Good morning, and welcome to American Water's Third Quarter 2017 Earnings Conference Call. As a reminder, this call is being recorded and it is also being webcast within an accompanying slide presentation through the Company's Investor Relations website. Following the earnings conference call, an audio archive of the call will be available through November 09, 2017. U.S. callers may access the audio archive toll free by dialing 1-877-344-7529. International callers may listen by dialing 1-412-317-0088. The access code for replay is 10113687. The online webcast will be available at American Waters Investor Relations home page at 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, Danielle, and good morning, everyone, and thank you for joining us for today's call. As usual, we will keep the call to about an hour and at the end of our prepared remarks, we will open the call up to 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 September 30, 2017, Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information discussed on this conference call, including adjusted income, adjusted earnings per share both has historical financial information and as earnings guidance, adjusted return on equity and our adjusted regulated O&M efficiency ratio can be found 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 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 our third quarter financial results and COO, Walter Lynch, will give key updates on our operations. Moving to Slide 5, our employees delivered solid financial performance and continue to execute on our strategies in the third quarter. These strategies include prioritizing employee and customer safety, building constructive regulatory relationships through transparency and credibility, providing excellent service to our customers, growing our business and becoming even more efficient in our operations to keep bills affordable for our customers. Our third quarter adjusted earnings were $1.08 per share, increase of $0.03 per share or 2.9% over the same period in 2016. This 2017 third quarter adjusted number excludes a positive $0.07 related to an insurance settlement from the Freedom Industries chemical spill which you may remember with a negative $0.22 in last year's third quarter. This quarter's adjusted number also excludes $0.02 of an early debt refinancing charge at the parent. Linda will discuss this in more detail in her comments. With a slide results we've seen year-to-date and projected through the year-end, we've narrowed our adjusted earnings guidance to $3 to $3.06 per share. Our foundation for growth continuous to be providing safe and reliable service by investing widely and effectively in our regulated operations. We've made more than a $1 billion in capital investments in the first nine months and we're on track to invest about $1.65 billion for the full year with a vast majority dedicated to water and wastewater system replacement and improvement. We've remained focused on controlling our O&M expenses to ensure that every dollar we spend on infrastructure replacements has minimal impact on our customers' bills. We're extremely proud of our employees' efforts to improve efficiencies and their commitment…

Thanks Susan. Good morning, everyone. As Susan mentioned, our regulated businesses continue to show strength through growth, increase investment in infrastructure, improved customer service and progress made to manage our expenses. Let's walk through some of the highlights of the quarter. We currently have active rate cases in our three largest states Pennsylvania, New Jersey and Missouri. In Pennsylvania, we entered into a proposed settlement agreement in October 16 that would provide additional annualized water and wastewater revenues of $62 million. As you may recall, this case was driven by $1.3 billion in capital investments ensure reliable service. The proposed settlement agreement is under review by the presiding administrative law judges and will then go before the Pennsylvania Public Utility Commission for approval. We anticipate a decision before year-end and are hopeful we can discuss the settlement further on or December 11 guidance call. Moving to New Jersey, we filed a general rate case in September 15, seeking $129 million of annualized revenue over three years. Since our last rate adjustment in 2015, we invested more than $868 million in infrastructure upgrades. These investments included replacing more than 200 miles of water main and a flood protection project that are rare to millstone water treatment facility. Susan will talk about her efforts to mitigate extreme weather impacts later. But this project will ensure the sustainability of the water supply for more than 1 million people in seven counties in central New Jersey. That level of investment also had a positive impact on New Jersey's economy creating approximately 14,000 jobs across the state. As we mentioned last call, we field a rate case in Missouri requesting an increase of $84 million in annual revenue, driven by more than $490 million in investment in our systems. This case marks the first future…

Thank you, Walter, and good morning, everyone. Let me start with our third quarter 2017 result on Slide 13. GAAP earnings were a $1.13 per share, an increase of $0.30 compared to the same period last year. We had a few non-GAAP adjustments in both periods, so let me start with those. First, we adjusted GAAP earnings for the Freedom Industries chemical spill settlement activities. In 2016, we entered into a binding global agreement in principle to settle all claims associated with this matter of which West Virginia American Water share net of insurance recoveries was a pretext charge of $65 million or $0.22 per share. At that time, two of our insurers providing coverage of up to $25 million each did not agree to participate in the settlement and we initiated legal action to pursue recovery. In the third quarter of 2017, we reached a settlement with one of those insurers to recover $22 million pretax or a $0.07 per share benefit. With this insurance settlement, West Virginia American Water share of its $126 million Freedom Industries settlement was reduced from $65 million to $43 million pretax. Consistent with prior year treatment of this settlement, this benefit was reflected as a non-GAAP adjustment. Also in August, we completed a $1.35 billion financing, which I will discuss in greater details and few slides. A portion of the proceeds was used to refinance certain higher cost debt before their original maturity dates in 2018 and 2021. This resulted in early debt extinguishment charges of $34 million in total. The majority of this amount or $28 million is expected to be recovered through customer rates and was recorded as regulatory assets and did not impact earnings. However, $6 million or $0.02 per share was associated with parent company debt and recorded as…

Thank you, Walter and Linda. Before taking your questions, I'd like to mention the extraordinary weather and fire advance that we've experienced in our country and our American Water service areas over the past few months. Given our geographic diversity, we are oftentimes located within natural disaster areas are close enough to offer help to other communities. With every event we face, safety comes first. We prepare, we leverage national resources and we look to help impacted communities. In August, Hurricane Harvey hit our operations in Fort Polk Louisiana, dumping about twenty inches of rain on the base. The storm also had a lesser effect on our Fort Hood, Texas operations. Our employees to work there and those who came to help, work tirelessly during and after the storm to maintain service to both military community. In September, Hurricane Irma made landfall in the Florida Keys as a Category 4 storm. By the time the storm moved up the coast to the desalination facility we operate in Tampa, our contract services group had acted as emergency plan and the facility made it through the storm with little to no damage and no flooding. The plant and our people were there to help the community during the recovery. And just last month as Walter shared, our team in California responded to the tragic fires in Sonoma and Napa counties, maintaining water service for firefighting during the event and restoring full potable water service for the vast majority of our residents there within a matter of a few days. Whether it's hurricanes, tornadoes, flooding ice storms or wildfires, our response to all of these events highlights our commitment to resiliency of water and sanitation services for our customers. We use a systematic approach to assess the vulnerability of all of our asses and we continually prioritize our critical infrastructure investments. Our engineering and operations team examined every facility we own and our regional water supply to develop a capital plan to determine how much and what kind of investment is needed to ensure ongoing safe and reliable service to our customers both during and after these disasters. We evaluate historic conditions combined with future predictions and we consider factors like a 100 year flood which nail seems to be occurring every 20 years and other impacts of climate variability. These engineering planning studies drive our capital needs assessment, business planning and our financial forecasting. During a significant weather event, a water utilities level of preparedness can literally mean the difference between a temporary inconvenience or a serious health or environmental consequence for our customers. We know that and we prepared for it. It's our job and we do it well. I'm extremely proud of our people and their commitment to doing what's right for our customers and our communities every day. Our thoughts and prayers continue to be with the people who are recovering from these natural disasters. And with that, we're happy to take your questions.

[Operator Instructions] The first question comes from Angie Storozynski from Macquarie Research. Please go ahead.

Thank you. I have two questions. First one about M&A, so two things, one is could you discuss any reaction you're seeing on the municipal front to the New Jersey bill that was recently passed? And secondly, in Pennsylvania, the fair value legislation being somewhat questioned in the pending asset sale case and how you think about the independent assessment of assets as you go forward and contemplate acquisitions in Pennsylvania? Thank you.

Sure, Angie, thank you. This is Susan. I want to start on your last question and then turn it over to Walter and let him add anything to that and then address the issue of the Water Quality Accountability Act in New Jersey. So with the fair market value in Pennsylvania, we think it's important to have an appraisal process that's fairly valued the systems we're acquiring and also sets a fair and sustainable base rate for our customers. We don't want to hire appraisal value just to get a higher base rate and we don't - we want the right base rate for us and our customers for the long term. We don't think system should be undervalued or overvalued because we think either one hurts the process long term in the spirit of the law. Pennsylvania's fair market value legislation requires appraisals to meet a uniform standard that the professional appraisal sector has. And there's been some questions about so what is the Pennsylvania PUC, what's their role, what's it not. In our looking, we have gotten an approval for a McKeesport under that we think that the Pennsylvania PUC can review the appraisals and determine if they comply. If appraisals don't comply, adjustment should be made, complying with standards is a check and balance that we think clearly the Public Utility Commission has authority for. So in our recent PUC application for the McKeesport acquisition, we sat down with the parties, we sat down with PUC staff, we sat down considers advocates, we listened to their issues and we try to find a way forward that we could all live with. And we're very pleased that this was approved the settlement that we reached with the staff, with the consumers there to get were all approved by the public commission last week. So, Walter, do you want to add anything to that?

Yes, Susan. I like to emphasize just the point of how we work collaboratively with the commissions and all the parties to get to a settlement that's fair for everybody. And I think this Scranton Sewer acquisitions is an example of that. So first acquisition in the state, we're dealing with the issue of combined sewer and storm water. Currently Pennsylvania American Water doesn't have a combined tariff for waste water, we have a number of different tariffs because we've done so many acquisitions over the years. So working through the first issue that I said the combined sewer and storm water, and all of the working through not having a combined tariff on the sewer side, it takes a lot of cooperation and a lot of dialogue with a number of parties including the Office of Consumer advocate and commission staff to get to the right place. But I think we've done that. I'm confident we've done that. The team has done a great job and working with all the parties. I think it's another example of how we're working to make sure that we get a fair settlement for all. And Scranton Sewer again is a perfect example of that.

And on the New Jersey Water Quality Accountability Act, it's been interesting because the legislation was passed this year and it hasn't really gone through the regulatory whether it's the DEP agency, what does that look like in terms of regulations, what does that look like in terms of the reporting. And I think our best guess Walter is that we think maybe those defining regulations may be put out as early as the first quarter of next year the first half of next year?

Yeah that's right, Susan. There's a requirement that's cyber security program in place by the first quarter and then the asset management plan by January 2019, but the DEP is working with all the other agencies to really come up with a really good detailed implementation plan.

So I think until then Angie, it's a little bit early to say we seen an effect. I think people are waiting to see what does this actually mean? What are the rags that I'm going to have to be in compliance with? So we're watching that carefully.

Okay. And my last question. I haven't heard anything about Keystone Clearwater, I might have missed it actually, but I would have expected it to be mentioned as an earnings driver on the market based side given the pickup in drilling. So could you tell us a little bit more about it?

Sure, sure. So I mentioned very briefly in my remarks, quarter-over-quarter, it's basically neutral, we are still projecting it to be a creative by the year-end because of the backlog of work that we have in the latter part of the year. We are seeing increased activity, we're actually seeing players that are picking up what they're doing, we're seeing more interest actually is interesting our keystone got out of the transportation meaning the moving water by truck. And so we're seeing an uptick in the amount of the drillers who are now wanting to actually put pipe, a lot of pipe above ground temporary piping. So we are seeing a pickup there. We believe that the latter half of the year that we're going to see a pickup and that will be accretive for the year.

Thank you.

Thanks Angie.

The next question comes from Richard Verde of Ladenburg Thalmann. Please go ahead.

Hi, good morning, guys. And thank you very much for taking my call here.

Thank you, Rich, and congratulations.

Thank you very much. I have a just a few quick questions here and congrats on the quarter too, I thought it was great. Congrats on this Wright-Patterson Air Force Base win. On a very high level, can you please give us a sense of the time frame for when price redeterminations from this contract, where could potentially positively impact the P&L?

Yeah what the price redeterminations typically take place 2 to 3 years, they happen every 2 or 3 years in the contract, so the fact that we just one week put in the bid for what we believe the upright work needs to be done to do some immediate projects but we also look at the O&M. So you probably won't see a price redetermination for Wright-Patterson for another 2 to 3 years because we just put in a bid that in that bid we look at the first 2 to 3 years and what we think it will take to do some of the capital upgrades on the project.

Okay. Great. Okay, thank you for that.

And what the initial O&M, the O&M costs will be.

Okay. Thank you for that. And then I have a question pertaining to the acquisition strategy. Looking back at 2013 to 2016 versus the years of 2008 to 2012, I mean the number of acquisitions jumped there the past three years. But I'm wondering where the strategy comes in and kind of shifts and goes to we're going to move away from the actual number of deals and just focus on number of customers moving forward how many customers we pick up per transaction. I'm wondered if you could kind of give us a sense of how we should balance thinking about in the model the number of transactions per year versus the number of customers we pick up, are we going to go more towards less transactions more customers or vice versa?

Rich, Walter, thanks for the question. We've said that's a 1% to 2% EPS growth, from customer acquisitions, is about 30,000 to 60,000 customers across our entire system. Our focus has been on growing our business through acquisitions adjacent to where we operate and also looking at our sweet spot as we define from 5,000 to 30,000 customers. We've also had a renewed focus on wastewater. And over the last three to four years we focused on buying wastewater systems in areas where we serve water customers. So we're going continue to do some of the smaller ones we're make sense in and around our footprint, our real focus is on the larger 3,000, 4,000, 5,000 to 30,000 customers to make sure that these acquisitions are sizable, they move the needle and they represent I think opportunities for us to improve the systems that we buy. Many of these systems need significant investment and the systems of 5,000 to 30,000 seems to me need more investment than some of the other, so that's really our focus.

Rich, one of the other things that we've been working on with this increase in acquisitions over the last few years is how do we integrate them effectively whether or not it's a smaller system or a larger system. And so we've really been working to enhance our profit so that it is seamless and regardless of the size of the customer addition.

And Rich to your point, Walter again. You can look at how we're executing on our strategy buying wastewater systems area where we're serving water system. And I think Scranton and McKeesport are two perfect examples of that and we're serving the water customers for decades and the opportunities came up by the wastewater systems because we can add value to the communities. And that was the case that we made and the communities agreed and we have purchased real soon McKeesport on that basis.

Okay. Great. Thank you, guys. It's great color. And then a couple more questions here, thank you again for taking the call. For the non-regulated segment as a whole, looking at a few of the investor decks this year, American was citing at the non-regulated segment the market based businesses could potentially be 15% of earnings is by 2021. Is that somewhat back half of the next five years loaded or could we expect to model that in where it's a straight line layering growth over the next five years?

So Rich, at that point, that is the guidance we gave as you probably know when we've promoted during this call and will continue what was December 12 is now December 11, we will update our five year plan on December 11 on our guidance call and give further color to that answer that question.

But the guidance, this is still your guidance so.

That is still our guidance at this point.

Great. Okay. Perfect.

And it is calculated as the compound annual growth rate.

Thank you. And then I'm sorry, what was that Linda?

It's calculated as the compound annual growth rate.

Yeah. Okay. Great. Thank you. And then just the last one, I mean it's not a secret here, the American has been great at cutting at costs, I mean the target rate continuously goes down the stretch target, at what point though I mean at some point it's got to kind of stop right and so where does that come in, is that A, could that be 20 years away, 15 years away or could we maybe expect over the next couple years that one of the Investor Days, Susan you announced we're going to bring down those this O&M expense again over the next five years even lower?

That we believe we can continually improve our business, Rich. We believe that the water industry in general is a little behind the electric and gas from a technology standpoint. We have really ramped up our technology integration and we've got some very exciting projects going on. And at this point, we see a lot of opportunity to continue the efficiency gains that we've also seen in the last few years. Walter, you want to add anything?

Yeah, Rich, the improvements will never stop that we have a continuous improvement mindset. We're focused on every cost him his business. And through the use of technology and best practices, we're going to continue to drive cost down for customers. So that's why I spotlight some of the things, we're doing in the business every quarter just to show you this is a continuous improvement mindset.

That's great. Thank you very much for the time, guys. I really appreciate it.

Thank you, Rich.

The next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.

Hey, good morning, everybody.

Hi, Jonathan.

How are you doing?

Good. How are you?

Oh not too bad, it's going well, so happy there.

[Indiscernible]

I know, how about it, on schedule I guess. So it's amazing what a defensive coordinator change can do sometimes. What was the settled rate base and now in McKeesport approval, I recall you agreed to buy the system for $156 million?

Yeah, Jonathan, Walter. The rate base is $158 million.

Okay. So I mean pretty much what you asked for them?

That's right. And our purchase price $159 million.

Okay. Great job there.

Thanks.

When Walter do you think you might get clarity and usury regarding the request future test year, do you have to wait until the final order or tentatively you get a thumbs up or down at some point earlier in the procedural schedule?

When that people will have indications through our negotiations, but again it won't be final until we get the final orders. So when that case is settled later the next year.

Okay. But so I mean it might be in light settlement bays or so?

It could be but then we open the comment on it, that's the question. So I'll look when we receive you order.

Okay. Thanks.

I'm back to McKeesport, just I want to make one point on that. If you look at the direct and indirect customers that we're bringing in as part of that acquisition represents about $7,000 per customer. We think that's important because with the think that's a fair settlement for us and the customers through our Pennsylvania American Water.

Okay. And then lastly, congrats Linda on the debt refinance deal. Just if there's any earnings benefit in the near term from the interest savings prior of the lower costs flowing through it?

Yeah in 2017, in addition to the onetime charge that we had for the may call as the parent of $0.02 per share, I mentioned earlier, we had a negative impact of about a penny from the overlap of interest expense in the third quarter. Now we do expect that we will see some benefits in the fourth quarter that will slightly exceed that negative carry that we had in the third quarter but it's less than $0.01. And then going forward, when we put forward our 2018 guidance, it will be included in there.

Okay. I mean there's perhaps some timing benefit before kind of flows I guess all through to rate payers through the rate case process I guess?

Right. And remember the majority of this will be for the benefit of our customers and then as we go through our rate cases that will true up.

And keep in mind, we talk about the fact that for every dollar of O&M we saved, we can put $7 of capital in the ground. This is great because this means that with this decade's long need, we have for investment, this is more investment we can make that doesn't impact the customer bill, so that's the way we look at this.

Right, right. And then is there a portion that does flow through to the parent that's kind of an ongoing benefit from this deal?

Yes. There will be. We've refinanced $428 million of debt that matured in October that was related to the parents and we will continue to see the benefits of that lower cost going forward.

Okay. Great. Thank you for the details.

Thank you, Jonathan.

The next question comes from Stuart Allan of Bank of America Merrill Lynch. Please go ahead.

Hey, guys, great quarter.

Thanks Stuart.

A quick question on a Military Services, is there been any update on the DoD budgeting process, I know there's been some movement on the Federal budget, I'm wondering if there's any movement on that front?

Yes, there has been. The sequestration was formally discontinued and so the commanding officers at the bases are hoping to have larger budget effective October 1. They are getting more money. We think it will be more of a gradual increase in capital for infrastructure because what happened in the three, four years of the sequestration, their budgets were significantly reduced. And it wasn't just infrastructure projects like ours that got put on the back burner, they had several other training warfighter training different things that now are in the queue. So we are hearing there is a pickup, it will eventually become, there will be more infrastructure projects like the type we do on the bases, but the initial increase in funding will go toward more of their mission critical items that they have for the military men and women there. So yes the sequestration was discontinued, they are seeing higher not quite up to what it was before the sequestration. We do think it will benefit us but it will be gradual as they put those additional funds to use.

Okay. That makes sense. Thank you.

Thank you.

At this time, there are no further questions.

Thank you, operator. So I'd like to thank everybody for participating in our call today. We really value you very much as investor owners and as a financial analysts who research our company for the benefit of your clients and their financial futures. We always want to be open and transparent in all of our discussions and dealings with you and we always want you to have confidence in your decisions around our company and your investments in our stock. If you've not had your question answered or you think of something else please call Ed or Ralph, and they will be happy to help. And as we've mentioned earlier, we look forward to talking with all of you in our upcoming 2018 Guidance Call which will be on Monday, December 11, from 9:00 until 10:30. At that time, we will not just be talking about 2018, we'll talk about some of our strategies, our five year plan, so please be on the call and we think that you will find it very interesting.

The conference is now concluded. Thank you for attending. You may now disconnect.