the Trenton officials also that was...
there could potentially be some give and take in some of this and other opinions besides those that they and we had. So we're working through that process.
We have it coupled to our rate case, but we are able to decouple it not to confuse it with Debra's earlier discussion of decoupling. But it is not something that necessarily has to impact our rate decision and we're working then both on parallel tracks and hope that we can conclude them simultaneously but we're prepared to go in separate directions with them.
I'd also say that it was always our plan and our hope that we could resolve them simultaneously and that we would be able to finish them both by the end of the year. We're still optimistic in that regard but if the Trenton acquisition tends to linger a little bit longer, we will be coupled then as appropriate and if we're able to finalize that acquisition early next year, that's not terribly inconsistent with what we've always said about the timing.
Unidentified Analyst
So there is a effective date for increased rates in New Jersey, does January 1st still make sense?
Ellen C. Wolf - Senior Vice President and Chief Financial Officer
Generally, Heike [ph] what we find in New Jersey is it takes 11 to 12 months for a rate case to be settled and we did file this in January of '08.
Unidentified Analyst
Okay. That's helpful.
Thanks.
Operator
Thank you. And this does conclude the question-and-answer portion of the call.
I'd now like to turn the call back to Don Correll for any closing remarks.
Donald L. Correll - President and Chief Executive Officer
Well thank you everyone for your questions. Thank you for your attention and thank you for your continued interest in American Water.
As Ellen and I both said we're exited about our future. We are pleased with the results that we've been able to achieve for this third quarter.
And we look forward to your continued interest and look forward to talking to you on our next call. Thank you.
Operator
Great, and thank you. And this does conclude today's conference call and webcast.
You may now disconnect. .