Ed Vallejo - VP, IR Jeff Sterba - President & CEO Walter Lynch - President & COO, Regulated Operations Ellen Wolf - CFO & SVP

Kevin Cole - Credit Suisse Neil Mehta - Goldman Sachs Michael Roomberg - Ladenburg Thalmann & Company Gerard Sweeney - Boenning & Scattergood Brian Chin - Citigroup Steve Fleishman - Bank of America Kevin Cole - Credit Suisse Jonathan Reeder - Wells Fargo

Thank you. Good morning, everyone and welcome to American Water's 2012 second quarter earnings conference call.

As usual we will keep our call to about an hour and at the end of our prepared remarks, we will have time for questions. Before we begin, I'd like to remind everyone that during the course of this conference, both in our prepared remarks and in answers to your questions, we may make statements related to 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.

These risk factors are set forth in the Company's SEC filings which are available to the public in the company’s investment relations website. With that I would now like to turn the call over to Jeff Sterba, our President and CEO.

Thanks Ed. Good morning all and thanks for joining us this morning.

In addition to Ed, I have also got with me Ellen Wolf our Chief Financial Officer and Walter Lynch, President of the Regulated Operations. It's great to speak with all of you as we announce very strong quarterly results and our most recent consistent string of record setting quarterly earnings reports.

Underlying the performance for the quarter is frankly one thing, consistent execution of our strategy. From investing appropriate capital to manage supply and delivery issues and that’s particularly given though weather challenges and drought conditions that we are facing throughout the country.

To drive operational expertise through developing a culture of continuous improvement and to growing our market based opportunities within and outside of our footprint is really execution that counts. All the while keeping the essential regulated feel of our cash flows our risk profile that you would expect when investing in the water utility sector while providing multiple avenues for solid growth.

So to summarize the quarter on slide five, you can see we have delivered very strong second quarter and year-to-date results and 11.5% increase in revenue quarter-over-quarter was coupled with solid cost control that resulted in an operating efficiency ratio for the last 12 months of 41.7% compared to 45.2% for the prior 12 months. These two items fueled a 56% increase in earnings per share from continuing operations quarter-over-quarter or more than a 42% increase for the first six months compared to the same period if 2011.

We saw similar improvements in cash flow from operations with the 67% and 21% increase for the quarter in six months respectively. And this provided an additional $55 million of internal cash so far this year to help fund our regulated investments.

This all reflects in our earned ROE which for the last 12 months increased almost a full percentage point over the prior 12 month period and as you know in May our Board of Directors increased its quarterly cash dividend payments which is payable in September by 8.7%. Also based on our performance so far and prospects for the balance of the year we are increasing our earnings guidance for 2012.

The range that we have had in place for the year is a $1.90 to $2 per share. We estimate that the company’s 2012 earnings now will be in the range of $2.12 to $2.22 per share for continuing operations.

Assuming normal weather patterns for the balance of the year and by that I mean from August going forward. Included in that range of 212 to 222 is $0.13 to $0.16 per share which is our best estimate of what we think is associated with increased pumpage experienced throughout the end of the July due to weather both in parts of our eastern operations as well as particularly the mid-west.

So, we are increasing our guidance range by $0.22 a share of which 60% to 70% is weather related and the balance is improved in our baseline performance. The mid-point of the new range translates into about a 22% increase in earnings per share from continuing ops over 2011 and roughly a 14% increase once you take out what we have indicated or likely impacts of weather through July.

So turning to page six, let me touch on some of the highlights since our last quarterly review which that helped fuel some of this earnings performance. As you know we closed on the New York acquisitions in the sale of our systems in Ohio.

I am very pleased with how this positions us from a cost, growth and regulatory perspective. I think this was truly a transaction that benefits both of the parties.

We also have completed the purchase of four tuck-ins during the quarter and we signed a public, private partnership agreement to install new order lines to bring high quality public water to a community in Pennsylvania that is struggling with contamination from waterborne pollutants. This solution which is we think one of the ways in which we really do help our customers is the partnership between our Pennsylvania subsidiary, the township and the Department of the Environmental Protection in Pennsylvania.

Also in Pennsylvania we recently entered into an agreement with Rex Energy to build about a 3.5 mile water pipeline extension in Butler County that’s geared to support shale gas development. With construction of a booster station, this extension will also provide local residents who currently rely on private wells.

The option to receive public water service and support, potential future commercial and residential development projects in this area. Through June of this year we have provided about the same amount of water to Marcellus drillers as we did in all of 2011.

On another note something we announced yesterday that we are very pleased and proud about our home owner service subsidiary has entered into a five year contract with the City of New York to provide the 600,000 home owners in its boroughs with the opportunity to purchase water and sewerage line protection. This is the largest U.S.

City of offer this kind of service contract to its residents and we expect to launch that program before the end of the year. The arrangement provides us access to the New York customers as well as it allows us to utilize the Cities water Bill, experience shows that these two kinds of elements lead to a significantly higher market penetration rate.

On the regulatory front rate cases have been resolved in three states during and subsequent to the quarter and one new case has been filed. The decisions received in California in the general rate case which was for 2012 through ‘14 but the cost of capital case and our proposal to remove the San Clemente Dam are particularly important because they provided resolution for issues that were outstanding for some time.

The decision in the San Clemente Dam removal is significant as it enables us to provide a positive environmentally friendly outcome in a manner that ensures full cost recovery. In addition you know that the in New Jersey the commission approved the implementation of a DSIC or the rules associated there with and we have now made the foundational filing to accelerate the rate at which we can invest in our systems there.

If this filing is approved which we would expect to appear within 90 days, this could result in the investment of an additional $140 million over the next two years to help improve the underground infrastructure in New Jersey. Our drive to create a culture of operational excellence and continues improvement is frankly is really taking hold and it is just, it's tickling to see how our people are responding to the number of initiatives that we have and frankly helping create them.

I think a number of indicators of that are flat operating cost trends, substantively improving operational efficiency ratios and also going live earlier this week on the first phase of our business transformation effort which you will recall is the implementation of SAP foundational platforms. The ones that we have taken live this week involve our financial systems and the human resource management systems.

These are always bumpy roads, I have been through them before, you all have seen companies go through these and there are always a challenge because it's not just new systems but you are changing the way think you are causing them to do something different than they have done for years and that’s a process of change. We recognize and full expect that we will encounter some of the same kinds of productivity declines that any other company implementing this kind of a massive change goes through but I am just tickled and pleased with the way our folks have been able to get to this point and doing everything else relative to the business that we have asked them.

Now before Ellen goes through our financial performance in more detail I would like Walter to give you a brief update on the weather and its impacts on us on our overall system condition. Walter?

Thank you Jeff. So as we all know, part of the story this quarter is weather and we can go to slide seven, this mat shows the extended drought throughout the country.

The yellow shades are areas of moderate to severe drought and the red shades are areas of extreme drought. You can also see the blue areas on the slide which indicate our service territories.

Generally, our water supply across the countries are in good shape, providing reliable services fundamental to our business and this quarter the record heat and lack of rainfall in many of our states have posed some challenges but only in limited cases we have potential water supply issue. I want to talk about a few of those now, in Pennsylvania there is a drought watch in effect for 15 western counties.

We serve customers in nine of those counties and there are no restrictions in place at this time. Our reservoirs were at normal levels at this time of year.

In Missouri, the states encouraging water conservation, the Merrimack River which is one of our sources supply for St. Louis County is at historic low levels but there are no restrictions at this time.

Also in Joplin, Missouri we have issued voluntary water conservation request and we are asking that our customers conserve water during this time. Indiana is under a state wide drought watch but we have adequate supply at this time.

But we can’t control the weather we can and do prepare for it, and this is where American Water truly has some great stories to tell, for example in Joplin, Missouri we installed the new gate system on top of our dam to increase its depth by 2 feet and this allowed approximately 68 million gallons of water to the reservoir. Also in Missouri, when the process of installing additional intake pumping capacity in the Merrimack River, this work will be completed in the next few days and it's well ahead of when we estimate it will lead to the river level continue to fall.

Central Kentucky, a new treatment plant and facility that opened in 2012 has kept our company well ahead of demand despite the extreme weather they have experienced there. This really shows the value of our long term planning.

This plan addressed the long term water supply challenges in Central Kentucky. But it's more than our investment and our systems that keep our service reliable.

It's also our outstanding employees. In West Virginia, in late June, storms paralyzed the state leaving approximately 700,000 residents without power which means you don’t pump water.

Our crews worked round the clock with emergency generators and other equipment to ensure continuous flow of water to our customers. We are very proud of the reference and accomplishments.

Now I would like to turn the call over to Ellen and she is going to provide some details on our financial performance.

Thank you very much Jeff and Walter and welcome to those of you for joining us on the call today. Let me take a few moments now to describe the underlying factors that drove our second quarter results.

As always built around our commitment to ensure reliable service to our customers and results to our shareholders. Turning now to slide nine, as Jeff indicated for the second quarter, we delivered very strong financial results with increases in revenues, net income and earnings per share as well as continued improved in our O&M efficiency ratio.

These results were driven by our teams commitment to strategies that focus on investing needed capital, providing value to our customers, controlling costs and as well as previously mentioned hot dry weather. For the second quarter ended June 30, 2012 we reported operating revenues of approximately $746 million a $77 million or 11.5% increase over the approximately $669 million reported for the second quarter of 2011.

Income from continuing operations for the second quarter was approximately a 117 million or $0.66 for common share compared with around 75 million or $0.42 per share in 2011 or an approximate 56% growth over the prior year. As Jeff mentioned earlier hot and dry weather in a number of our states led to record pumpage which had a significant impact on earnings.

We believe that this may have added in the range of $0.06 to $0.09 to earnings per share for the second quarter. Growth and cash flow also showed solid growth for the quarter.

Net cash provided by operating activities for the three months ended June 30, 2012 was around a $169 million compared to around a $101 million for the second quarter in 2011 mainly due to the increase and operating revenues and changes in working capital. Now I would like to discuss the various components of our income from continuing ops starting of course with revenues.

Revenues from our regulated business increased by a net of around $73 million or around 12% from June 30, 2011 to ’12 driven mainly by new rates awarded and various surcharges generated by regulators related to our continued investment and infrastructure and higher customer demand over the prior year. For the second quarter of 2012 impact of these rate increases was approximately $32 million.

The increase in revenues associated with higher demand amounted to approximately $27 million. In addition, we also received increased revenues from acquisitions of around $8 million the most significant being our New York acquisition in the second quarter.

In June, our California general rate case was approved authorizing additional annualized revenues; these revenues are retroactively effective to June 1, 2012 and in some California districts retroactive to 2011. The total amount of the California retro adjustments included in the quarter was around $7 million.

During the same period, our market based operations revenues increased primarily as a result of higher home owner service group revenue. Turning to the slide on rates slide 11, as you know our ability to invest in our infrastructure is driven by our ability to earn an appropriate rate of return on our investments.

Slide 11, shows rate cases that have been filed and those that are awaiting final orders on as well as rate cases and infrastructure charges that have been recently granted. During the second quarter of 2012 we filed a general rate case in Tennessee which would generate approximately $10.6 million in total additional revenues if approved as buy it.

As of August 2, we are awaiting final orders in three states requesting additional annualized revenues of around $54 million. There is of course no assurance that all or any portion thereof has any requested increases will be granted.

Looking at rate cases and infrastructure charges that have been granted for the second quarter and through the end of July, the company received annual rate case authorizations in New Jersey, Indiana and California for additional annualized revenues of around $65 million. As of August 2 year-to-date we have been granted additional annualized revenues assuming constant sales volume from general rate cases totaling $95 million and 8.4 million in additional annualized revenues from infrastructure charges.

Turning our attention to water sales volumes, total company sales volumes increased from the quarter ended June 30, 2011 to 2012 by 6.6% and 2.7% for the six months period. This increase in water sales volumes was primarily driven as you can see by our residential customer class which is up 6.7% from the second quarter of 2011 and is clearly driven by the hot dry weather in our eastern and mid-western states mainly New Jersey and Missouri.

Total operating expenses for 2012 second quarter increased by $7.5 million or 1.6% from the 2011 second quarter. Operation and maintenance in the regulated business was relatively flat actually decreasing by 0.5%.

Production cost increased mainly attributable to increased sales while employee related cost decreased 1.9% primarily due to decreased group insurance and pension expense as a result of lower head counts. Customer billing decreased 19% mainly due to improved collections of our receivables.

The increase in other expense is attributable to higher insurance cost from the resolution of prior years’ claim. The market based business operations decreased and total operating expenses of 1.8 million was primarily driven by a 1.6 million or 2.2% decrease in O&Ms expense which mainly is the result of lower production and supply cost in the quarter.

We also experienced higher depreciation expense of $5 million due to additional utility plant placed in service. And increased general taxes of $2.3 million mainly attributable to the ongoing cost of our New York acquisition.

Overall our regulated O&M efficiency ratio improved by 43.2% for the quarter ended June 30, ’11 to around 38% for the quarter ended June 30, ’12. This quarter’s operating efficiency ratio was of course aided by the extra revenues we received in the quarter primarily from weather.

Turning to the next slide 14, as mentioned in our press release we also announced that we now see minimum need for future equity offerings in the normal course of business. This is driven by many factors including the continued growth in our net income which means continued growth in our cash flow as well.

In fact SMP cited our “strengthened financial profile” when they reaffirmed our rating and revised our outlook to positive. These factors allow us to believe that our ongoing routine cash requirements will be met with cash flow from operations and debt bonds while continuing to maintain a stable equity ratio.

Based on our year-to-date performance the weather impact in the second quarter, our continued focus on expenses control and appropriate returns on needed investment, we are updating our 2012 earnings guidance. We now estimate that our 2012 earnings will be in the range of $2.12 to $2.22 per share for continuing ops.

This estimate includes our preliminary view of water sales through July and assumes a normal weather pattern for the balance of the year. This range includes $0.13 to $0.16 per share for the year related to weather and the previously mentioned $0.06 to $0.09 for the second quarter is accounted for in that 13% to 16% range.

And with that I would like to turn the call back to Jeff for closing comments before opening it up for your questions.

Thank you very much Ellen. On slide 16, we have the what we always close with which is what we said at the beginning of the year, you could us accountable for.

I won't go through these in any detail other than to say that every single one of these items is well under -- is either been completed well underway and ongoing effort going on with it. Let me just close with two quick follow-ups relative to O&M costs.

The first is that to keep in mind that the impacts of the discontinued operations, the sale of Ohio, the acquisition of New York does not affect the measures because those discontinued ops are taken out of our calculations whether it be what we show is total regulated O&M cost or is the operating efficiency ratio. And the other one is, one of the things and this is just from I guess doing this for few years, one of the things you always look at as you are building a change process if you will, building on the things that our company does really well today and then but also trying to enhance the things that maybe we are not quite so good at.

On the operating cost is how diversified is the reductions or the savings that you are seeing. Sometimes you will see it happen in one part of the business and that’s it and that can make you a little nervous, what I am so pleased about seeing is it across the entire company, it's all of the pieces of the business are operating in a more effective more and that gives you a lot more comfort about the long term and the fact that what you are trying to change is actually taking hold and people are jumping on it with excitement.

So with that that’s the end of our comments and we will open it up for any questions you all may have.

First congratulations on your continuous O&M improvement effectiveness, it's very impressive. And so I guess Ellen my first question is for you with the equity, can you help put some I guess more color or some duration around your ability to stay out of issuing block equity as it does appear that you are internally generated cash plus I guess maintaining your measured payout ratio and use of NOL and DRIP, they can stay out for a long time.

Is that an accurate description of I guess the possible timeframe?

The way I would look at it, it is a couple of things, our NOL carry forward has probably another 10 years give or take so you look at it in terms of the ability to get the benefit from the NOL that’s another 10 years. Our DRIP is only providing a small amount, we would love to see it increase and encourage all to utilize it but it's just a little bit happening in the equity but really to look at it over the long term is to look at as once we have and continue to grow net income the way we are growing and to continue their old paths the way we are going, we really don’t see a need to do an equity offering.

Okay and then now with New Jersey having the DSIC program, what percentage of your CapEx program do you think kind of fits under earning in real time returns.

It is about 25% of our CapEx is been recovered through DSIC like mechanisms and that’s going to increase but remember that on for New Jersey, we won't see that take effect until what you said third quarter, so it will start and that $140 million that investment will start after we get approval of the program -- of the foundational (inaudible).

Jeff and Ellen, so you are 7% to 10% EPS growth that you have affirmed this morning guidance if that’s off the weather normalized 2012 base, so I would just strip out the pumpage, it's 206 to 209.

Yes Neil the way to think about it is the 7% to 10% is not a year-over-year number, it is a long term projected growth rate. So and assumes kind of the things that we don’t control like weather are just kind of normal.

So it does, you should think of it in terms of normalizing that amount out.

And even if we were to strip out the pumpage benefit you still would have raised guidance here, so what specifically contributed to the balance of the guidance rates relative to the base plants.

Well you are right, we are in the 7% to 11% in the original guidance so a mid-point of say nine and we are now in the 14 range at the mid-point of the new guidance if you take out weather. It is fundamentally is what I talked about Neil in terms of execution.

It's execution of the strategy both in terms of building a culture based on continuous process improvement and operational excellence. It's having multiple avenues for growth that if you just think about water utilities in general while you think okay it's going to be, it's a function of regulatory rate relief and maybe a little bit of weather.

For us if we do DSIC (ph) or four tuck-ins like we did this past quarter that’s an element of growth. When you sign a deal to be able to extend line protection to 600,000 customers that’s like adding a New Jersey to that business.

So multiple of different avenues are grown, so it's really all of those combined.

My last question is around whether normalization in the rate case process, how many of your jurisdictions whether normalized, so if you were to file in 2013 as you are going to do in multiple jurisdictions with the 12 test year, will the commissions strip out the benefit of this hot and dry weather?

Generally when we file for rate cases we use what I call off months, the more normal months, November through let say March to shadow the trend in usage and generally what we have also found because some years if you remember about three years ago we saw the exact opposite impact where usage was way down because of weather and this year we see it's up because of weather. So I think both the regulatory side and our side tries to take the impact out.

Question on the economies of the New York City contract, maybe if you can kind of provide and estimation of what the premiums for your per customer and then also maybe talk more broadly about the other jurisdictions where you have visibility to put this on the Bill itself, what your penetration rates are in those territories.

Great question Michael but I am not going to answer, we just won't go into that much detail as you can probably understand that’s a competitive market and so that kind of detail is quite protected. I would just say that where you have access to customer list and you have the ability to utilize the local utilities bill, you get substantively higher penetration rates than in those areas where you don’t, we already today operate outside of our footprint, our regulated footprint in providing this competitive service.

We have an oath with a couple of communities through the same kind of relationship with New York City and as well as just in other communities where we have done direct mail. It’s a full competitive business.

New York is unique in that is the largest one its kind that's ever been issued. And we're very pleased with that, it's not a spectacle that you turn on.

It's extra wild to build. And since it hasn’t been offered in the past it will be a new product for a lot of the folks in New York.

But we're very, very excited about the opportunities.

if I can also add one thing from a customer perspective, being able to add the cost on to their water bill we find the customers are much more satisfied with that than having to get a separate bill, separate distinct. So we get higher customer satisfaction.

And then just one follow-up for Ellen. The reduction in uncollectible account expense of about $2 million in the quarter.

Is that going to recur over the next 12 months? I think was the first that it had shown up in a quarterly result.

We are seeing a reduction in our uncollectable. We will see what happens in the third quarter.

They are some very large builds that will be going out, larger builds; I wouldn’t say large, versus the utilities but larger builds. But we are seeing better on the collections and I give credit to many of those in operations and our customers' response.

Looking at the O&M side. Volumes were up about 6.6% and then actually on the regulated side the expenses were down 1.4%.

These are obviously great results but is there any more detail that you can give into how this accelerated so quickly? It seems like a very, very large improvement in a short period of time.

I mean understanding there is a weather component but volumes go up, there's some more cost associated with that and on a year-on-year basis the actual figures stayed in real terms stayed almost stagnant.

There's just a couple things and all those clothes are now on to add anything they want. I wouldn’t say that this is like some cliff thing that's happened.

Obviously you don't see the month-to-month, just the quarterlies but this is kind of the building of a trend and there is no single component, its exercising of our supply chain or aggressively and effectively. It's some labor reductions that we had.

In fact if you recall that we expensed some charges in the first quarter for severance for some fairly small downsizing that we did. If you look at the breakout of our cost, our product cost actually went up which you would expect.

But they didn’t go up nearly as much because of the things that we have done relative to acquisition, the chemicals, the power that help drive down the cost, the variable cost associated with production.

It’s right on, it's really due to the favorable pricing on a chemicals and the continued execution of driving cost down primarily on the power side and we executed some contracts that were much more favorable, some of our large things and we're seeing the benefits of that.

And one other thing to add because of the lack of branding we have had lower liquidity in our water so that we did not have to do quite as much treatment as you would expect.

Was this above your or below, however you want to look at it, of your plan at the beginning of the year?

Our plan was baked into our $1.90 to $2 a share guidance and there is a lot of moving parts. I don't think we'll get into a point of starting doing the plusses and minuses of each individual part.

We are doing obviously quite well relative to that entire part.

We'll look at this as a permanent change in terms of the costs associated on this. All things being equal, I mean understanding the weather and everything else but there is…

Well think about power costs for a second Gerard. There are two things that affect the power cost for us.

One is, what's happening is that overall power markets. So obviously when natural gas prices are low, power prices are going to be lower unless there is some fundamental demand supply imbalances which shifts prices up dramatically.

But the other piece of it is how effective are we in acquiring that model. So there is two different pieces to it.

I can't tell you how much is which piece. Obviously we're going to continue to do everything we can to improve our acquisition prowess and the tools that we use to do that but at the same time we can't control what happens to natural gas prices.

So you can't say its permanent unless you are going to say well let`s normalize what happens to power prices, chemicals prices all those kinds of things.

Question for Ellen, when you talked about not needing equity for the current timeframe, how far out does that go. Does that come and apply to '13 and '14 as well?

The way I would look at it Brian is in terms of again, what would drive our need to equity and as we said and have had the benefit in the past, the higher your net income the more, the less you need equity, the stronger your cash flow, the less we need equity and again, I would add with those NOLs that we're able to cash forward, give us more cash. So, what we're saying is right now we don't see a need if only those things continue and we continue to see the balance sheet strengthen.

We don't see need to enforce where the equity are.

When you talk about the long-term 7 or 10% EPS growth rate, in your mind, how much of that comes from things like acquisitions and tuck-ins versus your organic growth at the businesses that you currently already own.

Well I think the way to think about that Brian is, we said that investing 800 to $1 billion, the mid-point of $900 million a year basically provides the engine to fund about 6% growth. And it can be a little higher, maybe a little lower but its right in that range, 6-6.5%.

and the key for us obviously is being able to put that in and getting value of that through the rate taking process and so that's why we really focus on our cost control so that our rate cases are really capital base and we keep the size of the increase at a manageable level. So going beyond that, that means whether its tuck-ins, acquisitions, new product services and new markets.

So new markets for example, moving into New York Citi, new products and services for example moving into from using home owners services in that case is moving into the indoor plumbing business or on in our existing service territories is moving more into waste water and sort of just portable water. So those are extensions or logical organically extensions that add in addition to acquisitions.

So you remember that when we sometimes euphemistically refer to as the sandbox chart that's got the four colors and it shows how over time, the weight of those components will change as our efforts and success in improving our OEM existing assets gets to a point where we're earning our full cost of GAAP.

When you look at the efficiency targets, obviously since it’s a cost percent of revenue, the revenue has been a little benefited by the strong weather, so if we're trying to think about is there a way to kind of whether normalize where you really are on this efficiency ratio or to put it another way, should we expect that to kind of pull back a little bit the next year if it's like a normal weather year before you get there?

Remember we're doing a 12 month rolling average not a quarter over quarter. If you look at the quarter over quarter, it would clearly have a big dip for this quarter and you should expect it to come back up a little bit.

And that's why we think quarterly measures for something like this don't make a lot of sense. So you look out on a 12 month rolling average which normalizes our sum of that.

Its still, this quarter has a significant impact because of how good it was, but it won't have nearly as dramatic an impact. When we recorded the third quarter earnings we'll have to see if it's sticking in the same range, creeping up a little bit.

Remember our long term goal is below 40 by 2015 and I'd say we're well on target to hit that.

Given your footprint in Marcellus and the likely EPA regulation coming next year on frap bottle recycling, do you see this as a meaningful growth opportunity for your non-regulated businesses?

It is a business opportunity that we're taking a hard look at. There is a lot that goes into what kind of systems will be used and by that I mean centralized, versus decentralized.

What we may want to take on and the kind of the technologies that will afford the lowest cost for doing this. But I come from a part of the world where in the west we're water reinjection is done over time.

But the difference is, in the western formations there's almost a giant sucking us down trying to hold that water back down into the ground. In the east, given the geology they have to put it under such pressure and I think is creating a lot of concerns around the reinjection of water in the Marcellus area because it is just a different geology and that puts more pressure may be going into the water treatment side.

So we look at that as a business opportunity. Obviously if we do it, we're going do it as good and say for an appropriate a way as possible.

How big do you think this opportunity could be?

I think this is one of these markets that's got so many different conductions vectors if we go, it's hard to say. I mean they could be very large.

One of the things that you got to remember is that these wells, these are not long live wells. You go into the west and you'll be able to see a lot of wells it will produce for 10-15 years and then you put a pump around it.

These wells are shorter rides and so in order to keep the gap flowing, they've got to keep drilling. But I think both is, obviously that industry is very focused on how do we reduce the amount of water that we need to frac each well and that's about 5 million gallons.

So they are going to figure out how can they reduce the amount of water, that will reduce of amount of flow back and what's going to be the drilling. If you look in Pennsylvania, you’ve seen about roughly 25% reduction in drilling routes operating just this year.

Now I've started to stabilize and maybe it will come back a little bit as natural gas prices have turned up, but frankly there's been a significant downturn. One of the things about our approach into this business is we're fundamentally leveraging our infrastructure by which we serve retail customers throughout Pennsylvania and what we're finding is a lot of extensions that we make, we will serve some drillers, this Rex pipeline is a classic example, but it really opens up the path for expansion of our territory and to serve new residential customers and our regulators are comfortable with this approach.

From a business perspective, one of the things that means is we take on less risk, because we don't really have commodity or volume metric risk and we are going to recover those costs over a reasonable period of time, but yes, there may be other situations that will appropriately be done on the other side where you have a dedicated line that will one serve one instead of customers. I think that model is what will hold true if the flow back water treatment market develops because those treatment facilities have to be different just because of some of the compounds and the level TDS that you're having delivered.

Ellen, just to follow up on your equity comments, is there any change to your 45 to 50% target equity ratio or are you just saying even without any external rate you can naturally grow into that over the next few years?

We're talking about naturally growing into our environment on equity and I should also add one other point on this is, it does assume as we're talking about this, the continuation of 800 to $1 billion of investment in our infrastructure.

Ellen just mentioned the S&P, it really best work on.

I was just saying, assuming kind of the $900 million of annual CapEx, it looks like over the next five years, given the NOLs and the growing cash flows and everything, it looks like you're almost getting close to being self-funding, is that kind of where you see yourself from a net debt perspective?

By self-funding you are talking about no new debt issuances?

Not quite there but getting pretty close.

Yes, as long as the cash flow continues to grow, the answer will be yes to that with some debt. So there will be some debt.

And that Jonathan obviously is because your net income is growing, that increases our retained earnings and so we have the ability to issue some debt to maintain the same gas structure.

And then Jeff you mentioned with the New Jersey DSCI, assuming that goes through, is it 140 million of additional CapEx above your 800 million?

No what it really does is it may keep us a little more in the middle or upper part of that because remember for example this year, our total CapEx will be over 900 million largely because of ET. So in fact it may help to keep us up in that range and that 140 is over two years.

So to it's kind of roughly (inaudible) if you look at it that way.

And a little of it will just be allocating your current budget more to New Jersey given the more constructive for recovery mechanism.

That's exactly right Jonathan. Where the opportunities provide, we've got scarce capital, we're allocated, we're as encouraged to be invested.

And then finally, how should we be thinking about the dividend payout ratio and growth with the strengthening balance sheet. Do you continue to target the lower end of that 50 to 70% range to strengthen that equity ratio or might you get a little more aggressive with the dividend increases?

Well I guess two things, when we announced in May, we narrowed that to really 50 to 60%. We talked about the comfort that we have relative to the growth and we said that we would expect the dividend to grow more in line with the growth rate in our earnings per share.

So you would expect to see it grow in that kind of a range. We're at the low end certainly with what we're now projecting for this year, we're in the low end but if earnings are growing at a more rapid rate, we're going to category more in line with what that earnings per share is.

And as we said in the past Jonathan we'll always continue to have that balance between what's right for the shareholder and the cash flow needs of the company.

I wanted to ask a big picture question and it's on a map on page seven. I don't really mean for this to be a softball question, but given there was the drop conditions in the weather in sort of regional impact its having on the economy, the municipal budget situation, what have you.

Are you seeing any material change in the movement towards larger regional water projects or desalination or are you being called in for helping with anything or is it just sort of too early that this quarter's impact is having on that sort of movement?

Tim in terms of regional water development or people going oh, my god, we've got created more supply, I think it's cause people to think, if you also believe that weather patterns will become more volatile and droughts and precipitation will become more extreme, it does cause you to have to think about water supplies different. For us, one of the key to elements is to start really thinking about one water as opposed to these different streams of portable water, waste water and storm water.

But think of it a lot more holistically so you can get the right resource to the right use and that's where we think, reuse will become more than a tickling fancy in some constrained areas. It will become more mainline, main stream if you will.

I wouldn’t say that we are seeing a major awakening or aha aha. But I do believe that you are seeing people going oh gee!.

This could get serious. And I think that helps for a focal point on both the infrastructure as well as the opportunity to advance technologies like reuse.

And I think the other push is raising more opportunities, questions, doors but we'll wait to see what it really translates into, is the realization by municipalities that Uncle Sam is not going to bail them out of dire capital requirements or pension obligations that are taking away from their ability and investing in infrastructure and things like that. So I think there is a lot of churn which I will not jump to the conclusion is result space yet.

Well I'll just thank you very much for joining us today. Stay cool, stay safe and we'll look forward to talking with you in our third quarter.