Good morning, and welcome to American Water’s First Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded and being broadcast 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 May 11, 2017. U.S. callers may access the audio archive toll-free by dialing 1-877-344-7529. International callers may be sent by dialing 1-412-317-0088. The access code for replay is 10104445. The online webcast will be available at American Water’s Investor Relations homepage at http.\\ir.amwater.com. I would now like to introduce your host for today’s call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you, Anita. Good morning everyone and thank you for joining us for today’s call. We will keep the call to about an hour and at the end of our prepared remarks, we will open the call for your questions. During the course of this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events. 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 the 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 March 31, 2017, Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information discussed on the conference call, including adjusted return on equity and our O&M efficiency ratio can be found in the appendix of the slide deck for this call. Also, this slide that has been posted to our Investor Relations page of our website. All statements in those call related to earnings and earnings per share refer to diluted earnings and earnings per share. And with that, I’ll turn the call over to American Water’s President and CEO, Susan Story.

Thanks, Ed. Good morning, everyone, and thanks for joining us. Today, our CFO, Linda Sullivan, will cover the first quarter financial results and our COO, Walter Lynch, will give key updates on our operations. The employees of American Water again delivered solid results in the first quarter of 2017. Our strategies include providing excellent service to our customers, building constructive regulatory relationship, growing our business and becoming even more efficient in our operation to ensure affordability and value for our customers. The foundation for our earnings growth is the capital investment we make in our regulated operations. We invested $242 million this quarter, with $223 million for regulated infrastructure. We plan to invest about $1.5 billion this year with 1.3 billion dedicated to water and wastewater system improvement and upgrade. We minimized our customer bill impacts while making these investments through a continued focus on controlling O&M cost and through constructive regulatory mechanism. Our regulated business closed several acquisitions during the quarter and in April. The largest was Shorelands Water Company and we are pleased to welcome these 11,000 New Jersey families and businesses to the American Water family. We have added around 16,700 customers since the start of the year through closed acquisition and organic growth. Earnings were up slightly in our market-based businesses. We saw increases in our Homeowner Services Group as well as our Keystone Clearwater subsidiary. However, as we noted at both our December Investor Day and on February’s yearend earnings call, Military Services continues to experience a downturn in ongoing capital projects on basis. This is due to previous sequestration mandate and their effects on base budgets. The sequestration was lifted earlier this year and we could see the benefits of this in the DOD’s next fiscal year, which starts October 1st. Linda will discuss…

Thanks, Susan. Good morning, everyone. As Susan mentioned, our Regulated businesses has had a strong first quarter, making capital investments to ensure clean, safe and reliable water service while continuing to improve our operating efficiencies to benefit our customers. Let’s walk through some of the highlights of the quarter. In Pennsylvania, we filed a rate case in April 28, requesting an increase of $108 million and a return on equity of 10.8%. We’ve invested approximately $1.3 billion in Pennsylvania infrastructure and slightly decreased O&M expense since our last rate filing in 2013. This is a great example of increasing our system reliability and making it affordable for our customers. California American Water’s cost of capital filing was not extended, so on April 3, we filed an application requesting 10.8% return on equity, along with 55.4% equity and 44.6% debt. The outcome of this proceeding with affect rates starting in January 2018. In Virginia, on April 5th, the legislature and governor enacted new legislation that will benefit our customers. Senate Bill 1492 allows for statewide single tier pricing, one for water and one for wastewater for proceedings after July 1, 2017. Consolidated rates, which we have now in nine states allows us to spread the cost of infrastructure investments across a larger customer base and helps ease the financial burden in any one community. In Tennessee, the Public Utility Commission approved the infrastructure surcharge for 2017 projects. We’ll invest almost $16 million in projects that improve service and reliability and will only impact our average residential bill by about $0.77 per month. This type of constructed regulatory policy allows our subsidiaries to make needed improvements while reducing the possibility of large rate increases. The Iowa Utilities Board issued an order, adjusting rates for Iowa American Water. We invested approximately $38 million…

Thank you, Walter, and good morning, everyone. Today, I will cover the first quarter results and key financial metrics that bring customer and shareholder value. Turning to Slide 13, we had a solid first quarter. Earnings were $0.52 per share, $0.06 above the first quarter last year. The regulated businesses were up $0.04 per share, the market based businesses were up $0.01 and the parent was also favorable $0.01. I’d like to point out that our first quarter results include a $0.02 per share tax benefit related to the new accounting standard for stock-based compensation. Excluding this benefit, first quarter EPS increased 8.7% over the same period last year, again representing solid quarterly result. Let me walk through our results by business segment. Our regulated operations were up $0.04 per share. Revenue was up $0.08 per share from authorized rate cases and infrastructure mechanisms to support growth and acquisition, partially offset by slightly lower demand. Next, we had higher depreciation and general taxes of $0.04 per share, also driven by our investment growth. I’d also like to point out that O&M expense was flat in the regulated businesses compared to the prior year, as our employees across the company continue to focus on driving efficient operation that help make capital investments affordable for our customers. Turning to our market based businesses. They were up $0.01 compared to the same period last year. Homeowner Services was up $0.01 on revenue and contracts growth and Keystone was favorable from continued cost management. And as Susan mentioned, we are seeing improved market condition that are expected to impact results in the second half of the year. These increases were partially offset by lower capital upgrades in the Military Services Group of $0.01 per share, which includes the quarter-over-quarter impact from completion of the…

Thanks, Linda. Before taking your questions, many of you have asked about the Trump administration’s infrastructure plans and how they might impact us. So I’ll speak to that very briefly. As you know, tackling our nation’s infrastructure challenges for roads, bridges, airports and water infrastructure is a priority for the administration. And for a good reason. First and foremost are the safety and health of our citizens and there are also compelling economic and competitive justifications. We know reliable infrastructure is foundational for communities and businesses to thrive and investment also stimulates the economy through job creation. For example, every 1 million in water infrastructure investment yield 16 jobs. So American Water’s $1.3 billion invested in water and wastewater infrastructure this year will support 165,000 jobs. The details of an infrastructure package are still not clear, but the administration has been clear on the need for private sector involvement. For us, a focus on the need to invest in infrastructure is a good thing. For as long as you have been listening to our calls, we’ve been talking about the need for and our efforts to upgrade and maintain our systems to ensure clean, safe and reliable water services, all while running our business safely and efficiently so that our customer bills are affordable. So as we applaud these efforts by the administration and are actively involved in this policy development efforts to support our customers’ interest, it doesn’t really change our ongoing investment’s scope, plans or commitments. Regardless of what happens in Washington, we will continue to focus on serving our customers, assuring water quality and strengthening our infrastructure. And we will do this as we also partner and assist communities seeking help with your own water and wastewater service challenge. And with that, we’re happy to take your questions.

[Operator Instructions] Our first question comes from Ryan Connors with Boenning and Scattergood. Please go ahead.

I’d like to just talk about Pennsylvania. The related issues of the Pennsylvania rate case and sort of acquisitions there. And obviously the rate cases as sort of hot off the press. But can you tell us about how the -- well first of all, whether or not that includes Scranton addition, which I assume it does. And if so, whether if there’s any unique elements to how that’s being treated in terms of that being a wastewater system and it being a pretty large implementation of Act 11 and just unique dynamics or things to watch for in terms of how Scranton will be now pulled into the rate orbit for Pennsylvania.

Brian, it’s Walter. The Scranton acquisition is included in this rate filing. And because of Act 11, it’s going to be integrated into the preceding and with the same way that the water systems would. So it’s going to take, again, eight to ten months to work for the preceding and we just -- we’re going to work with the commission to make sure that the Scranton customers are represented in the right way.

Okay. So you don’t anticipate any unique or any kind of unique sort of push back in terms of the scale of that system and that being causing an issue in terms of single pricing or anything like that? I mean, you’re going to be pretty straightforward and be treated similarly than any other rate case?

That’s what we expect, Ryan. And again, when you consider the size, $1.3 billion worth of investment over the last four years. I mean, this is a significant investment, but still as part of the much bigger capital program that we have in Pennsylvania.

Right. Good point. Now what about the broader Pennsylvania? I mean, it seems like the deal flow, at least that announced deal flow, has slowed little bit. I mean, you have Scranton, it was obviously a big one, the key support, but lately, there haven’t been really any additions. I mean, should we interpret that as meaning there is a little bit of a deceleration? Or are there whole lot sort of in the hopper that we’re not seeing yet and the cadence remains really strong.

Well, let me say that we continue to work with communities to address their issues and be a solution provider for them. And again, we know that we’ve got a compelling story and we can add tremendous value to our customers.

Okay. And then one last one, just more of a sort of housekeeping, short-term issue. But we are, Linda, you mentioned the variability on weather and I appreciate the transparency there in terms of the guidance. But any early read on 2Q? We’re almost halfway through and whether that will be a headwind or a tailwind for the second quarter results.

This is Susan. Before Linda answers, we’re able to project what the weather’s going to be, none of us may be sitting around this table. But Linda, what do you think?

In the first quarter, Ryan, we did see a little bit of lower demand but it was really in line with declining usage that is normally expected.

And if you have any inside information, we would love to hear it.

We’re five weeks into 2Q, so I’m just trying to get an idea whether there’s any sense of whether it’s been in the first five weeks of 2Q, whether it’s been a headwind or a tailwind to sales.

Yes, and we’re not really seeing any large indicators through the April timeframe. I will say that when we look at weather variability, historically, we have seen the largest variability occur in the late summer months or in the third quarter of the year.

And Ryan, one of the things that really helps us, if you remember over the past couple of years, especially because of our geographical diversity, even when we may see, unfortunately, as we have flooding at different times in the Midwest and drier weather in the Northeast, they have tended to offset each other. So one of the benefits in terms of not -- quality of earnings or being able see through the weather is the geographical diversity we have. So you bring up a good point with all the rains that Missouri has had, we’ve not seen that in the Northeast. So that kind of helps us kind of net out and we think that’s good.

The next question comes from Angie Storozynski with Macquarie. Please go ahead.

So continuing on the M&A fronts. So I’m wondering, you have made two relatively high profile hires in your business development department. Is this a signal that maybe you might consider corporate M&A in addition to municipal M&A? Or those are completely unrelated?

So the quick answer is it really -- there’s no changes to our strategy. And just as some background, I’m really glad you asked the question. So if you look at American Water, in the past four years, we’ve actually doubled our market capitalization. We’ve increased our regulated acquisitions, we’ve also increased our capital investment. And you also pair that with the fact that we have an aging workforce. And so we’ve, over the past two to three years, been looking at strengthening an already really strong team, and we have so many professional, who have worked here for a long time. But for example, last year, we brought in a new Chief of Innovation and Technology Officer, Radha Swaminathan, because he brought some unique capabilities from his time in electric utility industry and what they had done in technology. We brought in a new Head of R&D and emerging technology because Dr. Mark LeChevallier is retiring as at the end of this year. We brought in a new Controller, Melissa Wikle and we also promoted several people inside to bigger and higher jobs. So really with Eric and Brian, it’s a continuation of that. And Eric is actually in business development and Mark Strauss group. And that group, as we talked about at Investor Day in December, that group supports the regulated acquisitions strategies that are state employ, but also we are always looking at the landscape of are there any states we want to enter. And we’ve talked about the conditions that we would have to have before we did that. And we also look at are there other opportunities, but that’s not the basis of our growth triangle and that’s not the focus mainly of what we’re doing. And with Brian, actually, it’s a different role than that is that as we’ve gotten bigger and as we look at our corporate strategies and our financial strategy convergence, we’re bringing in talent that has decades of experience of looking at creative financial planning, how you integrate corporate strategy with financial planning, being able to look at financial modeling, how we evaluate, making sure we make really good smart financial decisions. And I’ll tell you, with the addition of Melissa and Brian and the continued outstanding work that Ed Vallejo bring, our VP and Treasurer Jen Gamble, our team here, really, we brought these hires in to really make us even stronger than we have been in the past. And it’s pretty exciting.

Very good, thank you. And but again, can you -- we don’t obviously see the backlog of municipal deals that you’ve been working on, and I’ve heard the comments from Walter, but is there anything more you could let us know. I mean, you have a number of high-profile cases in your service territories or close to them with all kinds of issues, water related issues, lead poisoning or high levels of lead. We would have thought that those would have led to more imminent announcements regarding at least public-private partnerships with companies like yours. But we haven’t heard anything yet.

Right. And it is one of the reasons that in December, we shared kind of the long [indiscernible] into deck. Today, we shared the long process it takes in terms of acquiring a municipality that even if there is interest and they expressed an interest, when you’re a municipality, there’s a lot of efforts all this are in play. You have to get a lot of people on board. You have to get a lot of people aligned. It’s not quick. It would be much faster if the business was corporate acquisitions, which has its own set of issues. But in the municipality, we also understand that these are elected officials and they want to make sure not just that they’re getting a good price for their system, but that the people who buy their systems and other assets are able to serve the citizens well over the coming years. And this is a big interest. A lot of these mayors and council folks say, yes price is one thing and yes we need to have more capital, but on the other hand, I have to make sure that this is going to last for the next several years and that we don’t put our city in a situation where we have service use. So you’re exactly right, Angie. As we do more and more work with emerging contaminants, as we are looking not just at lead but other contaminants that are regulated, that we have growing concerns about and we’re looking at ways to deal with them, we are sharing with municipalities all over the country our efforts, our value proposition and some of them are interested, some of them aren’t, but it’s not a fast process. And I don’t think it’ll ever be a fast process because of the politics involved. And I know one thing that will help though and Walter can mention the Water Quality Accountability Act in New Jersey is one thing that it takes effect across the country because basically, private water companies like us are held to higher standards or where actually the regulations are enforced more strongly with us than they are with municipalities. And we believe that all people deserve clean water. You may want to talk about what’s going on in New Jersey, Walter.

Absolutely, Susan. If I could add to that as well. It does take a long time as we know. But our teams in the states are focused on executing and delivering value for the communities that they serve and will serve in the future. So the Water Quality Accountability Act right now was approved in the environmental communities in both the House and Senate in New Jersey. The next step is going from the budget committee, which should happen at the end of this month and then a floor vote in June. And then the governor’s got 45 days to sign it. So it is moving forward. We expect it to move forward and get approved. But we think this is going to be good, not just for New Jersey but as other states look to New Jersey as a leader in this area that they’ll look at something similar in those states.

And if I could add to that, when we look at our long-term growth triangle, we continue to see 1% to 2% growth EPS compound annual growth rate from regulated acquisitions. And that translates into about 30,000 to 60,000 customer additions per year. And they ebb and flow, they can be lumpy as we go through, but we’ve added 13,000 customers year-to-date.

And next question comes from David Katter with Baird. Please go ahead.

I was hoping you could discuss and give a little more color on the Senate bill in Virginia and how it adjusts, how you might evaluate opportunities in the state.

We’re really proud of that. We did play a role in moving that forward in Virginia. So what we have is single tier pricing. 1 on the water and one of the wastewater side and we’re going to use that like we do in other states. So if we acquire a system, we can spread those costs across a bigger customer base. And so we’ll just continue to work with our municipal leaders in Virginia to promote the benefits of that. We’ve seen it in all the other states and I think they recognize that because they passed it, the House and the Senate and the governor passed it for a reason because it’s in the benefit customers within Virginia.

And so would that make acquisitions in the state incrementally more attractive, do you think?

Yes, we believe so. And that’s why we’re big believers in the single tier pricing because again, it allows us to buy a system and most of the time, they need significant investment and we’re able to spread that investment across a larger customer base.

Got it, thank you. And then one more question on California. After 2 years of drought, how should we think about a potential rise in demand or usage rates? How the consumer trends adjust after conservation from a drought, do you think?

Well, we expect the behaviors to continue in California. I think the customers there have worked very, very hard over the last 6, 7 years to bring their usage down to levels that they can sustain. So that’s the way we look at it. The continued behavior around conservation is very important in California and our customers recognize that.

And also in California, we have revenue decoupling which aligns the conservation goals of the commission of our customers and our company.

The next question comes from the David Campbell [ph] of Goldman Sachs. Please go ahead.

Given the recent cost of capital application filed in California, we’re just curious, what is the revenue sensitivity for every 25 basis points change in return on equity?

So we can give that to you off-line. I don’t have it right in front of me. But what I can say is that our cast across the capitol filing was not extended, so we did do a filing on April 3. We requested a 10.8% ROE and that is up from our current authorized level of 9.99%. We also requested an increase in the equity ratio from 53% to about 55%. So we can run through that calculation and get it to you.

It’s Ed. We’ll give you a ring after I get back to my office and look at the numbers, okay.

Okay. Thank you. And also, when do you expect the rate from the new Pennsylvania rate case go into effect?

Typically it takes 10 to 12 months to work through the process here in Pennsylvania.

And then finally, following up on Slide 19 as it relates the potential infrastructure spending bill. I guess we were wondering if increase in federal funds for water infrastructure spending could potentially, I guess, limit state incentives for fair market value legislation. So Washington, D.C. might not necessarily impact investments and American Water’s current assets but may provide headwinds when it comes to future acquisitions.

That’s a really good question. So from everything we’re seeing, when you look at the amount of money spent by the private industry a year, which is between 2.5 billion and 3 billion and you look at the money that’s out there for 84% of the water systems and 98% of the wastewater, they actually are spending less from public funds. So it would take such huge numbers of, I’ll call free money, to have a big impact. However, there’s always a issue one of the things that we’re doing to watch out for our customers is our customers pay taxes just like the customers of municipality. So what we’re asking for is a level playing field. For example, the state revolving fund that gets funding nationally, federally, we can participate in states that allow us to on the waterside but not on the wastewater side. So we’re working on policy efforts to ensure that if there are pools of low-cost money that we have access to them equal to what the municipals have access to. And again, because all of our customers pay taxes also. So for us, there’s also in some conversations that we’ve been involved with in Washington, the trillion dollar infrastructure is not a trillion dollars in actual funding. It is finding ways that you have offset the need for that. So our ability to invest, job creation, those types of things could actually be used as a measure to count toward that and that’s one thing that we’re involved and making sure that we had recognized for that.

Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.

Two quick questions. When you originally established the 2017 guidance, did it contemplate the $0.03 to $0.04 one-time charge for the New York State manufacturing deduction?

Jonathan, this is Linda. It did not. And so as we began to look at our guidance and affirming our guidance, there were two really discrete tax items that we were looking at, that impacts from New York but also from the change in the new accounting standard for stock based compensation. And so those largely offset.

Okay. So you haven’t contemplated the stock tax benefit either?

Yes, we do about it. This is something that’s really hard to predict because it’s based upon the level of stock option exercises, the stock price, et cetera. And so we did not include it in the guidance. So that’s why we wanted to make sure that we outlined these items for you for additional transparency, so that you could determine the overall quality of earnings.

Right. And I guess, that kind of goes to my next question, just given the onetime nature, why not just back it out? The $0.03 or $0.04 item, at least.

Yes. And it’s really a one-time cumulative noncash item. Let me try to be very careful. You get some companies that outlined everything so special and back out in all this and we just we tried to be pretty transparent and clean, so unless it’s something -- that’s why we say we adjust kind of some interesting weather that we should be able to adjust for a weather that’s within a certain band and only if it’s extraordinary so that’s great point, Jonathan. But we just try to keep everything simple and clean as we can.

And I’ll add to that. That is our preliminary estimate. The new legislation came out on April 11. These are very detailed calculations and we’re working through that process now.

Okay. And then just building on Ryan’s earlier question. I guess, for Walter probably, about the PA rate case. I know you indicated that you expect to be relatively straightforward, but I think it is the first time and I’ll use the forward-looking test here. Do you expect any issues with that trends that it shouldn’t during the process and potentially during the settlement negotiation?

No, we don’t expect any issues there. We’re just going to work through it like we do with our other investments in Pennsylvania.

Okay. And using the forward-looking texture that didn’t allow you to I guess, grab and key sports since that one hasn’t closed. Is that the way to kind to think about that?

Yes, that’s correct.

But if it closes during the next few months or whatever, you wouldn’t be able to adjust that case, would you?

No.

Okay, great. Thanks for the time guys.

Yes. Our next question comes from Michael Gaugler from Janney Montgomery Scott. Please go ahead.

I would appreciate it if you could provide an update on the headquarters move and what your expectations are for tax savings at this point.

Absolutely, Michael. This is Linda. And we are really excited because we have broken ground on the construction. And so you can now probably see it from the Philadelphia skyline. You can see, still going up, if you will. So we expect the cost of the building to be up to a $165 million. For 2017, we would expect to spend about $75 million this year on the construction, as long as we stay on schedule, which is expected. We would -- we are looking at completing the construction towards the latter half of 2018 and then taking occupancy there. Now in terms of that tax credit, the way that this works is that once we move into the building, we will become eligible to receive up to $165 million in tax credit over a 10-year period subject to meeting certain criteria. And our goal here is really to make this revenue neutral for our customers. And so that is what we’re working towards. And we are going to be utilizing grant accounting for recognition of these tax benefits, which allow us to recognize those tax benefits over the life of the assets. And that’s very consistent with our approach to make this revenue neutral for our customers.

Okay. So what would you anticipate the life of the asset to be?

Buildings are generally 39 years.

39 years. Okay, that’s all I had. Thank you.

And I’d like to thank you all for participating on our call today. Please note that we value you as our investor owners and as the financial analyst who research our company for the benefit of your clients and their futures. We always want to be open and transparent in all of our discussions in dealings with all of you so that you can have complete confidence in your decision around the company and your investments in our stock. If we have not been able to address your questions or you have additional questions, please call Ed and Ralph, and they will be happy to help. I’d like to remind everyone that our annual shareholders meeting would take place next week from tomorrow, next Friday, May 12. Thanks again for listening and look forward to talking with you soon.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.