Good morning, and welcome to American Water's Third Quarter 2020 Earnings Conference Call. As a reminder, this call is being recorded and 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 November 12, 2020. 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 the replay is 10149253. The audio webcast archive will be available for 1 year on American Water's Investor Relations website at ir.amwater.com/events. I would like now to introduce you to your host for today's call, Ed Vallejo, Vice President of Investor Relations. Mr. Vallejo, you may begin.

Thank you, Matt, and good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will, as usual, open the call for your questions. During 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 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 September 30, 2020, Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information discussed on this earnings conference call, specifically, O&M efficiency ratio and return on equity, 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 on our website. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share. And I should note that consistent with our efforts to ensure the safety and health of our team, we are again conducting this call while practicing social distancing and from remote locations. As an example, Walter and 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 have a lot to cover today. I'll start with a few comments on the national election, then move to key updates on our business, including our continued focus on the implications of COVID-19. Susan will then provide a more detailed review of our third quarter and year-to-date financial results along with other updates. So let me start with Tuesday's election. American Water has and will continue to work with both sides of the isle in constructive water policy. Water and wastewater infrastructure remain a bipartisan issue, and we'll stay engaged with leaders at the state and federal level on this issue on behalf of our customers. We continue to believe that investment in the country's water and wastewater infrastructure is important. Supportive legislation and regulation are also critical to ensure customer bills are affordable. Let's move to Slide 5 and our third quarter results. The employees of American Water delivered solid results and further strengthened our low-risk profile and predictable growth story. Our results were driven by the continued execution of our strategies. Our third quarter 2020 earnings per share were up 9.8% compared to third quarter 2019. We invested capital of $1.38 billion in the first 3 quarters of 2020, which is a 10.4% increase over the same period last year. We balanced that investment through our focused effort to control cost as we work towards our long-term O&M efficiency goal of 31.3% by 2024. We've added more than 47,000 customer connections to date through closed acquisitions and organic growth and look forward to welcoming an additional 19,000 customer connections through pending acquisitions, most of which we expect to close in 2021. As it relates to the ongoing COVID-19 pandemic, safety continues to be our top priority. Susan…

Thanks, Walter, and good morning, everyone. Let's start on Slide 11 with a bit more detail on results for the quarter. Third quarter 2020 consolidated earnings were $1.46 per share compared to $1.33 per share in 2019. As Walter mentioned, included in earnings is an estimated $0.06 per share favorable weather impact. The Regulated Business segment results increased $0.14 per share or an increase of 10.8% compared to 2019 earnings. The Market-Based Business results were flat to the prior year, and the parent company decreased $0.01 per share compared to the third quarter of 2019. Our 2020 earnings through September 30 were $3.11 per share or a 7.6% increase over the same period last year. Results for the 9-month period include an estimated $0.10 per share increase year-over-year from warmer and drier-than-normal weather in the third quarter of 2020 versus wetter-than-normal conditions in the second quarter of 2019. Also, for the year-to-date period, results reflect $0.04 per share for depreciation not recorded as required by assets held for sale accounting and an estimated $0.02 per share unfavorable impact from the COVID-19 pandemic. Our Regulated Businesses increased $0.32 per share. Our Market-Based Businesses increased $0.02 per share, and finally, the parent results decreased by $0.12 per share year-over-year, primarily due to higher interest expense to support growth in the regulated business and the sale of a legacy investment in 2019. Moving to Slide 12. Let me walk through the third quarter results by business. The Regulated Operations increased $0.11 per share before considering the impact of the COVID-19 pandemic for the quarter. We saw a $0.16 per share increase from additional authorized revenue and surcharges to support infrastructure investments, acquisitions and organic growth. As I mentioned previously, results reflect an estimated $0.06 per share increase from favorable weather in various parts…

Yes. Thanks, Susan. Let me cover 2 more items before taking any of your questions. First, we plan to talk with you in February as we wrap up 2020 to discuss our 2021 earnings guidance and our long-term plan, including discussion on our ESG goals. In anticipation of that, you can expect that our plan of focusing on growth from infrastructure investment will continue. Additionally, we'll be meeting with many of you at the Virtual EEI Financial Conference next week. We look forward to talking with you all then. Second, as you all know, Veterans Day is next week. I'd like to take a moment to thank all the men and women who served and protected our country. As you may know, I graduated from West Point, was honored to serve as an army officer for more than 5 years. I'm proud to be a veteran and equally proud that American Water is a culture that reflects the support of our military. This year, we've been recognized by 2 veterans publications, U.S. Veterans Magazine and Military Times, receiving the honor as a top veteran-friendly company for having a top supplier diversity program and being among the top 100 Best for Vets Employers. And most recently, American Water received the highest recognition given by the U.S. government to employers, 2020 Secretary of Defense Employer Support Freedom Award, for exemplary support of National Guard and Reserve employees. We're extremely proud of this recognition, and we'll continue to work with and support those who serve our country. With that, we're happy to take your questions.

[Operator Instructions] Our first question comes from Ryan Greenwald with Bank of America.

So maybe if we could start with the military business. Could you provide some color around contribution with the new military bases after the latest wins? And then further, do you have any visibility to other opportunities that can materialize in the near term?

Well, let me take that, and Susan can jump in. But we don't break out the earnings from Military Services, we just do it on a segment basis for a number of reasons, but we just don't do that. But I can also talk to -- we're in 4 different solicitations right now, and we expect to hear back on 2 in the near term. So just a reminder, we won the last 3 major awards from the military, and we're really proud to be able to support the military and their families.

Got it. But nothing you can provide in terms of color around contribution at this point?

No. No. I'm sorry, Ryan. We don't break that out like that.

Fair enough. And then maybe if you could just talk about how you're framing timing of equity. I know you guys kind of alluded in the past that maybe in the middle of the plan, but curious if that mindset has changed at all given the strength of shares.

Yes. This is Susan. We have not changed our timing, and really, the timing that we have laid out in the plan -- and you're right, we had indicated in December, when we rolled out this current plan, that we had anticipated an issue somewhere in the middle of that 5-year period. That is still our current thinking. And it's really tied to when we need the proceeds, when we need some additional funding for the capital plan that we have laid out. As you recall, from December, we increased our capital expectation for the 5-year period and then obviously, rolled out our 10-year plan. And the equity issue we have in the current plan really supports the timing of when we think the investment occurs and when we really need the funding. And I just don't see any need to change that at this point.

Got it. And then just lastly, on the New York American Water sale process, can you dive a little bit more into that in terms of the milestones from here and the process going forward in terms of the time line?

Yes. As I said in the remarks, Ryan, we still expect to close this in early 2021, and so we're working on an established time line. We're still confident that we can get there. Even as the governor has talked about proposed legislation, we don't think that would slow this down.

Our next question comes from Insoo Kim with Goldman Sachs.

First question is for Susan. Remind us, in the results and in the guidance, what COVID-related costs, including the bad debt, is included or excluded from the results, given the various pending regulatory approvals for those.

Yes. Our guidance overall, as we indicated, we've changed guidance this quarter, increased it. And included in that guidance range is an assumption of $0.03 to $0.06 unfavorable for the year, and that really, I think, reflects our current trends. We saw a fairly substantial impact through the second quarter, and it's recovered some in the third as we saw the commercial business -- the commercial sector come back a bit, and the residential sector, again, continues to be pretty strong growth there. I think the challenge, of course, is to try to estimate how long this thing lasts and what the sort of new surge of cases may, in fact, do to businesses across our service territory, do they go into some additional phase of shutdown. So again, we've tried to capture some assumptions around that in our guidance range of the $0.03 to $0.06 unfavorable. Just difficult to predict, obviously, as we see this thing continue to unfold. And it is included in that guidance range that we established. I mentioned on the regulatory front, we now have deferral orders in 11 of the 14 jurisdictions, and that really does cover exposures to bad debt expense increases, direct costs associated with the pandemic, et cetera. So really, the impact that falls through, if you will, is just the demand revenue changes that we might see across the service territory. Everything else, the direct costs or direct impacts are captured in those deferral orders.

Got it. And could you quantify just year-to-date what those -- what the deferred costs amount to?

It's disclosed in the Q. I think if you go to that footnote in the Q where we talk about COVID specifically, we've laid out the reg assets recorded, net of some reg liabilities. I don't have the number right in front of me, but it's laid out in the Q for you.

Understood. Second question. Walter, I know you talked about increased communications with various municipal utilities for potential M&A, and I know that's been ongoing every year. But just given the COVID environment and your point earlier on potential focus nationally on water quality and water infrastructure, are you -- do you think, all else equal, you should see an acceleration of mini acquisitions by AWK over the next 2 to 3 years versus the rate that you've seen over the past few years?

Yes, it's a great question. And we're in many conversations with municipalities around the country. One of the reasons is the COVID impact, but still a lot of challenges around water and wastewater infrastructure, and we're a solutions provider. So we're going to continue to talk to municipalities about providing solutions. Our pipeline continues to grow, and we continue to talk to new municipalities. So we'll see where that takes us. Typically, it takes 2 to 5 years to complete these deals, so there is a delay from the time you start talking to them to the time you take ownership, but we're very confident in our ability to provide solutions for our communities.

Let me just quickly tag on to the question there. We do have a net regulatory asset of $26 million recorded at the end of September related to COVID.

Our next question comes from Angie Storozynski with Seaport Global.

So Walter, in your prepared remarks, you had a comment about some -- one of the states, I admittedly forget which one, that has a legislation that would provide for some adjustments for nonmunicipal systems, water systems being acquired. If you could remind me which one it is? And also, in light of that, I'm just looking at your New Jersey rate case settlement. You -- in the original filing, you asked for this acquisition adjustments mechanism. I don't see it in the settlement. So I just wonder if it means it's still going to be addressed or the settlement basically doesn't cover it i.e., those 3 acquisitions will not be -- well, the goodwill is not going to be added to the rate case basically in New Jersey?

Yes. Let me start with the second question first. The acquisition adjustment will be dealt with separately. And the order -- there was an executive order that came out that said 90 days after the emergency orders lifted is when they have to render decision So we don't have an exact time on it yet, but we're expecting that after the executive -- after the emergency orders lifted.

Okay. That's in New Jersey. And you mentioned some -- which other state has this potential adjustment for nonmunicipal systems? I thought you mentioned it.

Yes. No, it's Indiana. There is an appraisal process, yes, for the nonmunicipal utilities and really around establishing fair market value and a reasonable purchase price. So yes, Indiana has been a leading state in legislation because they recognize, I think, the importance of what we can do as a company in addressing the water and wastewater challenges. So we're really proud to be working with Indiana legislature and coming up with bills that really affords us the opportunity to do that.

[Operator Instructions] Our next question comes from Jonathan Reeder with Wells Fargo.

So a question around guidance. Midpoint to midpoint, you're raising at by $0. 04. However, you're citing kind of a net $0.07 to $0.08 benefit assumptions that were originally embedded in your guidance range. So that kind of implies your core results are actually tracking down $0.03 to $0.04 from the original midpoint. What's kind of the driver cause of that?

Jonathan, let me make sure I follow the question and maybe correct one thing. I think, at midpoint, we're up $0.06. We were roughly at $3.84 midpoint before, we're now at $3.90. And that really just was driven by the weather implications. That's the big driver of the of the change in midpoint, I would say. I think, we obviously did narrow the range a bit as we, again, have continued to see a little bit more recovery from the COVID costs than we had anticipated when we were discussing this with you at the second quarter. I recall then, our range was $0.05 to $0.08 unfavorable. We're now $0.03 to $0.06 is our current best guess at that. Obviously, the business continues to perform fundamentally very, very well. We've not seen any real slowdown in our investment opportunities. So the underlying business is performing very well.

Okay. Well, let me ask it maybe a little bit differently. Historically, I guess, investors have kind of been conditioned to AWK coming in more in the top half of the guidance range. I mean, you guys have done a good job executing. So if it's -- the midpoint is being raised $0.06, despite $0.07 to $0.08 of favorable items, it kind of puts you just a little below that original midpoint. So is there anything that kind of is causing that headwind or expenses not quite as good as you're hoping or rate release delays, anything like that? Not a lot, just a couple of [ venues ], but just kind of curious.

No, really no drivers of that nature. I mean, again, I think we're continuing to understand the impacts of COVID from a short-term and a long-term perspective. But as I said, the underlying business continues to perform quite well. There is always a number of gives and takes in any particular year, but we've not seen anything that's fundamentally changing our expectations about the ability for the business to perform.

Okay. And then, Walter, I know you guys were going to roll out guidance in February. Should we anticipate you rolling the base year forward 1 year from 2018 to 2019? Or is there a chance you guys use 2020?

We're still looking at that, Jonathan. And I think you'll just have to wait till February, when we come out and give you sort of the full plan. I think, as Walter indicated in his remarks, though, you can expect to see a continued focus on investment in infrastructure. That's what drives this business, and we think we have great opportunity to continue to do that.

Okay. And then last, I know you said commercial demand revenues weren't down nearly as much in Q3 as it was in Q2. But how did the trends exactly shake out on the residential side? I think Q2 was up only 5%, which was somewhat puzzling. Aqua America, which has some general overlap with your service territories, was up 10%. Where was residential in Q3?

I think we quoted that was up, Ed, you can check me 13%, I think, we said roughly 13% in the quarter, and again, we've laid out by quarter in the 10-Q. Yes, residential is up 13.6% in the quarter.

13.6%, yes.

Okay. So that really came back strong or whatever in Q3.

It really did. And then commercial, again, we saw as -- on a year-to-date basis, is really flat to the prior year. So obviously, you would expect growth, right? But we think back flat to year-over-year is an indication that across much of our territory, which, again, we like the geographic diversity of our territory as this thing rolls through the country. Different parts of the country are responding differently in terms of business reopenings, and we've seen that occur through this third quarter.

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

Yes. Thank you for joining our call today. We value your participation and the work you do on behalf of your clients. We hope our open and transparent discussions give you confidence in our company and the investment of our stock. If you have any additional questions, please call the IR team, they'll be happy to answer any questions you have. So again, thanks, again, and be safe, everyone.

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