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American Water Works Company Incorporated (NYSE: AWK ) Q2 2015 Earnings Conference Call August 06, 2015 09:00 AM ET Executives Greg Panagos – VP, IR Susan Story – President and CEO Walter Lynch – COO, President, Regulated Operations Linda Solomon – SVP, CFO Analysts Daniel Eggers – Credit Suisse Ryan Connors – Boenning & Scattergood Michael Lapides – Goldman Sachs Spencer Joyce – Hilliard Lyons Jonathan Reeder – Wells Fargo Securities Brian Chin – Bank of America Merrill Lynch Barry Klein – Macquarie Funds Group David Paz – Wolfe Research Operator Good morning and welcome to American Water’s second-quarter 2015 earnings conference call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company’s Investor Relations Web site. Following the earnings conference call, an audio archive of the call will be available through August 13, 2015, by dialling 412-317-0088 for U.S. and international callers. The access code for replay is 10068691. The online archive of the webcast will be available through September 8, 2015, by accessing the Investor Relations page of the Company’s Web site located at www.amwater.com. [Operator Instructions] I would now like to introduce your host for today’s call, Greg Panagos, Vice President of Investor Relations. Mr. Panagos, you may begin. Greg Panagos 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 would just like to say I’m happy to be here and excited about the opportunity with American Water. Before I read you our forward-looking statement I’d like 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 details 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 Web site. 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 Waters President and CEO Susan Story. Susan Story Thanks, Greg. Good morning, everyone and thanks for joining us. With me today are Linda Sullivan, 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, Nobel 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 second quarter 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 waste water 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 ones 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 serve 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 acquisition in areas where we already serve water. Our marketing base 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 home owners. We’re 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 Solution. Keystone is a water services provider to oil and gas companies in 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 tam of 350 employees has a strong reputation for meeting their customers need with a priority on safety and protecting the environment. These values are consistent with American Water’s value and they matter deeply to us and critically important. Keystone’s offering are aligned with America Water’s core competencies supplying, transmitting, pumping and storing water and developing the infrastructure that goes along with those services. Despite this fact that keeps on a relatively small part of our overall business portfolio we know it faces somewhat different risk than American Water’s traditional lines of business. As a result we set up legal structure to 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 of the U.S. In addition we believe Keystone’s turnkey business model is repeatable in other areas of this industry creating 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 the meaningful part of the earnings is lower risk regulated like 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. Walter Lynch 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 drive 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 are exceeding those reduction goals. California American Water has launched ambitious conversation 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, freely detection devices and water wide surveys. Our conversation stat is active at community events reaching after customers and equipping them with the tool they need to conserve water. As a reminder California American Water has rate decoupling so we do sale volumes do no result in reduced earnings. The other move in California is our water revenue adjustment mechanism or rent filing. As of June 30th we had an under collected rent receivable balance of about $50 million of which almost $45 million related to Monterey district. In order to assist with the impact on our customer bills in that area and to limited future accumulations we files the 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 reminder, California American Water is approximately 8% of our total regulated revenue; however, we put a tremendous amount of focus there because issues the state faces offer us an opportunity to fully deploy our numerous water supply and service solution. 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 own and 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 reprocess 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 waste water systems, while mitigation the impact on our customer’s bills. Now, I’ll turn the call over to Linda for more detail on our second quarter financial results. Linda Solomon 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 cost 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 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 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 a 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 unfavourably 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. Susan Story 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 a 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 waste water to large water users like manufacturing plants. Through this partnership, Illinois American will build the distribution infrastructure, very many 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 giving 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 have community events or classes during the summer months due to 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 exams are just two of our numerous sustainability efforts. We’re proud to note that we have already reduced our greenhouse gas emission 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. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from the Daniel Eggers with Credit Suisse. Please go ahead. Daniel Eggers 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? Susan Story 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 include Keystone and the shale area. Daniel Eggers Is that Southern for you’re not going to answer the question? Susan Story Yes, it is. Daniel Eggers On the growth triangle, you guys said that — you said non-reg is not going to be more than 15% to 20% of contribution from roughly 10ish % today. Is it that the correct messaging? Susan Story 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. Daniel Eggers 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? Susan Story Sure. You know, one thing because we won the two military bases last year, we’re starting to see the revenues as well as some of the working capital we’re putting into some of the projects on those bases. There are currently several outstanding RFPs, you know, as we’ve mentioned before, when they will be awarded is, you know, we never can predict with a tremendous amount of accuracy. There’s a chance maybe one could be awarded this year, maybe two to three next year that we’re involved with. But what’s important on military, and I think it’s important and you asked that in your question, on military, it’s not just the new bases but the continuing projects that are on the existing bases beyond just O & M contract that we have — the money we get paid each year for running the water and waste water systems. So I will tell you that we currently have on the books I believe another $200 million of backlog of existing projects to do on the bases that we already have. So for military services, we continue to ensure that we’re providing the best water and waste water services for those military men and women who serve our country. On the homeowner services, as we said, you know, we had mentioned about Orlando. We have launched it this year, so we’re starting to get customers signing up in Orlando. Orlando also presents for us the first place that we have a much deeper service offering beyond just water and sewer line but also HVAC and in-home plumbing. So that’s another opportunity there, and as I mentioned in my comment, we were awarded an exclusive contract that has been signed for Rialto, California, which is about 55,000 potential customers. And then we won the bid for exclusive contract with Wilmington, Delaware, but the City Council still needs to approve that. And we’re hoping to launch both of those by the end of the year. So in those two areas, that’s what we’re seeing from that market-based business. Daniel Eggers I guess just one last one too. When you think about moving into these new cities, is there a start-up 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? Susan Story 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 waste water 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. Operator The next question comes from Ryan Connors with Boenning and Scattergood. Please go ahead. Ryan Connors 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. Susan Story 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. Ryan Connors So it’s safe to say that that gap has closed then at this point and we’re largely — that gap has tightened up. Susan Story That’s right. And this variability chart is the one that we provided to you at the December 15th call. Ryan Connors Got it, okay. Susan Story 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 [indiscernible]. Ryan Connors 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 rate payers. 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. Walter Lynch 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. Ryan Connors 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? Susan Story Yes, it’s essentially setting it up at an accounts receivable from the customer, which would be a regulatory asset. Ryan Connors And then, Susan, you mentioned that, you know, that the NARUC summer meetings, some of your sustainability initiatives were highlighted and that’s great. Good you also kind of give us any take-aways from those meeting 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? Susan Story Sure, I’ll start it and then Walter may have a couple things since he was at the meetings also. One of the things that we’re very excited about that was launched at the summer NARUC meeting is a step forward in terms of not just water energy nexus but to look at — in most state utility commissions they look separately at electric, gas and water. One of the things that President Edgar rolled out was an effort at NARUC to start looking at where all utilities could come together on common items such as, for example, critical infrastructure, cyber security, looking at how we could work together, looking at the fact that now that things like the mechanisms for infrastructure replacement. There are a lot of issues at state utility commissions that really cross the boundaries of electricity, gas and water, and so there’s an effort to create this project or this task force at NARUC to look at what those are and where commissions can work with utilities in a state to find the areas that we can find some common ground and some common efforts. An example for us in California is the Monterey pilot, the AMI pilot that Walter mentioned. What that is, is that we actually partnered with specific gas and electric and we’re using some of their backbone to put the water meters there so we can send alerts to those customers they have a very steep tiered pricing structure for water in Monterey, so we can actually send, as part of the customers on the pilot, signals when they’re about to enter a new tier of pricing or they’ve set a budget and we can send them messages when they’re getting close to the budget. That’s just one an example. We’re very involved and actually American Water, we adopt the electric utility industry missed standards for cyber security. We’re very involved with the Department of Homeland Security and DOD in those things. So there’s a lot efforts like that, and we are very excited at NARUC where we’re looking at cross utility-type projects that can benefit all of us. Walter Lynch 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, cyber security in the same way, regulatory mechanisms that are going to be continued to incentivize us to invest and upgrade our water and waste water systems and where can we partner with electric and gases to drive better customer service. Those are the key themes that I saw coming out of NARUC. Operator The next question comes from Michael Lapides with Goldman Sachs. Please go ahead. Michael Lapides One question on the Clear Water acquisition, Keystone Claire 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. Susan Story Okay, sure. We did look at that and I will tell you that just a little more color around the legal structure. So there’s separate holding company, that Water Solutions Holding, that actually is the holding company for Keystone Clear Water, and that holding company is 95% owned by American Industrial Water, which is also a separate LLC, and 5% from Sand Hills Management, which is the founding members, which includes the current CEO and President and COO. So we’re glad they not only are staying to run the business, they continue to have an equity ownership. So that’s how it’s structured legally. We did actually, Michael, get — we took a look at MLPs. A few things just to let you know, so we are constantly monitoring it, the EBITDA last year of Keystone Clear Water was around $15 million. Even some of the smaller MLPs are between $50 million and $70 million EBITDA, so scale-wise, it’s just not quite large enough. No. 2, you know, we’ve just purchased Keystone. You have to have a predictability of the cash distributions. We’re continually looking at that as we get into looking at this business. And, of course, the big thing you’ve got to have really pretty clear visibility into the future growth potential. You know, kind of people talk about the feed the beast issue. So in terms of the future, we’re always open to all options that make sense to our shareholder interest, and we are looking at those variety of things. At this point, it doesn’t make sense to do a MLP. Michael Lapides 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 ever larger private or municipal owned ones. Susan Story 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 [indiscernible]. Walter Lynch Yes. We still pursue the smaller acquisitions but our focus is really on the five to 25,000 customer systems, and we see a number of opportunities. I’ve been in this business many years, two decades, and this is the best environment for acquisitions that I’ve seen. I think because municipalities are looking for options, and we, as the largest water and waste water company in United States, have tremendous expertise that we can share with these municipalities. So the opportunities are huge. They’re also with some of the fiscal issues that they’re facing. It’s a tough environment for some of these municipalities. I think the other thing is we work very closely with the legislatures to provide enabling legislation that allows us to pay a fair market value and really reduce the bureaucracy and some of these acquisitions. So that’s our focus. We have great people out in our state that are focused primarily on growing the business, from the state leadership teams to the growth teams, and we’ve — I think we’ve been doing a very good job and more to come. Operator The next question comes from Spencer Joyce with Hilliard Lyons. Please go ahead. Spencer Joyce 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 an at MLP structure? Can you speak to any of those points? Linda Solomon 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. Susan Story And so the current model includes both permanent pipelines as well as temporary pipelines that are owned by Keystone. So that’s one element of it today. The assets are — or the business is very asset light. The audited financials were about $36 million in assets at the end of December. So that gives you a feel for the size of it. As Susan mentioned on the MLP structure, I mean this is one of the things that we look at is what are the future growth potential and can you continuously have a transparent pipeline for growth in the business. And that’s one of the key elements to look at from a MLP structure. And Spencer, to add to that when we talk about asset light, we do it in terms of our business overall, which we’re so capital intensive in utilities in some spaces that may not seem as capital light. For us it does. However, one of the things we are looking at is the potential remember that as part of [indiscernible] as a 60% owner, there were capital constraints. One of the things we are looking at strategically is the possibly or potential of actually deploying more capital to build longer-term pipelines as opposed to having the ENP fund them. What if we now have the capital, Keystone has the capital to actually fund some of those constructions and entertain things like take or pay contracts or those type things. So the good news is you’ve got Keystone, which is an outstanding company. And I will tell you just to add to this, I spent a day with those folks out there before we closed, and after we announced the acquisition, and, culturally, they are — it’s been such an easy transition. They are from Pennsylvania. They grew up there. The CEO actually has a background in water, environmental remediation compliance. It’s just an outstanding group of people, but they’ve had a certain suite of services that now with the purchase by American Water, we can maybe can broaden some of those suite of services, which could include more capital. Spencer Joyce Just to kind of recap here, so when we think kind of asset light in air quotes, you know, we’re maybe drawing a comparison versus the utility, which would be perhaps more capital intensive. And then also from the standpoint of the business maybe a little bit lighter on assets versus what it could be given some of the constraints that [Rex] had previously. Susan Story You know what? I could not have said it better myself. Operator The next question comes from Jonathan Reeder with Wells Fargo. Please go ahead. Jonathan Reeder I’ll start out with the 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. Linda Solomon That is the impact in July and it’s across all of our regions. Susan Story 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. Jonathan Reeder Okay. So for the I guess the first half of the year, what was the weather impact? Linda Solomon In the first half of the year, we had an increase in demand, or in the second quarter we in 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 dryer weather in the northeast, and given our geographic diversity, that was offset somewhat by the wet weather that was in the central region. Jonathan Reeder 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? Linda Solomon 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. Susan Story But yes. But January through June you could say it was break even. Jonathan Reeder Yes. Okay. And then… Walter Lynch One can offset the other, right. Jonathan Reeder Yes. Okay. 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? Linda Solomon We’re only tracking the ones we’re involved with, Jonathan, and we only — the ones that we’re involved with typically are medium to larger size. We don’t get involved with the smaller ones. So there could be. Jonathan Reeder 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? Linda Solomon 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 but you know, you 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. Jonathan Reeder You said $1.5 billion gross revenue and that’s for the 50 years? Linda Solomon Correct. Jonathan Reeder Walter, I didn’t know if you could give any kind of update on the New Jersey and West Virginia rate cases, how they’re kind of progressing and how you would handicap the prospects for reaching settlements? Walter Lynch Let me start by saying they’re both progressing on schedule. So, typically, New Jersey, it’s 9 months to 12 month to get a rate order. We filed in early January. That’s going according to plan. In West Virginia, there’s a 11-month rate case process, and again it’s moving according to schedule so nothing to be concerned about for both of those. Jonathan Reeder 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? Walter Lynch 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. Jonathan Reeder Okay. And then what would be the timing on the outcome 11 months would put us into is it early 2016? Walter Lynch Around April 1st of 2016. Operator [Operator Instructions] The next question comes from Brian Chin with Bank of America Merrill Lynch. Please go ahead. Brian Chin Just piggybacking on the last question, I know it’s really early on here, but for the Missouri rate case, just thoughts on possibility of a settlement there. That would be great. Susan Story 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. Walter Lynch 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. Brian Chin Can you remind me again, historically, have you guys gotten settlements in Missouri or not? Walter Lynch Yes, we have. Brian Chin Great, and roughly at what point in the process does most of the leg work on that settlement and an agreement typically get reached? Linda Solomon 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. Brian Chin 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. Susan Story 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. Brian Chin Is there a sense of timing as to when you guys will make a decision on what you want to do there? Susan Story The credits are for a three year period where the clock started in June. And then we have the opportunity to have an extension of six months automatically and a request of an additional six months that would be due — that would be met with approval requirements, so a three to four year period. Operator The next question comes from Barry Klein with Macquarie. Please go ahead Barry Klein This might be a little bit in-depth, but in the pyramid that you always put onto the slides in the presentation, you added — it looks like you added a new area entitled Other. And I was just wondering if you could please explain what it meant for that portion of the period — the pyramid. Susan Story Well, Barry, that’s a great question. We have actually included Other in the past couple of years, but we have not — you are correct. We have not talked about it a lot. We put that in there because one of the things, one of the advantages we have at American Water with our size and scale, we have our own R&B group and we have 20 scientists. And most of their work is dedicated to finding better ways to do our business, bring efficiency, water quality. We work along with the EPA. We work with foundations, actually, all over the world including Israel as opposed to Europe on new technologies in the water industry. What happens when we do that while the focus of making our business more efficient, we also, at times of opportunity with partnering up with starter companies where out of our deployment in testing we’re able to get small interests in some of these businesses. So, you know, not a big thing, but it’s called our — and we have an innovation development process. We actually came up with the process called TNT Express that is used in wastewater plants that reduces the energy of aeration by 50%, and it — carbon edition by up to 100%. We actually did an international license agreement with Abengoa on that, which, you know, last year maybe was a $0.5 million, not a lot of money. But this other is almost a [holding] category for lots of smaller things like that, that may or may not be something down the road. There’s no, in the long-term triangle, we don’t assign any weight to it in terms of how much of the growth is going to provide, but we put it up there because there could be some things like that that come up. And, again, this is not big investment into things for the purpose of creating new business. It’s investment into opportunities that help our base business be better, but, potentially, could result in some income. Operator The next question comes from David Paz from Wolfe Research. Please go ahead. David Paz Just on the regulated acquisition strategy, I know there have been some companies [indiscernible] on 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? Walter Lynch You know, we have — we operate in 16 states, so we have varying levels of competition in each of the states where we operate, but by far we are the biggest and we have the biggest footprint. It gives us an opportunity to expand out, get to know different municipal leaders, so I think we have a competitive advantage there. I think the other huge competitive advantage we have is that we worked on legislation that allows us to buy wastewater systems and share those costs with our water customers. And, for example, in New Jersey, we have 650,000 customers. When we buy a system, we can spread the cost across that huge customer base and minimize the impact on those customers that we just acquired. So we use that for our advantage. We use that for advanced of our customers and providing great customer service for them. Operator This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Susan Story 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 6700 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. Operator The conference is now concluded. Thank you for attending today’s presentation.