Good morning, and welcome to American Water's Second Quarter 2022 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. The audio webcast archive will be available for one year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Thank you, Jordan. Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we will be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our June 30 Form 10-Q, each filed yesterday with the SEC. The reconciliation for the calculation of the O&M efficiency ratio, a non-GAAP financial measure can be found in our earnings release and in the appendix of the accompanying slide deck, which has been posted to the Investor Relations page on our website. All statements during this presentation related to earnings and earnings per share refer to diluted earnings and earnings per share. Susan Hardwick, our President and CEO, will discuss second quarter and year-to-date highlights and our focus on managing costs in today's inflationary environment. John Griffith, our Executive Vice President and CFO, will cover our financial results in more detail, review our affirmed 2022 earnings guidance and long-term targets, and we'll close with an update on recent acquisition activity. Cheryl Norton, our Executive Vice President and COO, will then review the progress of our investments year-to-date in the Regulated Businesses. We'll share some key details and milestones for several of our active general rate cases, and we'll conclude with another of our ESG impact stories. We'll then close by answering your questions. With that, I'll turn the call over to American Water's President and CEO, Susan Hardwick.

Thanks, Aaron, and good morning, everyone. Let me also say how happy we are to have John Griffith with us as our CFO, and you'll hear more from John shortly. Let's turn to Slide 5, and I'll start by covering some highlights of the first half of the year. In the first six months of 2022, earnings were $2.07 per share compared to $1.87 per share in the same period of 2021. Results for the Regulated Business drove the majority of the growth, accounting for $0.16 of the $0.20 increase while MSG and other results were up $0.04 as compared to the same period in 2021. The regulated growth was in line with our expectations as we knew the first half of the year would be strong due to revenue increases from several general rate case proceedings completed in 2021 and early 2022 and from infrastructure mechanism filings. These higher revenues were partially offset by higher operating costs, which I'll talk more about shortly. Our Regulated Business invested over $800 million in capital projects and acquisitions for the quarter and $1.25 billion year-to-date, reflecting great work by our teams responsible for executing these investments. As you will recall, the total capital investment plan for 2022 included the $235 million acquisition of the City of York's wastewater system that we were excited to close in May. Coupled with our strong first quarter results, our capital investments are off to a good start for the year and on pace to meet our $2.5 billion goal for the year. We continue to stay focused on the plan. And as you saw yesterday, we have now for the third time affirmed our 2022 earnings guidance. And John will cover 2022 results and guidance in more detail a little later in the call. Before I…

Thanks, Susan, and good morning, everyone. I recall Susan saying on the first quarter earnings call that it had been a privilege to serve as CFO where she was thrilled it was her last one in the role. So before I get started with the results, let me just say that I am thrilled to take the baton from Susan as CFO at American Water and join this great team. So with that, turning to Slide 8, let me provide a few more details on second quarter results. Regulated results in total increased $0.02 per share compared to the prior year. We saw a $0.16 per share increase related to higher revenues from new rates, acquisitions and organic growth. As a reminder, prior year results reflect an estimated $0.03 per share of favourable weather in the second quarter. O&M expense increased by $0.06 per share, which reflects some of the effects of inflation on chemical, power and fuel costs. Depreciation expense increased $0.03 per share in support of growth in the Regulated Business. The Market-Based Business and Other results increased $0.04 per share in the second quarter of 2022 as compared to the second quarter of 2021. These results in 2022 include interest income on the seller note and earnings from revenue share agreements from the 2021 sale of Homeowner Services of $0.06 per share while 2021 results included $0.08 per share of operating earnings from HOS. Results for the Other segment also include interest expense on long-term debt financing in both periods, which has increased year-over-year. Related to HOS, I also wanted to note that we recorded the final working capital true-up entries for HOS in the first half of the year amounting to $0.08 of earnings. As we previously disclosed, we recorded a $0.02 loss on the sale…

Thanks, John, and good morning, everyone. While I usually start by reviewing the regulated segment's operating results, I want to start today on Slide 14 by covering the announcement coming from our Military Services Group just a few weeks ago. I'm so proud of MSG's latest award our first ever Navy contract. This contract continues the team's streak of utility privatization wins at military installations in recent years. With the addition of the wastewater contract with Naval Station Mayport, we are currently serving 18 installations with between 30 and 50 years remaining on these contracts. We also have two other bids outstanding, one of which is expected to be awarded in 2023. And as you can see, we have a potential of about 70 additional opportunities in the years ahead. MSG's business model centers around adding new military installations to our portfolio and then optimizing revenues through new infrastructure construction projects on the bases we serve. A military installation's mission can change or expand or new technologies or system improvements may be identified that improve efficiency or sustainability. We work with our military partners to identify and lead these needed infrastructure projects. Again, we're extremely proud to provide vital services for the military personnel, their families and the civilians that support these missions. As we turn to Slide 15, let's cover our regulatory activity in our states. Shown here is our summary of completed rate cases in 2022 and key facts for each of the rate case filings so far this year. In the appendix, we also share some details of changes in our infrastructure charges year-to-date. These key efforts reflect Susan's comment on our team's ability to execute our regulatory strategies. As you can see on the slide, our New Jersey case is the furthest along with constructive discussions…

Our first question comes from Richard Sunderland from JPMorgan.

Maybe starting inflation and your guidance reaffirmation, could you frame a little bit of the 2H inflation risk relative to the 6% to 8% impact year-to-date? I guess, in particular, is there any reason the headwind could be ratable? And then given you had the HOS benefit in 1H that offset, how do you think about offsets over the balance of the year?

Rich, yes, let me make a couple of comments and certainly have John weigh in here. I think we made it hopefully pretty clear in our prepared remarks, first of all, that we affirmed guidance for the year. So as we think about expectations for 2022, we're quite confident in our ability to hit the targets we've established for '22. We did indicate that we continue to see some pressure in headwinds around particularly chemical costs and energy costs. We also highlighted that we're working diligently in the regulatory environment to ensure on a go-forward basis that we have those costs addressed. And as Cheryl pointed out, a number of our cases do have forward-looking test years. So we're hopeful that we can limit any exposure here really to 2022. The other comment that we made, and you obviously rightly pointed out the HOS gain that was recorded, which again, those sorts of transactions are not terribly uncommon when you have a transaction of the size we had last year when we sold HOS, just final working capital true-ups. And I would say they're final. We don't expect any more activity related to that transaction. That was a benefit to the first half of the year that certainly helped us offset some of those cost increases. But I'd also say it's not uncommon for an organization of our size, as John remarked to have pluses and minuses throughout the course of the year. And our focus on cost management, our focus on how we operate, how we are focused on efficiency, we'll continue to have levers that we can pull to offset exposure that we may see in the second half of the year. So that's our plan. And again, I'll just say it again, we affirmed our guidance for 2022, and we fully expect to hit those targets for the year.

Got it. I appreciate the color there. I guess just turning to this topic, but on a macro level with the commentary around CapEx. I'm curious what you're seeing on that front, is there potential for either the dollar spend to go up given inflationary factors? Or I guess, on the other hand, less pipe replacement to occur under the current budgeted CapEx. Just curious how you're thinking about that into the budget update.

Yes. And Cheryl can weigh in here too from an operating standpoint, but we don't see any change at all in our plans in terms of the amount of work we're doing. We may see some cost increases there on pipe. But I would tell you, again, our supply chain folks have done a tremendous job, both managing the availability of supply and the cost increases we've experienced. They really have been fairly modest on those types of commodities. And again, we don't expect any change in our plans to invest. Cheryl, anything to add there?

Yes, I would just say that we've always got hundreds of projects pretty much ready to go that we know need to be done across our systems. And so we have some flexibility in how quickly we move those projects forward. But at this point, we've been able to manage through any supply chain delays and any cost increases and still get the work that's been prioritized done and continue to do that, we think, through the years coming. So no real concerns there, just being flexible in how we approach those projects.

Got it. That makes sense. And just a final query, you talked about pension impacts. Are you able to quantify the potential headwind in '23?

No, not at this time. Obviously, as we said in our prepared remarks, we do need to get to the end of the year, we'll do the remeasurement there, and we'll see where we are. But again, our focus would be to use all of the tools at our disposal to manage those types of increases I mentioned in my remarks around regulatory approaches. We've got trackers in two states already, so that will mitigate it there in two of our largest states, by the way. And we're continuing to focus on regulatory solutions in all the cases we have currently on file to address that specific cost. So we're optimistic we'll be able to manage through whatever increases we may or may not see there.

Our next question comes from Insoo Kim with Goldman Sachs.

My first question going back to, I guess, thinking about the '22 guidance a little bit, given the year-to-date results. I think on Slide 10, you said that second half of '22 EPS will be lower compared to 2H 2021. If I just -- if I take the last four quarters worth of EPS, it gets to kind of, I guess, the midpoint of where '22 guidance would be. So then if the 2H 2022 is going to be lower, is that implying that at least in the range you're trending towards the bottom half of the range?

I don't think you should assume that. What we tried to point out on Slide 10 is simply the reality of our earnings profile. We're pointing out that in the prior year, you would have had results from New York. We just didn't want folks to miss that as you think about what your expectations are for each of the remaining two quarters. And then we obviously have talked about inflation here and our -- the headwinds we may experience. And again, our strategy is to try to offset those impacts. What we've continued to say is we've affirmed our guidance for 2022, and we're very confident in our ability to hit that.

Okay. Got it. So I should take that in addition to the other commentary on demand, rates and the inflation, too, I guess, I’ll secure it more in isolation.

Exactly.

Okay. That makes a lot of sense. The second question, last month, the EPA put out new advisories for PFAS and other chemicals. I know it's -- a lot of this is more state-based. Some of the states have mandates, some had their own recommendations and it is okay, you guys have had your targets as well. Just based on the new advisories, any thoughts on your operations on the PFAS and other chemical levels, whether that translates into CapEx opportunities or other expenses?

Yes, it's a good question. And so obviously, it's something that we're very focused on, and I'm going to let Cheryl comment on how we see this latest news.

Yes. Thanks, Susan. What EPA put out recently were health advisories. And there's no regulatory requirement for us to test or to meet any certain levels with those health advisories. Those advisories were extremely low, in our opinion, below the detection limit of the methods to test for PFAS compounds. And so we're anxiously waiting to see what EPA comes back out with as far as a real regulatory limit. But we have tested all across our footprint. We know where we stand and we have already started looking at what capital projects would be necessary going forward. And any regulations in states other than where we're at today will mean future capital investments.

Our next question comes from Angie Storozynski with Seaport.

Just one comment on 2022. So I remember in the past you used to say that weather can have about a $0.07 positive or negative swing for the year. So I'm just wondering if it's still the case. And I see that you're calling for water conservation in at least parts of New Jersey. And I'm just wondering if that could potentially cap this earnings benefit.

Angie, I'll let Cheryl comment in a minute about what's specifically happening in New Jersey. We haven't really seen to date through June much of a weather impact. We're all, I think, across the country sort of sweating this quarter. So we'll see what it does to results here in this third quarter. Yes, we've probably moved away from that sort of quantification, I think what we've historically done there. So we'll just need to wait and see what impact it does have on demand in this quarter. And Cheryl, do you want to talk specifically about what's going on in New Jersey?

Yes. We've got two areas in New Jersey where we've seen peak usage rise to the level that we feel it's important that we start to encourage or specifically ask our customers to conserve, to water only on alternating days, put steps like that in place so that we can kind of shave off those peaks and that we can serve our customers continuously without any kind of dips and pressure or anything like that. So we have seen usage spiking, and that's why you're seeing those conservation messages come through.

Okay. Changing topics. And I know it's really new, but we see this proposed minimum effective tax rate, right, 15%, at least overnight, that it seems that it might pass. Could you tell us how you think it's going to impact your -- well, your earnings projections, if anything else or cash flows?

Yes. It's a good -- yes, sure. It's a good question. And obviously, we need to kind of dust off our analysis that has been done around this topic again. And as you said, it's sort of back new in the news. And I think as we've talked about this in the past, it really is probably an impact on cash flow primarily. Ultimately, any impacts to effective tax rates gets worked through the customer bills. So I would say it's probably cash flow -- and I think -- well, again, just need to look at our analysis that we did at the time. I don't recall it being terribly material, but we'll just need to dust it off and see if there's anything there to report.

Awesome. And just my last question on municipal M&A. I appreciate all the comments, Susan, you had in your prepared remarks. But is there any more you can share about this one -- I wouldn't say an award because it's an exclusivity period took for negotiations, went to your competitor. I mean, we have little to no insight into what terms you proposed versus Aqua Pennsylvania. But I mean, is it as simple as the highest price wins? Or do you have some other competitive advantages? Is it about the location of the service territory? What is it that you might not be winning these contracts despite such a big balance sheet? No contracts...

Well, yes, sure. I'm obviously not going to comment on any details here. I would simply say it's never that simple. I think it's important to go back to the comments that John made in his prepared remarks that we've got a pipeline at 1.3. We just closed New York. We talked about the acquisition in West Virginia we just announced yesterday. We have plenty to do in this space. There is plenty to do, and we are doing a lot. So we take every opportunity seriously, and we approach every one with the same rigor, the same metrics, the same approach to benefits that can be provided to communities, and we put our best foot forward and then we move on. And that's probably all I have to say about that. Again, we've got lots of great opportunities here.

Our next question comes from Michael Gaugler with Janney Montgomery Scott.

On Slide 15, Cheryl, you mentioned in Illinois, the low-income assistance plans now in place. Just wondering, do you have them in most or all of the states you operate in?

Yes, Michael. We have low-income assistance programs all across our footprint, but we're also looking at how we can expand those or how we can make those more accessible to additional customers. We realize there are just some customers out there that no matter how affordable our bills are, they're going to struggle to be able to do that. So we're also working at the federal level, trying to get as much support for a federal assistance program, the program has been hugely popular and helpful for our customers across our footprint in the states where they've implemented that. So we're going to continue to try to work at the federal level to get more federal funding as well as some of those local or more utility-based programs.

So Illinois then was the -- just to be clear, Illinois was the last one in terms of adopting this type of legislation in your system?

Well, Michael, this is a separate piece of legislation. It -- I wouldn't say that there's legislation in every state. We have our own program, our Help to Others program that all of our states participate in all across our footprint. So our customers have had some access to low-income assistance for years now.

Our next question comes from Ryan Greenwald with Bank of America.

John, congratulations on the new role. It's a pleasure to connect.

Thanks very much, Ryan.

Absolutely. I appreciate the update. Just a follow-up and brief on the pension comments. You guys had previously disclosed a loss through mid-May. What was the pension asset performance through June 30?

I don't know, Ryan. I mean I don't think it's something we have got at our fingertips. I don't know what you can divine from the Q on that. Yes, we don't have anything out there, Ryan, to answer that specifically.

Understood. Is it fair to extrapolate the $9 million pension expense from the PA rate case for the balance of the company, assuming PA is like a 20% allocation?

No.

Any color on the best way to kind of think about that?

Well, I think that's a difficult approach. Those are estimated costs as of a set of analyses we did for the rate case. I think the answer really to the question is you really just have to wait until we get to the end of the year, and we see really what the impact is going to be going forward. And I would just reiterate what we said in our prepared remarks that we are working diligently in many of these open cases to address these costs. As Cheryl highlighted several of these jurisdictions have forward-looking test years. And we have worked hard to either include these costs or estimates of these costs in those rate cases or we have proposals on the docket to be able to address go-forward exposures. And to the extent we don't cover those costs timely enough in rate cases, we will continue to focus on ways to mitigate those impacts through other cost management efforts, other things. So I don't think you can really draw any broad conclusions based on what you've seen to date, either in terms of market performance or even in our own filings. I think you really just got to wait until we have more insight into expectations at the end of the year, and then we'll certainly tell you how we think about it. But I'd also tell you, again, remind you that John commented in his remarks, we've affirmed our long-term guidance here. So as we think about this going forward, we're certainly confident in our ability to manage the cost, both from just a straight cost management standpoint and regulatory solutions.

Understood. And then maybe just lastly, the Pennsylvania Governor's move earlier this month to reduce the corporate tax rate, any initial thoughts on potential impact for you guys in PA there and how this could play into the rate case dynamics?

I don't really have anything to say about that at the moment. Again, we'd be considering those types of impacts in this current case. So nothing really to comment on there.

Our next question comes from Gregg Orrill with UBS.

Another one on pension. You talked about the quarter method. What's the size of the quarter that you use?

Well, I think the sort of standard approach is a 10%.

And that's across -- that's generally across the company? Okay.

Right. Yes, we have just a single plan, yes.

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