Good morning, and welcome to American Water's Second Quarter 2018 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, an audio archive of the call will be available through August 9, 2018. 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 10122331. The audio webcast will be available on American Water's Investor Relations homepage 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, Brandon, and good morning, everyone, and thank you for joining us for today's call. As usual, we'll keep the call to about an hour and at the end of our prepared remarks, we will be -- we will open the call for any of your questions. During the course of this conference call, both in our prepared remarks and to address 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 estimates 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 other factors as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our Form 10-Q filed with the SEC. Reconciliations for non-GAAP financial information discussed on this conference call, including adjusted earnings per share and our adjusted regulated O&M 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 and will remain available through September 2, 2018. All statements made during this call related to earnings and earnings per share refer to diluted earnings and earnings per share. And with that, I will now 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 second quarter financial results; and COO, Walter Lynch, will give key updates on our operations. The employees of American Water delivered strong results in the second quarter of 2018. We had a number of positive events this quarter, and I will highlight just a few of them. First, we continue to deliver strong consistent growth and financial performance. I will discuss more details in just a moment. Our Regulated Business continued to make critically needed investment in infrastructure for safety, reliability and resiliency. We continue to provide water and wastewater solutions within our service areas through disciplined acquisitions. We also made progress in optimizing our portfolio of Market-Based Businesses. We completed the acquisition of Pivotal Home Solutions, which significantly grew and enhanced our Home Warranty Business. As we've noted before, Pivotal is a leading provider of home warranty protection products and services and is highly complementary to our legacy Homeowner Services Group. On July 5, we announced the sale of the majority of our Contract Services business to Veolia North America for a purchase price of $27 million. Veolia and we have already closed on 17 of the 23 contracts sold with the remainder to close by the end of the year. We will keep 4 separate contracts in Camden, North Brunswick and South Orange, all in New Jersey, as well as Godfrey, Illinois due to their proximity to our existing service areas. Six other contracts, not part of the Veolia transaction, are being sold to others or will terminate within the next 12 months. Another highlight of the quarter is the selection of American Water to the inaugural NAACP Equity, Inclusion and Empowerment Index. This index was created in partnership with…

Thanks, Susan. Good morning, everyone. As Susan mentioned, our Regulated Businesses had a strong first half of the year, making capital investments to ensure clean, safe and reliable water service, while continuing to improve our operating efficiencies to benefit our customers. We also had tremendous growth driven by acquisitions. Let me start on Slide 9 with an update on our New Jersey rate case. We filed this case last September, seeking recovery of more than $868 million in infrastructure upgrade statewide since our last rate adjustment in 2015. We concluded evidentiary hearings on June 25 and are now in the briefing phase of the proceeding. We expect a final decision in the first quarter of 2019. Also, effective April 1 of this year, New Jersey American Water customers received a rate decrease of almost 6% as a result of the lower federal tax rates under the Tax Cuts and Jobs Act. Moving to California. We now expect both a proposed and final decision later this year on our general rate case for 2018 to 2020. If approved, this case will support approximately $230 million of capital investments on our systems. We also expect the California Public Utilities Commission to approve in September the Certificate of Public Convenience and Necessity for a water supply project in Monterey. This action, as we discussed in the first quarter, will give us the authority to move forward with this critical water supply project. In June, Maryland American Water filed a petition with the Maryland Public Service Commission seeking recovery of approximately $18 million in capital investments since our last rate adjustment in 2015. The driver of this case is a new reservoir and intake that will secure the water supply for our customers in Bel Air and parts of Hartford County. The reservoir, which…

Thank you, Walter, and good morning, everyone. Before I jump into the numbers, I would like to provide a few key updates that occurred during the second quarter on Slide 14. First, I am pleased to announce that S&P affirmed our A credit rating with a stable outlook, which is a reflection of our strong commitment to maintaining a predominantly regulated risk profile. Second, we closed the Pivotal acquisition for $363 million on June 4, and we fully settled our equity forward agreements issuing 2.32 million shares for $183 million or approximately 50% of the purchase price. And lastly, as Susan mentioned, we received final approval by the U.S. District Court of the Freedom Industries related settlement. We also settled this quarter with the final outstanding insurer for a $20 million pretax benefit that was reflected as a non-GAAP adjustment consistent with all other elements of the settlement. In total, West Virginia American Water's final share of the $126 million Freedom Industry related settlement, net of insurance recoveries was $23 million pretax. As reflected on Slide 15, we had a strong second quarter of 2018. GAAP earnings were $0.91 per share, an increase of $0.18 compared to the same period last year. Excluding the insurance settlement, adjusted earnings were $0.83 per share, an increase of $0.10 or 13.7% over the same period in 2017. The Regulated segment was up $0.08 per share and the Market-Based Businesses were up $0.02. Now let me walk through the adjusted quarterly results by each business. Regulated operations were up $0.08 per share in total. Net revenue was down $0.01 with 3 primary drivers. First, we had a $0.14 increase from additional authorized revenue and surcharges to support infrastructure investments, acquisitions and organic growth. Second, we had warmer weather resulting in a benefit of $0.01…

Thanks, Linda. American Water's stated purpose is to keep life flowing and that means for our customers, our communities and our planet. We also have 5 values that we measure ourselves by, and those are safety, trust, environmental leadership, teamwork and high performance. Living by these values actually constitutes a full 50% of our employee performance plans and individual employee ratings. These values match up nicely with the goals of our investors interested in ESG principles and measures. We agree that the hows are just as important as the whats. While we have always focused on ESG principles as the way we should run our business, we have not done a good job communicating our efforts as well as we should have. You told us you wanted to hear more, so you will. Following the third quarter, we will share quarterly updates on ESG metrics that are important to our company and our investors. We look forward to your feedback on these. We know that being a good corporate citizen and environmental leader and a role model for sustainability is more than metrics or communication campaign. It's ensuring that we leave our children and grandchildren a healthy planet and the natural resources that we enjoy today. It means developing solutions to issues before they become problems. It means keeping our employees and our customers safe from harm. It's providing a workplace where every employee is respected and developed to his or her fullest potential. It means building strong communities where we serve and meeting and exceeding the expectations of our customers. So we close with a snapshot of just some of the things that others outside of our company are saying about our efforts. With that, we're happy to take your questions.

[Operator Instructions]. Our first question comes from Julien Dumoulin-Smith with Bank of America Merrill Lynch.

So couple of quick follow-ups, if you can. Just to start off on New Jersey. I'm curious on the stated income tax for -- on the corporate side. Why would it not flow back to regulated customers, just given, especially the commentary in the other jurisdictions that you have in the slide here?

So we are working through that right now, in terms of how that will affect our New Jersey subsidiary and the parent company allocation. And so as you are aware, we are currently in a general rate case in New Jersey, and so we're working through how that increase in the corporate business tax rate would impact our customers.

Right. Completely understood. But broadly speaking, you should think about this principally as a parent level impact.

Right. And we also have a corporate headquarters that is located in New Jersey, which will impact that calculation as well. And so we're going through all of the detailed calculations from a state tax apportionment perspective. We're also working through some clarifications, either through administratively or through legislation, to make sure that we understand the complexity of how this will apply to water utilities.

Understood. Excellent. Turning back to the Market-Based side of the business, if you can. Just curious how is the sort of Keystone water side of the business going year-to-date, just given some of the trends there? And then separately, can you just talk to a little bit more of the sales side of the equation, the Veolia deal, in the context of, sort of, pruning the business? Is the thought process here, this is more opportunistic? Or should we expect more as you think about the aggregate size of the Market-Based Business and kind of bumping up against that 15% pro forma?

Julien, that's a great question. So I will take Keystone first and then talk about the sale of CSG and then more broadly our views and philosophy around the Market-Based Businesses. So in the Keystone and Appalachian Basin, we are continuing to see of a firm market, strong year for revenues. As Linda said, through the first half of the year, it is accretive. For example, our 2 biggest businesses in Keystone water transfer, we have steady work continuing. We're continuing to try to hire more employees. Rig count has slightly decreased for the past few months, and so we're looking at that, but we're still seeing robust activity there. And in the oil and gas construction for pipelines, we're seeing consistent bid opportunities, increased infrastructure planning for 2018 and 2019. So in terms of the business there, as you know, there are a lot of takeaway pipeline capacities that are still under construction that will be very helpful for the Appalachian Basin compared to Henry hub, as you're very aware of. So Keystone continues to be in a good market, and we continue to monitor the market there and look at our main businesses and how we optimize those businesses. In terms of how the CSG sale, we've mentioned in the past that our Contract Services Group, and to remind everyone, this is where we run systems for other people where municipalities or industrials actually maintain the assets, we run the business. It's a much more competitive business. There are a lot more players in the market like Veolia, SUEZ, different people. And as we looked at our Market-Based segment and started looking at buying Pivotal, the growth of Homeowner Services, how well Homeowner's doing and your earlier point about ensuring that Market-Based is predominantly 15% or less of…

Got it. Excellent. And then lastly, can I turn quickly to Missouri. You obviously alluded to the legislation there in your prepared remarks. How does that change the strategy? I mean, obviously, you've had some success of late in the settlement there. Does that require any kind of enabling subsequent rate case here? Or how do we see that actualize the latest legislation?

Yes. As far as the RSM goes, that would be applicable in the next rate case. And as far as the growth, the legislation that deals with the vote of half simple majority instead of 2/3, it's really just allowing us to have more discussions with municipalities throughout Missouri, and particularly some of the smaller municipalities that had a really high threshold as far as the vote count. So we just think it's more in keeping with the rest of Missouri and the rest of the country, and it enables us to have many more discussions with some of the smaller municipalities.

Our next question comes from Richard Verdi with Atwater Thornton.

Great quarter too, great on the report and on the other news delivered. I just have two quick questions regarding the acquisition front. Obviously, American is the most operationally diverse water utility and it helps blend against unfavorable weather conditions or regulatory impact. But despite that operational diversity, I was wondering if there are any states outside of that current American Water footprint that the company may be consider entering through the acquisitions?

So Rich, that's a great question. As a company, of course, our growth projections we give, the five year, based on growth within our service area, we do have a corporate business development group. We are always looking across the country at other states, opportunities, but as I think we have mentioned before, we have three kind of gates before we would look at going into a new state. The first one is looking at the regulatory environment, the second one is the business environment or business climate and the third one tends to be the one that is the most difficult, which is do we see a line of sight to get to at least 50,000 customers within five years. Why that's important to us? You hear Walter and Linda talk all the time about the O&M efficiency. We're very proud of the chart we put up that showed that our O&M cost, the adjusted that's used in the calculation for O&M efficiency and we have a reconciliation table in the appendix, but that calculation, our O&M costs are less today than they were in 2012. Our reputation being able to do investment that's desperately needed in systems is dependent on being able to also help offset a portion of those impacts to customer bills by reducing O&M costs. What we find is, if we don't have enough customers to get a critical mass, then we're not able to make the investments, we're not able to get some of the economies of scale. So we find that, that third element of ensuring that we can grow to about 50,000 customers in five years tends to be the one that is our biggest hurdle. So with that said, we are always looking at every state in the nation, we are always looking at opportunities, and we are always looking at a chance to grow and to provide our expertise to as many people across the country as we can.

That's great color. And for the second question, I was just wondering if the company is seeing any municipal acquisition competition from the electric utilities? And if so, how that might be impacting the acquisition effort?

That's a great question, Rich. So again, for water investor-owned utilities, I think that, of course, the answer is yes. And predominantly, Eversource with their acquisition of Aquarion, and I'm sure that all of you are keeping up with what's going on with the merger between San Jose, Connecticut Water, and then Eversource's bid for Connecticut Water and Cal Walter's bid for San Jose. So I think that's the main thing that we're seeing. And again outside of that, as we look at our strategy of buying municipalities that are between 3,000, 5,000 and 30,000, those are relatively small for someone to break into an industry. They also typically are in areas contiguous to where we're already located, we have name brands in those areas, we have people in communities. So for that area, we don't see as much because first of all, these acquisitions of distressed municipalities take, as Walter showed in his slides, years to cultivate relationships because when municipalities are buying, yes, price is a big deal, but they also want to make sure that their citizens have the best service possible and are taken care of, and that they don't have to worry about emerging contaminants and that they have professionals running the system. So what we find is, for that particular market that we focus on, it's more difficult for someone who is not in our industry to break into them.

Okay. Great. And actually, I have one other question, too, and it pertains to the military front. By our estimates, that's a pretty large opportunity and the majority of those contracts should be awarded between kind of next year and maybe 2025. And so I was just wondering if you could give us an update on the military base and this -- on the military base contract ops in the sense of, is that more focused on pursuing new opportunities? Or is it -- are you guys more focused on kind of pruning and improving the bases you have under the umbrella right now? I mean, are you guys going out and actively looking for new bases to bring in underneath the American umbrella?

That's a great question, Rich. And answer is yes, we are. And so to back up for those that may not be quite as familiar, when you buy a base, there's typically work that goes on, it's mostly -- it's working capital predominantly. Then we have an operating. Once you win a base, you have a 50-year contract to operate on that base water and wastewater. Then as you mentioned, it is buying new bases or doing capital upgrades on the bases. The reason that we've seen the Military Group for us over the past 2, 3 years be a little soft is because of that third category. When the Department of Defense went through 3 or 4 years of sequestration, their budgets decreased significantly. They didn't have as much money for fixed capital upgrades for infrastructure. The money they did have they put in more of the war fighter training and those areas. With sequestration lifted a year or so ago, we're starting to see a little more flow. It will take a bit of time for that to kind of trickle down to providing money for the infrastructure once they've met the other needs. But you're exactly right, that we have, I think, 8 RFPs outstanding for bases. There is a chance that 3 will actually be awarded this year, and we see the rest of them being awarded over the next 3 to 4 years, as you said. We also -- there are 2 to 3 that we're looking at putting in RFPs. And to remind you, we typically only focus on the medium- to larger-size bases. Those are the ones that are worth more of our effort with our size, and that tends to be $250 million or higher for a 50-year contract value. So yes, we do see opportunity, specifically, in the Army and the Air Force. And we actually last November hired a new President of our Military Services Group, General David Turner, who had recently retired as the General from the Army, and so we're very bullish on that part of our business. We like that it is regulated like, and we do, as you mentioned, see opportunity down the road for that.

This concludes our question-and-answer session. I would like to turn the conference back over to Susan Story for any closing remarks.

Thank you, Brandon. And thank you all for participating in our call today. Again, please note we value you as our investor-owners and as the financial analysts who research our company for the benefit of your clients and their futures. We always want to be open and transparent in our discussions and dealings with you, so you can have confidence in your decisions around our company and your investments in our stock. If we've not been able to address your questions or you think of something lighter, please call Ed and Ralph, and they will be happy to help. Thanks, again, for listening.

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