American Water Works Co. Inc (AWK) — Q2 2015 Earnings Call Transcript

Thank you, Gary. Good morning, everyone and thank you for joining us for today's call. As Gary said, my name is Greg Panagos, and I'm the new Vice President of Investor Relations for American Water. Before I read you our forward-looking statements, I just want to say I'm happy to be here and excited about the opportunity with American Water. While I haven't had the chance to meet most of you yet, I look forward to working with all of you. We'll keep the call to about an hour and at the end of our prepared remarks, we'll open it up for your questions. Before we begin, I would like to remind everyone that during the course of this conference call, both in our prepared remarks and in answer to your questions, we may make statements related to future performance. Our statements represent our most reasonable estimates. However, since these statements deal with future events, they are subject to numerous risks, uncertainties, and other factors that may cause the actual performance of American Water to be materially different from the performance indicated or implied by such statements. Such risk factors are set forth in the Company's SEC filings. I encourage you to read our 10-Q on file with the SEC for a more detailed analysis of our financials. Also, reconciliation tables for non-GAAP financial information discussed on this conference call can be found in the appendix of the slide deck located at the Investor Relations page of the Company website. We'll be happy to answer any questions or provide further clarification if needed during our question and answer session. All statements in this call related to earnings per share refer to diluted earnings per share from continuing operations. And now I would like to turn the call over to American Water's President and CEO Susan Story.

Thanks, Greg. Good morning, everyone, and thanks for joining us. With me today are Linda Solomon, our CFO, who will go over the second quarter financial results and Walter Lynch, our COO and President of Regulated Operations, who will give us key updates on our regulated business. I would also like to officially welcome Greg Panagos to our team as Vice President of Investor Relations. Greg has more than 20 years of corporate finance and investor relations experience, including several years in the energy industry. He has served in a number of senior investor relations and communication roles, including Barrick Gold Corporation, Transocean, Noble Energy, and Pennzoil. His knowledge and experience are a great fit for American Water, and we're happy to have him join our team. And now for the quarter, once again, our employees delivered solid operational and financial results. We continue to execute our strategies through ongoing investment into our infrastructure, a sharp focus on operational efficiency, and growth in our regulated and market-based customers. Turning to Slide 5, we reported earnings per share of $0.68 for the second quarter. Excluding the impact from the Freedom Industries chemical spill in 2014, this is about an 8% increase compared to the second quarter of 2014 and a 9% increase year-to-date through June. Based on our performance through the second quarter and also including our known July weather impacts, which Walter and Linda will discuss shortly, we are reaffirming our 2015 earnings guidance to be in the range of $2.55 to $2.65 per share. On Slide 6, you see that we continue to deliver on our strategies in both regulated and market-based segments for the quarter and year-to-date. The capital investments we make in our regulated segment continue to be the foundation of our consistent growth. So far in 2015, we've made about $474 million in infrastructure investments to ensure safe, clean, and reliable water services for our customers. We plan to invest $1.2 billion to $1.3 billion in capital in 2015, with over a billion dollars of that to improve our water and wastewater systems. About $200 million is allocated to regulated acquisitions and strategic investments. Through the second quarter, we invested $41 million in acquisitions, which does not include the Keystone Clear Water acquisition, which closed on July 9th. This is our last quarterly call. We’ve completed the purchase of water and wastewater systems in Haddonfield, New Jersey, and Mishawaka, Indiana and in both Arnold and Redfield, Missouri, officially adding 19,000 customers to our regulated segments. We also have 17 pending acquisitions which, once approved and closed, will give us the opportunity to serve an additional 14,000 customers in several of our states. The largest of these acquisitions is the Environmental Disposal Corporation, which serves 5,300 wastewater customers in Northern New Jersey. This acquisition is a great example of executing on our long-term strategy to focus on wastewater acquisitions in areas where we already serve water. Our marketing-based segment had a strong second quarter. Homeowner Services entered into an exclusive contract with the City of Rialto, California, to offer service line protection programs to homeowners. We were also recently notified by Wilmington, Delaware, of its intent to award an exclusive contract to offer our programs to its residential customers pending city council approval. If approved, we expect both of these programs to launch by year-end. As you know, our long-term growth triangle includes a market-based share component which we have shown could contribute from 0% to 2% of our long-term earnings growth. This is our last call; we announced and closed on the acquisition of Keystone Clearwater Solutions. Keystone is a water services provider to oil and gas companies in the Appalachian Basin, which includes the Marcellus and the Utica. Keystone’s leadership, which we have left intact, has over 30 years of experience in addressing water solutions for Appalachia’s oil and gas market. The team of 350 employees has a strong reputation for meeting their customers' needs with a priority on safety and protecting the environment. These values are consistent with American Water’s values and they matter deeply to us and are critically important. Keystone’s offerings are aligned with American Water’s core competencies supplying, transmitting, pumping, and storing water and developing the infrastructure that goes along with those services. Despite the fact that Keystone is a relatively small part of our overall business portfolio, we know it faces somewhat different risks than American Water’s traditional lines of business. As a result, we set up a legal structure for Keystone. For example, we’ve established it under a holding company separate from our existing regulated segment and separate from our market-based American Water Enterprises entity. As a reminder, American Water Enterprises is the subsidiary that includes our military contract and homeowner services lines of businesses. We expect the shale market will continue to grow for many years given the critical role it plays in energy security and economic prosperity in the U.S. In addition, we believe Keystone’s turnkey business model is repeatable in other areas of this industry, which creates opportunities for expansion in this sector. It’s important to note that over the past few years, our non-regulated segment has averaged around 11% of our revenues and 9% of our earnings. We are not going to fundamentally change the risk profile of the company going forward and our long-term plan is that our non-regulated segment in total will not contribute more than 15% to 20% of earnings over the next five years. Additionally, the upper part of that range will occur only if a meaningful part of the earnings is lower risk regulated, such as our military services business. Looking forward, we remain confident in our ability to deliver on our long-term earnings per share growth of 7% to 10% through 2019 anchored from our 2013 earnings. Walter will now give an update on our regulated segment.

Thanks, Susan. Good morning everyone. As Susan mentioned, our regulated business has delivered positive results year-to-date and I’m especially proud of our progress on our efficiency ratio, which I’ll talk about in a moment. Let me start by providing you with an update on California on Slide 8. California continues to experience the worst drought in the last 100 years. Based on an overall 25% state mandated reduction, our California American Water customers have been asked to reduce water usage anywhere from 8% to 32% depending on their level of water use in 2013. One of our districts is exceeding those reduction goals. California American Water has launched ambitious conservation outreach programs to reduce water use. This includes mail, radio, and social media and door-to-door efforts on programs such as Turf Rebate, replacement rebate, leak detection devices, and water-wide surveys. Our conservation staff is active at community events reaching out to customers and equipping them with the tools they need to conserve water. As a reminder, California American Water has rate decoupling, so our sales volumes do not result in reduced earnings. The other move in California is our water revenue adjustment mechanism or WRAM filing. As of June 30th, we had an under collected WRAM receivable balance of about $50 million, of which almost $45 million related to the Monterey district. In order to assist with the impact on our customer bills in that area and to limit future accumulations, we filed an application with the California Public Utility Commission requesting recovery of the existing Monterey balance along with a return over a 20-year collection period. We also requested that the WRAM account be trued up annually going forward. We expect a decision on the Monterey WRAM filing in mid to late 2016. As a reminder, California American Water is approximately 8% of our total regulated revenue; however, we put a tremendous amount of focus there because the issues the state faces offer us an opportunity to fully deploy our numerous water supply and service solutions. Many of these, such as our AMI Customer Alert Pilot in Monterey, could apply in many other states where we operate. On July 31st, Missouri American Water filed a request with the Missouri Public Service Commission for a general increase of about $51 million. This request includes about $25 million of new revenue and about $26 million of infrastructure surcharge revenue, known as ISRS in Missouri, which gets rolled into base rates at the end of the case. Consistent with our growth strategy, the filing includes $436 million in new infrastructure investments since 2012 to ensure reliable service to our customers. The Company's last filing was more than four years ago, and since then the Company reduced its operations and maintenance expense by about $7 million, which means we're able to invest over $40 million of capital with no impact on customer bills. We estimate that for every $1 of O&M expense reduction allows a capital investment of about $6 with no impact on customer bills. I commend our team in Missouri for their disciplined approach to managing costs. The process in Missouri takes approximately 11 months to complete, so we anticipate a decision in the second quarter of 2016. Lastly, in the second quarter, we saw wet weather in the Midwest that was offset by dry weather in the Northeast. However, we have seen above normal rainfall through much of our footprint in July, which resulted in modestly lower sales. Linda will talk about the known financial impact of this in a moment. Moving to Slide 9, we continue to make steady progress towards achieving our O&M efficiency ratio stretch goal of 34% or less by 2020. We achieved 35.9% for the last 12 months ended June 2015, which is a result of a disciplined approach to cost management by our employees. These efforts, of course, are driven by our focus on the customer and our commitment to clean, safe, reliable, and affordable water services. This is fundamental to our business. When we achieve smart O&M reductions, we can invest in our water and wastewater systems while mitigating the impact on our customers' bills. Now, I'll turn the call over to Linda for more detail on our second quarter financial results.

Thank you, Walter, and good morning everyone. In the second quarter, we continue to deliver strong financial results. As shown on Slide 11, revenues were up almost 4% quarter-over-quarter and up 3% year-to-date. We reported earnings per share for the second quarter of $0.68, up about 8% over adjusted earnings for the same period last year. Year-to-date earnings were $1.13 per share, up about 9% over adjusted earnings in the same period last year. On the right side of the page, we show each business segment contribution to 2015 earnings per share. For the quarter, the regulated segment contributed earnings of $0.68 per share or an increase of about 6%. Our market-based segment contributed $0.06 per share in the second quarter, an increase of about 20%. Parent interest in other, which is primarily interest expense on parent debt, was a negative $0.06 per share for the quarter flat to the prior year. Now, I'll go over the different components of our second quarter adjusted earnings per share growth on Slide 12. 2014 adjusted earnings were $0.63 per share. The second quarter of 2015 came in $0.05 above 2014 adjusted earnings at $0.68 per share, reflecting increases in both our regulated and market-based segments. Our regulated segment benefited from both increased revenues and lower costs of $0.03 each. The higher regulated revenue was primarily from authorized rate increases and higher infrastructure charges. The lower operating and maintenance expense was mostly due to three factors. First, lower transportation expense as a result of lower fuel prices and leased vehicle costs. Second, lower uncollectible expense as we continue to bring collections back toward historical levels after the implementation of our customer information system. And third, savings in employee-related costs from lower wages, salaries, and severance expense. For the market-based segment, earnings per share was up $0.01 due to additional construction projects under our military contracts and the addition of two new military bases in the second half of 2014. We also had contract growth and geographic expansion in our homeowner services business. Partially offsetting these improvements were higher depreciation, taxes, and other costs of about $0.02 per share, mainly from growth associated with our capital investment programs at the regulated segment. In the appendix of this slide deck, we have included our revenue and expense bridge slides to provide more detail to the variances I just discussed. Now let me cover regulatory highlights on Slide 13. We have three ongoing general rate cases in New Jersey, West Virginia, and Missouri for a combined annualized rate request of $127 million. As Walter mentioned, these rate cases continue to reflect our disciplined approach to investing. For rates effective since July 1 of last year through today, we received a total of $55 million in additional annualized revenues from general rate cases, step increases, and infrastructure charges. These are the highlights of these cases, and we encourage you to review the footnotes in the appendix for more information. Slide 14 is a summary dashboard of our financial performance, which showed improvement across the board. During the second quarter of 2015, we made total investments of $348 million, primarily to improve infrastructure in our regulated segment and for regulated acquisitions. As Susan mentioned earlier, we expect to invest $1.2 billion to $1.3 billion for the full year of 2015. For the quarter, our cash flow from operations increased approximately $14 million, primarily from earnings growth. Our adjusted return on equity increased by approximately 40 basis points over the past 12 months compared to the prior year. We also paid a $0.34 quarterly cash dividend to our shareholders in June, which represented about a 10% increase compared to last year. And on July 24, the board of directors approved a $0.34 per share dividend payable in September. As Walter mentioned in his comments related to the California Water Revenue Adjustment Mechanism or WRAM, we requested recovery of the Monterey WRAM balance over a 20-year period along with a return. Based on long-standing precedent in California, we expect to collect the entire WRAM balance; however, due to extending the recovery period, we will recognize an immaterial non-cash, timing-related adjustment to earnings in the third quarter. This adjustment has been factored into our reaffirmed 2015 earnings guidance. We have now closed the Keystone acquisition for a purchase price of about nine times the trailing 12 months EBITDA. Under our purchase agreement, we will have small purchase price adjustments for changes in working capital, capital investments, and the results of operations through the July 9th closing date. Once we record the acquisition in the third quarter, we will provide additional details. For segment reporting purposes, we will include the operating results of Keystone as part of our market-based business segment. The market-based segment will be comprised of American Water Enterprises and Keystone Clear Water Solutions. Keystone, as Susan noted, is a legally separate entity. Keystone has about 20 EMP and other large corporate customers in the Appalachian region. Today its business is relatively asset-light. Its costs are largely variable, and we believe it will be able to capture synergies with American Water. We expect the acquisition to be earnings neutral in 2015 and accretive to earnings per share in 2016. We will provide you additional detail on Keystone during our Analyst Day presentation on December 15th. And lastly, we mentioned earlier we experienced wet weather in July, which for the month is estimated to unfavorably impact net income by about $4 million. We will be updating you further on the third quarter earnings call. Building on our solid financial performance year-to-date and despite the wet weather in July, we are reaffirming our 2015 earnings guidance to be in the range of $2.55 to $2.65 per share, and with that I'll turn it back over to Susan.

Thanks, Linda. Before taking your questions, I would like to take just a couple of minutes to highlight American Water's sustainability leadership. Our Company treats and delivers over a billion gallons of water a day to our customers, and this is just the start of our environmental focus. We have some of the best people in the water industry, and they choose to work here because environmental leadership is a core value at American Water. When you marry great minds with a passion for innovation and sustainability, you can accomplish some pretty exciting results. Let me give you just a couple of examples. Reclaiming and reusing water is an imperative in the face of water supply and infrastructure challenges for future generations. And this isn't just a California issue as some believe. In fact, 40 of 50 state water managers say they expect water shortages in some portion of their state in the next ten years. It will take bold strategies, including public/private partnerships, to address these challenges. This year, Illinois American Water was selected by the Metropolitan Water Reclamation District of Greater Chicago, or MWRD, to partner on a beneficial water reuse project. The agency is partnering with us to reclaim, treat, and distribute wastewater to large water users like manufacturing plants. Through this partnership, Illinois American will build the distribution infrastructure, manage the customer base, buy water from MWRD, and resell the water. Once fully operational, this water reuse project will significantly reduce fresh water withdrawals from the Great Lakes. This project has already been recognized by the American Society of Civil Engineers as a game changer in its recent report regarding innovative infrastructure solutions. Let me give you one other example where we're using water in smarter ways. Geothermal heat pump technology is not new, but an innovative American Water R&D pilot could transform traditional geothermal HVAC systems and introduce a new application in renewable energy. American Water is piloting a geothermal innovation to heat and cool a 40,000-square-foot school on Long Island, New York. Our pilot geothermal system transfers ground temperature from a water main using a heat exchanger, allowing the same system to cool during the summer and heat during the winter. Once unable to hold community events or classes during the summer months due to a lack of air conditioning, this school has been fully utilized this year with a geothermal installation. This pilot project was actually highlighted at the NARUC Conference in New York City just last month. These examples are just two of our numerous sustainability efforts. We're proud to note that we have already reduced our greenhouse gas emissions by 17% since 2007, exceeding our initial target of 16% reduction by 2017, a full two years early. Additionally, our water pump efficiency efforts to date are expected to produce energy savings of 12 million kilowatt-hours per year. These are just some of the reasons that American Water was ranked No. 24 of the almost 500 companies listed in Newsweek Magazine's top green companies for 2015, one of only two utilities in the top 25 and the only water utility. We are proud of this recognition because we believe being green is not just good for the environment; it's also good for the bottom line. We believe our company cannot only do well, but we can also do good and with that, we're happy to take any questions you may have.

Susan, you kind of talked about Keystone. Obviously, it's an interesting opportunity, but the trailing earnings contribution that you guys showed when you bought it wasn't particularly all that large. Is that number of earnings contribution, has that changed since '14 in some appreciable way? And then you kind of look out over forward, what's going to drive that business, you know, with or without an improvement in drilling activity in the region?

We are going on December the 15th, at our Analyst Day, we're going to be providing a deeper look forward in all parts of our growth triangle including Keystone and the shale area.

Is that Southern for you're not going to answer the question?

Yes, it is.

On the growth triangle, you mentioned that non-regulatory contributions will not exceed 15% to 20%, up from about 10% today. Is that the accurate message?

That's correct. Currently, over the past three years, our earnings from the market-based business has been around 9%. So that puts it in context. In the past, Dan, we've talked mainly from revenue numbers, so we've actually added more transparency in talking about earnings from that segment as opposed to just revenues.

Okay. I guess we didn't really get into what all is going on with the core of that business these days, but just can you give an update on government contracting and the home businesses and kind of where you're seeing the opportunities right now or where the action's been this year so far?

Sure. With the two military bases we won last year, we are beginning to see revenue as well as some working capital being utilized for projects at those bases. Several RFPs are currently outstanding, and while we cannot predict their award timelines with great accuracy, there is a possibility of one being awarded this year and maybe two to three next year that we are participating in. It's important to note that in the military sector, it's not just about new bases but also the ongoing projects at existing bases, which extend beyond just the operations and maintenance contracts we have, through which we receive payments annually for managing the water and wastewater systems. I want to highlight that we currently have around $200 million in backlog related to existing projects at the bases we are already serving. For military services, we strive to provide the best water and wastewater services for the military personnel serving our country. In terms of homeowner services, we recently launched operations in Orlando and are starting to sign up customers there. Orlando marks our first expansion into a broader service offering that includes HVAC and in-home plumbing alongside water and sewer lines, presenting another opportunity for us. Additionally, we have secured an exclusive contract for Rialto, California, which has about 55,000 potential customers. We have also won an exclusive contract with Wilmington, Delaware, but it still requires approval from the City Council. We hope to initiate services in both locations by the end of the year. This is what we are observing in that market-based segment.

I guess just one last one too. When you think about moving into these new cities, is there a startup cost associated with trying to recruit customers and acquisition-wise where you is more expense on the front end as you push into these towns as you get people and it pays off over time, or are you guys amortizing that expense over a longer period?

Dan, we love that you listen to us when you talk to us. Yes. The answer is yes. We have the upfront marketing expenses, and because we have to let people know that we're there and one thing that's important, we put a lot of emphasis on these exclusive partnerships. That's important because in an exclusive partnership, our billing is typically on the city or the municipality or whatever the governmental entity or the entity is that's on their water and/or wastewater bill, so for us that tends to be a higher take rate. And that's why those are so important for us as opposed to just we do have areas where we just generally market and we provide separate billing, but the exclusive contracts are really much more effective for us financially.

A few questions this morning if I might, first, just on the guidance, it seemed like I noticed weather is still a $0.07 plus or minus swing point in the guidance, even here kind of midway through the third quarter I guess, so just wanted to get some color on that. That seemed like it was a little, you know, large in terms of a swing factor there at this point in the year, so I just want to get some flavor on why that's such a large wild card at this point.

Ryan, the chart that we have in there shows the major variabilities as of February 26th, so that's the full year variability. In terms of the impact of weather that we've seen thus far in July, it's about $4 million net income. And it's due to wet weather across our system.

So it's safe to say that the gap has closed at this point and has tightened up.

That's right. And this variability chart is the one that we provided to you at the December 15th call.

Got it, okay.

One thing as we look at this too, you know, the reason we put multiple items up there is as we establish a range, we understand there's going to be variability. Some of the variability offsets each other. So you don't take each one in isolation, but as you remember, we started in 2013 saying, so why do we have a $0.10 range? Why do we have the range we do? Here are some factors, ups or downs, puts or takes. So it's important to look at all in context.

I wanted to talk a little bit just get some color on this WRAM application for the extension there. Now, you mentioned, Walter, that the decision there is expected mid to late 2016. It seems like a pretty straightforward filing and a pretty good deal for the ratepayers. So I'm just wondering what the key points of debate are on that filing and where the push-back is, if any, on the way that that's structured.

Yes. Thanks for the question, Ryan. I think two things. One is the length of time over which we're going to be able to recover it. And the other is the return that we're asking for. It will take time to work through that and that's why we say it will take to mid-2016 to get that decision.

And it's my understanding that the application seeks to establish the WRAM balance itself as a regulatory asset. Is that correct? And if so, can you give us a very brief Cliff Notes version of how that works?

Yes, it's essentially setting it up as an accounts receivable from the customer, which would be a regulatory asset.

And then, Susan, you mentioned that, you know, that the NARUC summer meetings, some of your sustainability initiatives were highlighted, and that's great. Could you also kind of give us any take-aways from those meetings in terms of what's around the corner just looking ahead at the big regulatory developments, any big topics there about, you know, what might be next in terms of policy developments or regulatory, you know, evolution in the water space?

Sure, I'll start, and then Walter may have a couple of things to add since he was also present at the meetings. We're very excited about a new initiative launched at the summer NARUC meeting aimed at integrating the water-energy nexus. Traditionally, state utility commissions address electric, gas, and water issues separately. President Edgar introduced an effort at NARUC to encourage collaboration among utilities on shared concerns, such as critical infrastructure and cybersecurity. This initiative aims to explore how utility commissions can work with utilities to identify common interests and joint efforts across these sectors. One specific example from California is the Monterey pilot project, where we have partnered with gas and electric utilities to use their infrastructure to install water meters. This allows us to alert customers about their upcoming tiered pricing changes, which is especially beneficial given Monterey's steep water pricing structure. We're also actively involved in adopting cybersecurity standards from the electric utility industry and working closely with the Department of Homeland Security and the Department of Defense on related initiatives. There are numerous collaborative efforts underway, and we are very eager about the possibilities presented by NARUC for cross-utility projects that will benefit everyone involved.

I think Susan did a great job recapping the meeting. I mean the four areas again that she mentioned, water energy nexus and opportunities for us to look for the electric and gases, cybersecurity in the same way, regulatory mechanisms that are going to be continued to incentivize us to invest and upgrade our water and wastewater systems, and where can we partner with electric and gas to drive better customer service. Those are the key themes that I saw coming out of NARUC.

One question on the Clear Water acquisition, Keystone Clear Water acquisition, keeping in a separate legal structure, how do you think about the optionality that creates if this business continues to grow in terms of potential revisions to the corporate structure, in terms of whether this is a business that, and I don't know if legally it could, is this a business that could eventually wind up in an MLP structure? And if you don't mind addressing that first and then I may do one follow-up.

We have examined the legal framework, and I want to clarify that Water Solutions Holding serves as the holding company for Keystone Clear Water. American Industrial Water owns 95% of that holding company, while the remaining 5% is owned by Sand Hills Management, which comprises the founding members, including the current CEO and President. We are pleased that they are committed to running the business and maintaining an equity stake. As for our exploration of Master Limited Partnerships (MLPs), we noted that Keystone Clear Water had an EBITDA of about $15 million last year, while smaller MLPs typically fall between $50 million and $70 million in EBITDA, indicating that we are not quite large enough for that structure. Additionally, having just acquired Keystone, we need predictable cash distributions as we assess this business model. It's crucial to have clear visibility into the future growth potential. We are always considering options that align with our shareholder interests, but at this time, pursuing an MLP does not make sense for us.

One follow-up, actually, on the core regulated business and really an M&A question. You all have been excellent over the years in terms of doing kind of small bolt-on acquisitions. What's your thought process around, or what's your market dynamic and opportunity set around, kind of more larger-scale M&A? It's, obviously, a far more fragmented business than the electric and gas, but just trying to curious when you look at the landscape of publicly traded or kind of larger private or municipal owned ones.

I will start and then I want Walter to fill in because he and his team have done a lot of work on this. In terms of looking at other IOUs, you're always looking at the marketplace, but the fact is it's a pretty well-valued space out there, but we're always looking at all options. Where I think our sweet spot is, though, something that Walter and his team have put a priority on, so Walter, do you want to talk about kind of the focus going forward on the regulated acquisitions?

Yes, we are continuing to pursue smaller acquisitions, but our main focus is on customer systems with 5,000 to 25,000 users, and we see several opportunities in this area. Having been in this business for two decades, I can say this is the best environment for acquisitions I have experienced. Municipalities are actively seeking options, and as the largest water and wastewater company in the United States, we possess significant expertise that can benefit these municipalities. The potential is substantial, especially considering the fiscal challenges they face, which makes it a difficult situation for some. Additionally, we closely collaborate with legislators to secure regulations that enable us to offer fair market value and streamline the process for these acquisitions. That's where we're concentrating our efforts. We have a strong team in place at the state level focused on business growth, including state leadership and growth teams, and I believe we've been performing very well with more developments on the way.

Just one real quick one here from me, I want to jump back to Keystone. Correct me if I misheard, but I believe the purchase may have been qualified as asset light earlier in the call. And when we think about water service, I mean trucks, pipes, tanks, asset light is not what comes to my mind. And then to kind of follow-up, if it really were an asset light business, why you would you all have looked at an MLP structure? Can you speak to any of those points?

Absolutely, Spencer, let me start, and then I'll ask Susan if she has anything to add. In terms of the asset light, you're right. The things that are owned by Keystone are really the pumps, the pipes, the valves, and a temporary storage tank. We also see vehicles as part of the assets as well.

The current model encompasses both permanent and temporary pipelines that Keystone owns. This aspect is important to note. The business operates with minimal assets, having recorded around $36 million in assets by the end of December, which provides a sense of its scale. As Susan pointed out regarding the MLP structure, we are evaluating future growth potential and the necessity for a clear growth pipeline. This evaluation is crucial for the MLP structure. Additionally, when discussing the asset-light nature of our overall business, it’s essential to consider that our operations, particularly in utilities, are heavily capital-intensive. Despite that, we perceive it as asset light. We are strategically examining the possibility of increasing capital deployment to develop long-term pipelines instead of relying solely on the ENP for funding. With Keystone's status as a 60% owner, there were constraints on capital, but now we have the opportunity to fund some construction projects and explore options like take or pay contracts. Fortunately, Keystone is an exceptional company. I had the pleasure of spending a day with their team before the closure and post-acquisition announcement, and the cultural integration has been seamless. They are rooted in Pennsylvania, and their CEO has experience in water-related compliance and environmental remediation. They’ve provided a specific range of services, and with American Water’s acquisition, we have the potential to expand this range, possibly incorporating additional capital.

I'll start out with an easy point of clarify question. The $4 million net income headwind from weather that you mentioned, does that include July's impact as well? I might have missed that.

That is the impact in July, and it's across all of our regions.

Yes, Jonathan, one thing we try to do, typically, we don't talk about the month outside the quarter. But because we were able to get the information, we wanted to go ahead and share that. That was not from the second quarter.

Okay. So for the I guess the first half of the year, what was the weather impact?

In the first half of the year, we had an increase in demand, or in the second quarter, we had an increase in demand, of about $2.7 million. Over half of that was associated with an increase in our commercial customers, and then the remainder of it was weather-related. And what we saw was on the residential side, we had hotter or drier weather in the Northeast, and given our geographic diversity, that was offset somewhat by the wet weather that was in the central region.

So, pretty much if we if through July, I mean you're kind of at break even or so from a weather impact and everything, nothing too major?

So we are negative all the way through July from a weather standpoint because we had that $4 million approximate net income impact in July, the month of July.

But yes. But January through June you could say it was break even.

One can offset the other, right.

Yes. Okay. And then the military bases that you mentioned, you might get awards for this year that they might announce, are these just the ones that you're involved with, or is that kind of encompassing the whole RFP space?

We're only tracking the projects we are involved with, and those are typically medium to larger sizes. We do not engage with the smaller ones. So there could be more out there.

Okay. And then do you expect a pickup in the pace of RFP awards going forward, or, you know, maybe you can talk about how many are open right now that you're actively bidding on?

There are numerous ones that are open. You know, pretty much probably high single-digits that are open. They're in varying stages. We have best guesses, and they're pretty spread out over the next two or three years, so we never know. It depends what's going on in Washington, what they're going through. I will tell you that we have this year seen more interest from the Air Force. In the past, the Army has been the service that has been most interested, and we still are seeing some RFPs from the Army, but we're really seeing a lot of interest in the Air Force. And Jonathan, what we have disclosed previously is that we are active in several RFPs today with a gross revenue value of $1.5 billion to the extent that we would be successful in all of them.

You said $1.5 billion gross revenue and that's for the 50 years?

Correct.

Let me start by saying they're both progressing on schedule. So, typically, New Jersey, it's 9 months to 12 months to get a rate order. We filed in early January. That's going according to plan. In West Virginia, there's an 11-month rate case process, and again it's moving according to schedule so nothing to be concerned about for both of those.

Okay. How about on West Virginia? I mean it's been a bit of a challenge, you know, your past few cases there. You know, you, obviously, had the challenges last year that, you know, weren't necessarily your fault but you needed to respond to them. You know, how is the outlook there? It was a pretty large, you know, ask in part because you haven't gotten what you've needed in the past. What's kind of been the response in West Virginia?

Well, our team's doing a great job working through, the rate case process and talking about the value that we provide to our customers. And, we're confident that we're going to continue to make that case and we're hopeful to get a fair outcome.

Okay. And then what would be the timing on the outcome 11 months would put us into is it early 2016?

Around April 1st of 2016.

Just piggybacking on the last question, I know it's really early on here, but for the Missouri rate case, just thoughts on the possibility of a settlement there. That would be great.

So this we have just filed a rate case in Missouri on July 31st, and so we are going to be working through the process as we normally do in this case.

Yes, and typically, in Missouri, it takes 11 months, and we are working through that process and, you know, it's right on schedule even though we just filed.

Can you remind me again, historically, have you guys gotten settlements in Missouri or not?

Yes, we have.

Great, and roughly at what point in the process does most of the leg work on that settlement and an agreement typically get reached?

You know, it really depends on rate case by rate case, company by company. It's really hard to predict that. You know, you go through the process and it can happen as we work together.

And then one last question for me, because most of my other questions were asked and answered. Any update on sort of the corporate headquarters move? I would love to get an update there.

We are in the beginning stages of that. The latest information is that we have received approval of the tax credit in New Jersey, which if we determine that we would move to the Camden location, we would be able to effectuate those tax credits. We are currently in the process of looking for location, and so we are working through that. And to the extent that we can find a location in the Camden area, we are very excited about seeing part of the revitalization in that city.

Is there a sense of timing as to when you guys will make a decision on what you want to do there?

The credits are applicable for a three-year timeframe that began in June. We also have the potential for an automatic six-month extension, plus a possibility of requesting an additional six-month extension that would require approval, making it a period of three to four years in total.

This might be a little bit in-depth, but in the pyramid that you always put onto the slides in the presentation, you added a new area entitled Other. I was just wondering if you could please explain what it meant for that portion of the period in the pyramid.

That's a great question, Barry. In recent years, we have included Other, but you are right that we haven't discussed it much. We included it because one advantage of American Water is our size and scale, which allows us to have our own R&D group with 20 scientists. Most of their efforts are focused on improving our operations, enhancing efficiency, and ensuring water quality. We collaborate with the EPA and foundations worldwide, including Israel and Europe, on new water technologies. As we work to make our business more efficient, we sometimes take the opportunity to partner with startup companies, allowing us to gain small stakes in those businesses from our testing and deployment efforts. While this isn't a significant aspect, we refer to it as our innovation development process. For example, we developed a process called TNT Express for wastewater plants that reduces aeration energy consumption by 50% and can cut carbon emissions by up to 100%. We entered into an international licensing agreement with Abengoa last year, which generated approximately $0.5 million, not a large sum. The Other category mainly serves as a holding space for various smaller initiatives that might not lead to immediate significant outcomes. We don’t assign much weight to it regarding long-term growth potential, but we included it because there may be opportunities that arise. Importantly, this is not a large investment aimed at creating new businesses; it's about investing in opportunities that enhance our existing operations, which could potentially lead to some additional income.

Just on the regulated acquisition strategy, I know there have been some companies looking to expand their water business, you know. And they are seeking to buy small water companies. Have you seen competition pick up, or noticeably picked up, for your regulated acquisition?

We operate in 16 states, each with different levels of competition, but we are by far the largest and have the most extensive footprint. This positions us well to expand and build relationships with various municipal leaders, giving us a competitive edge. Another significant advantage is our involvement in legislation that allows us to purchase wastewater systems and distribute the costs among our water customers. For instance, in New Jersey, we serve 650,000 customers, so when we acquire a system, we can spread the cost across our large customer base, minimizing the financial impact on newly acquired customers. We leverage this to benefit our operations and enhance customer service.

Well, thank you so much, Gary, and thanks to everybody for joining us today. We had a good quarter, and I just want to remind you that, you know, all of this happens because of the 6,700 employees that we have out there every day. We talk about the facts, you know. We talk about the numbers, but these are our employees out there serving one customer at a time every day. And I tell you we are very fortunate in our industry to have some of the best people anywhere, making sure that we are able to be up here today talking about the numbers that we were able to accomplish. So I want to give a shout out to them and thank them for all their hard work. And thank you for all of your questions and for supporting our company.