Q2 2020 American Water Works Company Inc Earnings Call
[music].
Good morning, and welcome to American Waters second quarter 2020 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 website.
Following the earnings conference call and audio archive of the call will be available through August 13th 2020.
You asked callers may access the audio archive toll free by dialing 187734475 to nine international callers may listen by dialing one plus one for one to 317 0088.
The access code for replay is one of zero one for 6461.
The audio webcast archive will be available for one year on American water's Investor Relations website at IR Dot M. water dot com slash events.
I would now like to introduce your host for today's call Eds away Ho Vice President of Investor Relations Mr. Bill I Hope you may begin.
Thank you Gary and good morning, everyone and thank you for joining us for today's call.
At the end of our prepared remarks, we will of course open the call for any of your questions.
During this conference call both in our prepared remarks and answers to your questions. We may make forward looking statements that represent our expectations regarding our future performance or other future events.
Now these statements are predictions based upon our current expectations estimates and assumptions. However, since these statements deal with future events. They are subject to numerous known and unknown risks uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.
Additional information regarding these risks uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our June Thirtyth 2020 form 10-Q, each is filed with the FCC.
Reconciliations for non-GAAP financial information related to adjusted return on equity and our adjusted regulated over name efficiency ratio can be found in our earnings release and in the appendix of the slide deck for this call also this slide deck has been posted to our Investor relations page of our website.
All statements in this call related to earnings and earnings per share referred to diluted earnings and earnings per share.
I should note that consistent with our efforts to ensure the safety and health of our team. We're again conducting this call what practicing social distancing and from remote locations. As an example, Walter in Susan remain in separate locations. If for any reason technical issues do arise Walter will take over and lead us through the.
Full presentation and with that I will turn the call over to American water's, President and CEO Walter Lynch. Thanks, Ed Good morning, everyone and thanks for joining us we've a lot to cover today and we thought it might be helpful to first address the impacts of Kobin 19 in our operations and our estimates of the financial impact so far.
As we've done since the onset of this health emergency American water continues to provide essential water and wastewater services to our customers and we know the critical role we play in helping our customers and communities through through this pandemic.
As we relate on our first quarter call. We remain focused in three areas. The first is the Karen safety of our employees and their families. The second is the safety of our customers in the communities. We serve in the third as the execution of our preparedness plans. We can continue to provide essential services and help our communities get through the pandemic.
With recent surges or cobot 19 cases in many parts of our country. The measures. We took early on remain in place while adding additional measures. These include employee health screenings prior to coming to work social distancing suspension of all non emergency in home appointments limiting the amount and nature of contact with cuts.
Summers during field appointments and a required work from home policy for non essential employees where possible.
Because the number of cases varies across our footprint, we're taking into account CDC and local and state guidance as we work on plans to return to a more normal state of operation when possible with safety as the primary driver.
As you know we were among the first utilities to suspend shut off and late fees prior to any orders being issued by states. We continue to work with customers were experiencing financial hardships by offering customer assistance programs and access to low income programs.
Susan will cover this in greater detail, but we're working constructively with public service commissions as they look to address utility response managers customer protections and cost recovery for regularly utilities in the jurisdictions.
Additionally, our liquidity and access to capital remains strong and we continue our disciplined approach to execute on our core strategies, such as making needed capital investment.
Finally American water and the American water charitable foundation continue to help commute the communities, we serve giving more than $400000 in charitable contributions over the past three months to help mitigate impacts of cobot 19 in the communities we serve.
Before I ask Susan to discuss the financial impacts of Coven 19, so far I want to thank our employees not only for their tremendous effort throughout the pandemic, but also for what they've done all year to stay safe and provide essential service to the communities we serve.
Now, let me turn the call over to Susan.
Thanks, Walter and good morning, everyone.
Slide six it summarizes the estimated impact as the pandemic on results through June 32020.
We've seen an estimated 5% increase in residential customer volume metric demand over this period that we think is directly related to be impacted covered 19 as many of our customers had been working from home and or sheltered in place because of the pandemic.
Likewise, we have seen commercial and industrial demand weakened by about 13% and 7% respectively. As our best estimate of the impacting code 19 over this period as many businesses have shuttered.
And I'd simply remind you that we're about 70% residential on an annual revenue basis.
As Walter Walter mentioned, we discontinued service shut off that would normally occur due to non payment and are no longer charging late fee. As a result, those revenue categories are also down.
Also we've incurred some incremental operating costs to keep our employees and customers stage and have seen some increase in uncollectable accounts expense.
The total estimated impact and the loss demand forgone revenue and increased costs is estimated at about $21 million, which equates to about $15 million after tax or nine cents per share before considering the accounting for future recovering.
We've been working with regulators across our entire service territory alongside other utility to address how these impacts the cost of service and recovery should be addressed.
As a result in those discussions and regulatory orders received today at June 32020, we have recorded a net regulatory asset of $12 million for future recovery, which represent a significant portion of the total estimated impact.
After considering the accounting for future recovery the impact, resulting from cobot 19 year to date is an estimated five cents per share in total.
Let's turn to slide seven to look at some of that specific regulatory activity.
As we said we've been in discussions on behalf of our customers with public service commissions across our service area. Currently 10 of our 14 regulatory jurisdictions have issued orders to address the impacts of code 19, authorizing deferral of incremental costs and certain other financial impacts, resulting from the implementation of moratorium on.
Shut off and Disconnections.
For State, Missouri, New York, Tennessee, and Kentucky have pending proceeding where we also expect to receive authority to capture the financial impact of 19.
As a result of the orders received an expected actions by regulators as I mentioned Weve recorded at $12 million $12 million for future recovery, primarily related to forgone revenues from reconnect.
In late fees and estimated uncollectable accounts expense.
Now as it relates to new to the demand for our services American water has a predominantly residential customer base and like I mentioned, just a minute ago as noted our residential load is higher and our commercial and industrial load trended down due to business closures.
We estimate that demand the net demand loss directly related to code 19 to be approximately $10 million through June 30. This lost revenue is being tracked in each of our utilities.
We believe that this loss demand relates directly to the pandemic and while we've conservatively not recorded a regulatory asset at the consolidated level for future recovery. We believe we have strong arguments and good opportunity to recover the lost revenue in our future covered 19 or other filings.
This lost revenue was essentially four cents per share of the total five cents per share estimated unfavorable impact from cobot 19 in the quarter and year to date periods.
We will work diligently to seek recovery of these malls revenues as we think that makes more sense that making arbitrary cost reduction that could have longer term impacts on service delivery.
As we think about the impact that covered 19 on our market based businesses for military services Onem operations currently continue as normal subject to each installations individual requirements. Our services are deemed essential so we continue to deliver sage clean and reliable water and essential wastewater services to our military base partners.
Yes.
For homeowner services there has been some delay in new partner relationships and some delays in the launch of new products that we attribute directly to covert 19, and the estimated impact of those delays in about one cents per share year to date.
We believe we can maintain our customer base. During this period of economic downturn, because how monitors see value when these products that protect them against large unexpected expenses expenses.
And perhaps just a couple of final comments before I turn it back to Walter.
We are executing our capital investment plan for the year and are looking for additional ways to assist communities need. We go forward and we continue to remain confident we have sufficient liquidity available for the foreseeable future with $2.3 billion available at the end of June.
Turning back to Walter for a discussion of the remainder of the results from the quarter.
Yes, Thanks, Susan let's move on to second quarter and six month results as it's been an eventful year to date with several key rate cases significant capital investment multiple acquisitions and a sharp focus on business fundamentals through trying times once again the employees of American water delivered solid results and further strengthen.
Our low risk profile and predictable growth story.
Our second quarter 2020, GAAP earnings per share increased 3.2% compared to second quarter 2019 included in GAAP results or two cents per share for depreciation not recorded due to assets held for sale and an estimated five cents per share unfavorable impact from the cobot 19 pandemic.
We invested capital of $930 million in the first half of 2020, which is a 17% increase over the same period last year. This increase was driven by the continued investment in our systems and the communities we serve along with more favorable construction weather this year versus last.
We also continue to work hard to minimize the customer bill impacts of these investments by controlling own and costs.
We continue our disciplined approach to regulated acquisitions, we've added more than 17700 customer connections to date through closed acquisitions inorganic growth and look forward to welcoming an additional 43600 customer connections through pending acquisitions, most of which we expect to close in 2020.
Our market based businesses were up a pending earnings per share reflecting year to date price increases inorganic growth from homeowner services.
We're also very honored to assume operations of joint base, San Antonio and Texas, and the United States Military Academy in West Point, New York in the second quarter of 2020.
Moving to slide nine.
The foundation of our earnings growth continues to be the capital investment we make in our regulated operations to provide clean safe and reliable water and wastewater services to our customers.
Our strategy remains consistent as we plan to invest $20 billion to $22 billion in capital over the next 10 years to ensure the quality and reliability of our services and to bring water and wastewater solutions to communities across the United States.
We are affirming our long term EPS compound annual growth rate in the 7% to 10% range and we expect our 2020 GAAP earnings to be in the range of $3.79 to $3. An 89 cents per share Susan will talk more about that in a few minutes.
Also consistent with our previous dividend guidance on July 29, our board of directors declared a quarterly cash dividend of 55 cents per share of common stock payable on September Onest 2020.
Turning to slide 10, let's walk through some of the regulatory highlights of the second quarter 2020.
On June Thirtyth, Missouri American water filed a rate request with the Missouri Public Service Commission. The case includes $920 million in water system improvements and $30 million in source system improvements from January 2018 to May 2022.
This includes the replacement of approximately 275 miles of aging water and sewer pipes as well as the upgrading of treatment plants storage tanks wells and pumping stations across the state. The company's request is expected to take 11 months to complete in any new rates would not become effective until mid 2021.
Pennsylvania American water file the general rate case in April requesting $92 million in the first year and $46 million in the second year since our last case in 2017, Pennsylvania American water will have invested $1.6 billion infrastructure upgrades for the four year period of 29 team through 2022, including.
Replacing more than 427 miles of aging water and sewer pipes traditionally the public utility commissions review of the filing may take up to nine months and new rates would not be effective until 2021.
New Jersey American water file a general rate case in December 2019, requesting an overall revenue increase of approximately $88 million, excluding the revenue from diesel.
Since our last rate case, we will have invested more than $1 billion in system upgrades and New Jersey.
Virginia American water follow general rate case, requesting an overall revenue increase of $5.6 million in November 2018.
This case was driven by approximately $98 million infrastructure upgrades since April 2017, and we expect the decision later this year.
Now, let me turn to California, where there's been quite a bit of activity.
California American water file for new rates in July 2019. The case covers 2021 through 2023 and request an increase in authorized revenue of $46.6 million over three years.
The request seeks $197 million for infrastructure improvements plan for 2021 and 2022.
Due to covert 19, we now expect the decision on this case in the first quarter of 2021. In addition, we filed a motion for interim rates to be effective back to January Onest 2021.
Also our Monterey Peninsula water supply project is now scheduled to go before the California Coastal Commission for approval in mid September.
In early July the California Public Utility Commission released a proposed decision on a low income repair assistance proceeding with a common period currently underway and possible vote in August.
The decision would require California American water to file a proposal to alter its water revenue adjustment mechanism known as Ram in this next general rate case filing in July 2022, becoming effective in January 2024.
Rams are mechanisms, commonly used across utility sectors, and really have proven critical to prune and conservation and infrastructure investment from our experience. We believe the best way to address concerns with the impacts of Rams is to improve forecasting in the rate making process. We're hopeful issues with the proposed decision will be resolved before the decision is voted on.
If the proposed decision is adopted as is California American water will consider options when they filed their next rate case in 2022, which would affect rate starting in 2024.
On the Legislative front this year I would highlight two bills. So were signed by the governor of Indiana.
The first one authorizes recovery for above ground infrastructure without a full rate case and the second establishes an appraisal process for non municipal utilities to establish fair value and a reasonable purchase price.
Additionally, Missouri past the water safety and Security Act, which requires most water utilities would up to 30000 customers to establish a cyber security plan and a valve and hydrant inspection program. This is similar to legislation that exist in Indiana and New Jersey.
Finally, the sale New York American water continues to progress and we anticipate the closing of the acquisition by Liberty utilities in early 2021.
Moving on to slide 11.
Customers remain at the center of every decision, we make today and into the future.
This means smart investments balanced by efficient operations and capital deployment.
As I mentioned earlier in the first half of this year, we invested a total of $930 million with the majority in our regulated businesses, including $881 million, an infrastructure investment and $40 million and regulated acquisitions.
As we make these critical investments to maintain reliable service. We must also ensure affordability for our customers will continue to focus on on him efficiency and work toward our own am efficiency goal of 31.3% by 2024 for the 12 month period, ending June Thirtyth 2020, our own them efficiency.
Prove the 34.3% compared to 35.2% for the 12 month period ended June 32019.
Our adjusted on him expenses are just slightly higher today than they were in 2010.
Since then we've added approximately 281000 customer connections while expenses only increased at a compound annual growth rate of 0.8%.
We're very proud of our employees focus and commitment to controlling costs on behalf of our customers, especially given the current economic challenges some of our customers are facing.
Moving on to Slide 12, we believe our commitment to putting customers first as a key to growing our regulated footprint.
So far in 2020, we've closed on 13 acquisitions in six different states, adding approximately 10800, new customer connections. We've also added more than 6900 customer connections organic growth in the first six months.
We look forward to adding another 43600 customer connections through currently signed agreements in nine states most of which we expect to close in 2020.
These new agreements reflect our commitment to provide water and wastewater solutions to communities across our footprint.
We know that many communities are facing unprecedented challenges now and so we're pleased when we're able to help.
This includes our recent acquisition the village of Shiloh wastewater system in Illinois.
This is another example of acquiring the wastewater system in an area, where we provide water services for decades.
According to our village Mayor James Rineer, the sale of wastewater system to Illinois American water quote allows the village to focus and other priorities and quote.
Also went on to say quote, Illinois American water's provided excellent water service to our residents for many decades, we look forward to expanding our partnership and quote.
We're very disciplined in our approach to acquisitions, leveraging our tremendous expertise to find solutions for communities.
We now have about 800000 customer opportunities in our pipeline as many communities are seeking solutions to increase challenges, which include regulatory financial and those posed by coven 19 in managing water and wastewater systems.
And with that let me now I'll turn the call over to Susan.
Thanks again, Walter let me start on slide 14, with a bit more detail on result.
Second quarter 2020, consolidated GAAP earnings were 97 cents per share compared to 94 cents per share in 2019.
As Walter mentioned included in GAAP, earning 10 cents per share for depreciation not recorded due to assets held for sale accounting and the estimated five cents per share unfavorable impact from the cold with 19 pandemic.
Regulated business segment results increased 10 cents per share or an increase of 11.5% compared to 2019, earning.
The market based business results increased one point per share on the parent company deep decreased eight cents per share compared to 2019.
Our 2020 GAAP earnings through June 30 were $1.65 per share or a 5.8% increase over the same period last year and the six month period results include three cents related to depreciation not recorded due to asset held for sale and an estimated five cents per share unfavorable impact from the code Nike pandemic.
Our regulated businesses increased 18 cents per share our market based businesses increased two cents per share primarily from Holland homeowner services and finally, the parent results decreased by 11 cents per share year over year.
Moving to slide 15, I walk through the second quarter results by business.
Regulated operations increased 14 cents per share before considering the four cents per share estimated unfavorable impact from Cowen 19 on the regulated business.
We side 20 cents per share increase from additional authorized revenue and surcharges to support infrastructure investments acquisition and organic growth.
Walter mentioned as a reminder, that 2019 results include four cents per share of unusually wet weather in the regulated business.
I am expense increased five cents per share and depreciation related to ongoing operations increased seven cents per share both to support Reg regulated acquisitions and other growth.
And market based businesses second quarter results in 2020 increased two cents per share compared to 2019 before considering the one cent estimated favorable impact from kind of 19 on the market based businesses.
The increase was driven primarily by homeowner services group organic growth and contract price increases also during the second quarter. We are now fully operational on joint base, San Antonio and the United States Military Academy at West Point, New York.
The parent result decreased eight cents per share with two cents per share, reflecting higher interest expense to support growth and the regulated business. The remaining six cents per share was the three cent per share sale in the legacy investment that occurred in 2019 and timing of expenses and other items of three cents per share.
Finally on slide 15, you'll see the total five cents per share estimated impact from cobot as we've discussed.
Moving to slide 16, six month GAAP EPS increased 5.8.
5.8% year over year, as I mentioned and many of the drivers of the variances in the quarter noted previously also explain the year over year results.
Moving to slide 17, the regulated businesses received $80 million and annualized new revenues in 2020, and this includes 18 million from step increases and 62 million from infrastructure surcharges.
We've also filed requests and are awaiting final orders on five rate cases, as Walter just walk you through and Q infrastructure surcharge proceedings for total annualized revenue request and $294 million.
The continued successful execution of our regulatory strategy is a key element of our ability to consistently deliver financial results.
Moving on to slide 18.
The company expects its 2020 earnings to be in the range of $3.79 per share to $3. An 89 cents per share on a GAAP basis included in this guidance range is the estimated six cents per share for depreciation not recorded as required by the accounted for assets held for sale and the estimated five cents to eight.
Cents per share unfavorable impact from the code 19 pandemic that full year estimated impact and club 19 is highly dependent on the projected impact of a number of unknown factors, which included the link and severity of decreased demand for services and the nature and scope of regulatory solution.
Our current thoughts are that we start to see moderation in the impact on demand in the third quarter 2020.
This guidance ranges the same range that was previously announced on an adjusted basis, but let me be clear our 2020 expectation of result in the range of $3.79 to $3.89 per share is unchanged from prior expectation.
We continue to believe this range is reflective of expected results on a normalized basis.
Normalized for the two unusual items in 2020 related to the depreciation issue and covered 19.
We think that guiding to GAAP results, which include these two items makes the message quite clear.
And I also want to repeat what Walter said, we are affirming our long term earnings compound annual growth rate expectation on an earnings per share basis of a range of 7% to 10% while investing capital in the range of 8.8 billion to 9.4 billion over the next five years.
Finally, moving on to slide 19, as we noted in the release on July 29, 2020 becomes board of directors declared a quarterly dividend at 55 cents per share of common stock payable on September one 2020.
This reflects the continuation of the 10% increase in annual dividend declared by the board on April 29, 2000, each money, we continue to be a top leader in dividend growth, we have grown our dividend at a compound annual growth rate at 10.1% over the last five years and we expect to continue that growth at the high end up to seven to 10.
In percent range.
Also we continue to targeted dividend payout ratio of 50% to 60% of earnings.
Our total company consolidated actual return on equity is 10.7% for the 12 month ended June 32020.
Regulatory execution, along with strong results from our market based businesses allows us to consistently deliver on our earnings commitment.
We believe that delivering on results combined with our strong earnings growth and superior dividend growth expectations continue to provide excellent value for our shareholders.
To summarize the decades of capital investment need continue and drives our planned at $20 billion to $22 billion of capital investment over the next 10 years with the fragmented water and wastewater landscape and his state and local communities continue to face added challenges from impacts and totaled 19. We believe we can provide those dates and times.
Around water and wastewater solutions to help mitigate those impacts.
The capital light market based businesses continue to improve customer experience and generate cash and simply put our business model and resulting investment thesis is dealt on fundamentals.
And that will all segments in the economy are being impacted by will help emergency we see our business as resilient and we have built in a way to under these challenging.
And with that let me turn the call back to Walter for a few additional remarks.
Yes, Thanks, Susan I want to end by thanking American water's employees for everything they've accomplished in the first half of this year, especially since the beginning of our responses the pandemic in March.
With safety is our top priority we've continued to provide essential services in every community we serve.
The American water and the American water charitable foundation, we support many organizations across our footprint that make a difference for the communities, we serve including those that seek to foster a more equitable society.
And as we always have we continue to support an inclusive in diverse culture at American water.
All these efforts are in addition to executing of our strategies investing in our systems, bringing water and wastewater solutions to new customers and communities and becoming fully operational with two new military bases.
While there may be significant concerns in the market given covered 19 and a variety of other factors I'm pleased to report that our fundamental story to American water remains the same and our performance remains consistent because of the incredible employees work here.
With that we're happy to take your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question is from Angie Storozynski with Seaport Global Please go ahead.
Thank you.
I question, most the boundaries the guidance first so I just so I'm clear.
I mean on the GAAP level there is this positive.
The positive offsets to.
To your.
To the five cent hits from earnings I mean that some upside from corporate related expenses I don't have that benefit on an adjusted basis, So basically saying that even with that five cents income still within.
The adjusted EPS range or is there some other offset to that question hit on an adjusted basis.
Hey, Andrew Good morning, let me address that and I think I think you mostly got it right I think what we've continued to try to say here in the range of 379 to 389 per share is what we believed to be expected result on a normalized basis.
During the first quarter, we called that adjusted because we were dealing with the depreciation issue in New York, Obviously, the code estimates had not been fully vetted at that time.
We now have a better insight it to weapons code estimates are but I think fundamentally it's important to stay focused on that range of 379 to 389, which is where we believe we will we will end the year and whether you think about that as adjusted or gap I think it's important to note. That's what we believe.
To be.
Sort of normalized operations and that's what we've always said.
We have gone through a GAAP guidance approach here I think just to make it easier to understand and easier to follow what our guidance is.
But there is no change from our expectation around sort of normalized results.
Range of 379 to 389.
Okay, I understand and my second question.
On New York.
I appreciate Walters comments that the that fit the sale transaction continues.
Seems like.
At least based on press reports that attempt to municipal ice part of this systemic New York system.
So do you expect that the transaction gets delayed does.
By titles potential Vizio solar.
How should we think about it.
Okay. Thanks, Angie, it's Walter How're you.
Let me start by saying, we're moving forward with the sale of New York American water. The regulatory approval process is progressing there've been some delays related to giving third parties and opportunity to submit alternative proposals to the sale and we've taken that into account when we look at the what we're seeing as far as the beginning of 2021.
So we don't anticipate any other delays because it's a very tight timeframe that they've given these these communities and opportunity to submit alternative proposals.
One proposal has been received so far we're reviewing that but liberty and American water committed to moving forward with the sale.
Awesome and lastly, I mean, we keep waiting to see.
Interveners filings in your New Jersey rate case, I understand that they haven't been posted yet.
I would give us at least a sense.
So what are the key contentious plane.
And how how the rate cases going.
Well the rate cases is proceeding according to our anticipated schedule.
We.
The postings have not been public so we really can't comment on those but just just to say, there's really nothing out of the ordinary in these.
Okay. Thank you.
Thank you Andrew.
Thanks Angie.
The next question is from Insoo, Kim with Goldman Sachs. Please go ahead.
Thank you My first question just following up on Andrews questions on the guidance.
I think I understand that the moving pieces and longer term I do agree which affect on a normalized basis that is what it is but I guess just from an apples to apples comparison versus the range that yet given out on adjusted basis as a first quarter. It seems like either at the corporate expense.
Impact expectation is excluded from a on apples to apples basis or.
With that you're.
Essentially trending five to eight cents below the original plan.
You've talked about the you're confident that getting a lot of that back.
A disconnect costs and whatnot, if those things do not materialize what type of.
Cost measures to you have to potentially offset this or is it something that you're just going to hold back into.
To to deal with it in 2021.
Hey, Walter I can start there.
Certainly and again.
I think as we again just talking about guidance for a second.
A couple of thoughts I would give you relative to that it may be add to Angie.
Response.
If we were continuing to provide adjusted guidance, we'll say using that terminology. We would certainly look at these cobot costs as an item that we would adjust for.
So.
They would be considered part of that adjusted guidance just like we had than New York. So we would be adjusting for that and essentially saying they shouldn't be considered as part of normalized operations.
And as we thought through that we said it just makes more sense to go straight to GAAP guidance and say these are going to be the results on the books and they happen to be exactly the same guidance, we've been providing all along on a normalized basis again, the 379 to 389. So we view this is literally no change in guidance.
So again thats, how we think about guidance as it relates to sort of recovery again, we've got orders and 10 at 14 States and we've got proceedings in the other for that we believe will allow us.
Fully to seek recovery of all of the all of the costs associated with co made with the exception. The law demand revenue that is really the piece that ultimately fall through in that five cents loss demand for since the non regulated side of the business.
So again, we're going to continue to work with regulators on recovery of the loss demand dollars and again, we think it makes sense to.
To work through the regulatory process on recovery before we start to again sort of arbitrarily reduce costs.
That that again can have longer term impacts on our ability to continue to deliver services. We think this is that.
Eight and event that has occurred during this period, we're hoping that we start to see some moderation of that exposure in the third quarters I mentioned.
So we believe there's some isolation to it.
And we can again sort of work with regulators to seek recovery and cost reductions, while we continue to focus heavily on them as we've outlined here. We've made progress again on the on efficiency ratio and we continue to focus very heavily on costs.
And our cost structure in the business, we think thats, where our focus should be not on sort of arbitrary reductions that could potentially affect our ability to deliver service.
Got it yes, the only thing I'd add to that I'm sorry go ahead.
Oh that my follow up.
This question was just going to be so when you do provide 2020 on guidance.
If they are and expectations of lingering cobot related impact that will essentially that backed out to provide a more normalized GAAP guidance.
Well again I think we'll we'll continue to talk about any impacts we see from co, but I mean that that's what I think we're trying to do hear it simply highlight for you.
The significant issues that affect result, and this particular year.
It's it's the New York depreciation issue and it's cold.
The extent, we see lingering impact into 21, we'll continue to talk about the impact of coded and make it very transparent to you what those impacts might be and how we're addressing them whether they be from a regulatory perspective or some other.
I'm, not saying that will adjust for them again, I I'm a bit of appear as it relates to reporting I think GAAP results are they are the best indicator of performance and so were.
We think transparency around GAAP results is the right approach and that's what we're doing here.
Understood and just one follow up if I may.
I think theres been a tough from attempt and trail about increased clean energy plant and Thats part of that.
Focus on the water side on the water quality, how do you see that impacting our benefiting it'd be too K from a rate base or.
Having to manage expense.
On an expense basis or is it.
Still something Thats more on a state by state basically.
Yeah, it's really more in a state by state basis.
We continue to.
Talk to the folks on a federal level about the ways a private water American water can help.
Resolve some of the issues in the challenges in the water and wastewater space, but it's largely driven by the states.
Understood. Thank you very much.
Thank you.
Sequencing.
The next question is from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, good morning, Susan Walter.
Hi, Thanks beat on the dead horse a little longer.
So the guidance but.
So you're kind of saying the covidien pacsun five cents so far.
Looking at your Crystal ball for the second half of the year, there's the potential for an additional three cents does that what you know how should we should view that five to eight from a full year impact to gap that you're talking about.
Yeah, I think Thats fair, Jonathan now as I said in the release and our remarks today, Theres, obviously lots and announce.
And.
We will track this just like we do it the changing landscape every single day.
But we have an expectation that the largest.
A portion of the impact again this by 10 four cents on the regulated side is really driven by.
Demand changes.
And we expect that to start to moderate again, we've started to see.
Employs returned to work.
Across our territory, we've seen industrial.
Demand and start to come back up.
I think commercial is probably the biggest variable to be honest with you.
As you think about restaurants and.
Some of those the smaller commercial enterprises, they are likely going to have a little bit longer recovery period.
So I think that is the biggest variable our current view is that we'll see some of that moderation here in the third quarter. So that five to eight cents range. We've given around coven really reflects that set of assumptions that that for the balance of the year again.
We should be able to sort of contained within those that range. That's our current thinking.
Okay and for some reason you are successful getting.
Regulators to support.
Recovery about lost revenues and that represent essentially that five to eight cents upsides.
Terrific right now right now again, yeah as you think about how that process may play out, though obviously will.
Well, we are working with regulators currently and we'll continue to do so.
We'll have to work through a process to get those dollars reflected for recovering so it may take.
Net of time, where there has been quick action by regulators today.
Literally across the country as you know.
Regulatory community has been very supportive of the process to identify a need for solution here around particularly around disconnects in that sort of thing. The lost revenue piece is sort of another layer of challenge that we need to work through with regulators.
And that may take a bit of time, but yes, I mean, if we if we can work through that there is potential upside there and as I mentioned in the script Marine our prepared remarks, and it may have been sort of a subtle comment.
At the state level.
We are we have recorded these loss revenues as recoverable items. We just took a conservative view at the parent and said, we don't have regulatory orders in place to support it yet.
So at the consolidated level, we did not record those regulatory assets, but we certainly expect to work through it with regulators and we'll see what progress we can make.
Okay, and then 12 million regulatory asset that has been recorded on the cost side does that assume the other four states I mean and opens or is the only kind of significant size. One in there, but does that assume that those four also I guess on from the cost recovery at least.
Well, we start yeah, we certainly have taken lots of guidance from our discussions with regulators in those states. We have had active an ongoing conversations with them from the beginning we've certainly filed petition that would support that.
Approach, we have lots of precedent, obviously and our other 10 states wells understates across the country.
Again, we're not trying to predict what regulators will do necessarily but we certainly believe we've got good support for that approach and it is reflected in the accounting that we've done portal.
Okay, and then limit.
Sorry, sorry.
Go ahead go John and I will jump in.
All right well.
Yes, I know I just wanted to emphasize that again, we run this business for the long term and we're going to continue to focus on those cost reductions that benefit our customers employees and long term you. It's part of our culture, we've been doing it for many years, we're going to continue to do it you can see beyond him efficiency continues to improve and that's really important the way we run the business I just wanted to ask.
Besides that for this this call.
That kind of actually leads into my thoughts I mean, I know you guys do run a very lean shop and everything but your comments around.
Kind of make an arbitrary cost reductions that could impact long term quality.
Versus other utilities out there that seem to be finding these cost offsets that they say won't impact.
Service quality is is that just because you already feel like you run Super Lean where you don't have this low hanging fruit just to kind of.
Offset the.
The loss sales impact and therefore, you know.
Not have to go back to the well fast customers pick it up.
Already running Super Lane and that's why.
You feel like any additional cuts could impact the quality.
Yeah, and I can only speak for our company, Jonathan but we've been on this journey now for a dozen years focused on efficiencies and we're going to continue to do that but again, we're going to make the decisions in the context of whats right for our company for our employees for our customers.
And that that's really what guides our decisions.
Okay. Thanks for the thanks for taking my questions.
Thanks.
Thanks, John.
This concludes our question answer session I would like to turn the conference back over to Walter Lynch for any closing remarks.
Well, thank you I'm going to for I'm going to defer right now to employ always as a few comments to make.
Thanks Walter.
Well as you all know.
One other ways American water grows is by developing our employees and Thats a great thing.
So now it's the with mixed feelings today that I must share with you that Ralph Jed look our IR director for the last three and a half years, we'll be moving on to join our treasury team to continue to develop and as a financial executive at American water.
And vice versa coming to us from the Treasury team, Mike to Vonnie will be joining the IR team, Mike is that CFA holder and he is experiencing treasury at DNA and internal audit.
You all will be meeting Mike virtually at least as we talk to you all over the next couple of weeks.
Ralph.
Thank you for your dedication and your sense of humor, and most importantly for your council and friendship.
Kelly and I know that you'll be a grid addition to the treasury team.
So got speed as you continue journey my friend.
Okay, Thanks, Congratulations Ralph and Mike.
Okay. So thank you for joining our call today, we value your participation in the work you do on behalf of your clients. We hope our open and transparent discussions give you competence in our company any investment in our stock. If you have any additional questions. Please call. The IR team there will be happy to answer them, thanks, again and be safe.
The conference has now concluded. Thank you for attending you may now disconnect.
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