Good morning and welcome to American Water's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] 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, Cindy. 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 third quarter earnings release and in our September 30 Form 10-Q, each filed yesterday with the SEC. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted earnings and diluted earnings per share. John Griffith, our President, will share highlights of third quarter and year-to-date results and will comment on our 2025 EPS guidance and longer-term targets. David Bowler, our Executive Vice President and CFO, will discuss our year-to-date financial results in more detail, general rate case updates, our 2025 outlook and our 5-year financing plan. Cheryl Norton, our Executive Vice President and COO, will then discuss our new capital investment plan, including the expected impact of EPA's lead and copper rule improvements, and we'll conclude with comments on customer affordability and our acquisition outlook. Susan Hardwick, our CEO, will conclude with a look at our compelling investment thesis. After our prepared remarks, we'll then close by answering your questions. With that, I'll turn the call over to American Water's President, John Griffith.

Thanks, Aaron, and good morning, everyone. Let me start by saying how happy we are to have David in the role of CFO, after having served as our Deputy CFO and Treasurer. You'll hear more from David shortly. And likewise, as we noted last quarter, I'm pleased to hand the business development baton to Cheryl, whose oversight of our state presidents and her role as Chief Operating Officer is key to our business development activities as we continue to drive enhanced focus on origination activities at the state level. Let's turn to Slide 5, and I'll start by covering some highlights from the third quarter and year-to-date periods. As we announced yesterday, we delivered strong financial results in the third quarter, in line with our expectations, adding to an already strong 2024. Earnings were $1.80 per share for the quarter compared to $1.66 for the same period last year. In the first nine months of 2024, earnings were $4.17 per share compared to $4.03 for the same period last year. Our results reflect the clear execution of our plan in 2024, which David and Cheryl will discuss further. These results give us confidence to affirm our 2024 EPS guidance of $5.25 to $5.30 per share, which, as you'll recall from last quarter, represents our narrowing of guidance to the top half of the previous guidance range. As a reminder, our 2024 and 2025 EPS guidance ranges include $0.10 per share of incremental interest income from the amendment of the HOS note earlier this year, which is on top of the interest income from the original note terms that we are replacing with earnings from the regulated business. As we've said in the past, repayment of the note is a component of our long-term financing plan as a source of funding…

Thanks, John, and good morning, everyone. Before I get started with results, let me first say how excited I am to assume the role of CFO at American Water and continue my work with this great team. I also look forward to meeting many of you at EEI in a couple of weeks. Turning to slide 9. Let me provide a few more details on year-to-date results. Consolidated earnings were $4.17 per share, up $0.14 per share compared to the same period in 2023 and up $0.18 per share on a weather-normalized basis. As noted, earnings in 2024 were higher by an estimated $0.07 per share as a result of weather in the second and third quarters as compared to $0.11 per share of favorable weather in the second and third quarters of 2023. Excluding the impacts of weather, revenues increased by $0.84 per share, driven primarily by general rate case outcomes in 2023 and thus far in 2024. And looking at operating costs, O&M was higher by $0.19 per share, driven primarily by employee-related costs and other increases to support growth in the business as we expected. Production costs related to fuel, power and chemicals were also slightly higher compared to this period in 2023. Next, general taxes, which are comprised of property and gross receipts taxes were higher by $0.06 per share with the increase in property tax tied to the level of capital investment and higher gross receipts tax driven by higher revenue, primarily in New Jersey. Depreciation increased $0.21 per share and long-term financing costs increased $0.28 per share both as expected in support of our investment growth. The higher long-term financing cost includes interest on the $1 billion convertible note issuance from last June, the $1.4 billion senior note issuance in this February as well…

Thanks, David, and good morning, everyone. On Slide 15, I'll start with a discussion of our current long-term capital plan. For 2025, we expect our investment spending level to be $3.3 billion. From 2025 to 2029, we expect to invest $17 billion to $18 billion, an increase of about $1 billion over our previous five-year plan. This level of spending reflects the result of our consistent risk-based project planning. Along with risk, customer affordability is a key variable in our analysis, which I'll speak more about shortly. The increase in the current plan compared to last year is a combination of increased spending to meet compliance requirements for EPA's lead and copper rule improvements or LCRI, and rolling the plan forward a year. As you are aware, in October, the EPA issued the final LCRI, which sets a deadline near the end of 2037 for lead replacement by water utility providers for assets under their control, among other stipulations. American Water consistently meets water quality standards related to lead and copper rules across our footprint, and we are supportive of new or revised water quality standards such as LCRI. Removing the risk of lead service lines over time is absolutely the right thing to do for the health and safety of our customers. We are now expecting to spend about $1 billion over the next five years related to LCRI or about twice the rate of our recent annual spending, and we are still planning to invest approximately $1 billion in capital to comply with EPA's PFAS rule. In total, looking out over the next decade, we expect to invest about $40 billion to $42 billion in our regulated systems and acquisitions, which is $5 billion higher than the previous 10-year plan. One of our key initiatives with this higher…

Thanks, Cheryl, and I'm happy to be batting cleanup for us here today. You've heard from John, David, and Cheryl, a recap of our long-term strategy, and it should sound very consistent. Beyond our words, though, we have a proven track record of execution on our plans, including achieving our EPS guidance year after year. I fully expect 2025 to be another successful year, demonstrating consistent execution of our plans. Slide 21 is a compilation of the unique competitive advantages that we have at American Water that make us stand out as a premium utility. I've been on all sides of the regulated utility industry in the U.S. throughout my 40-year career, gas, electric and now water and wastewater. I know very well that there are some other great companies in the utility industry, ones that could cite three, four or maybe more of these qualities on their own resume. But what makes American Water unique from all of the others, though, in my opinion, is the collection of all of these attributes in a single investment opportunity. But let me be specific and call out just a few of these key attributes. American Water, without any dispute, is a top-tier performer on earnings and dividend growth. We have a geographic and resulting regulatory diversity that is rivaled by few. That diversity reduces risk period. And speaking of risk, our capital plan is low risk on a number of measures like decades of need and basic infrastructure renewal at the core of our plan. Our investment appeal based on our company's mission, values and these distinguishing fundamentals is compelling. Our mission is to provide safe, clean, reliable and affordable services to the customers we are privileged to serve and to those that we hope to serve in the future that today are in need of the services we deliver. We can fulfill this mission and provide a fair return to our investors. Look, American Water has been doing this work since 1886. That's nearly 140 years, but there's much left to be done. Some may question and some do still today, the sense of urgency that we exhibit as we execute this investment plan. The sense of urgency is driven by the tremendous need, simply put. We will continue to do this work and deliver the superior returns our investors expect. It is a privilege to lead the 6,500 member team that is committed to and focused on delivering solutions to our customers. And you, our investors, make it possible for this important work to continue. And with that, I'll turn it back to our operator to begin Q&A and take any questions you may have.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Richard Sunderland of JPMorgan. Go ahead, please.

Hi. Good morning. Thanks for the time today.

Good morning, Rich.

So I've been getting a lot of questions on the financing plan and hoping you can walk through the $1.5 billion equity increase versus the $1 billion CapEx increase. Are there any timing factors to the financing plan driving equity higher than the incremental CapEx, like maybe capturing some of the years six through 10 equity in this current five-year plan?

Yes, it's a good question, Rich. And obviously, we've seen a lot of commentary on that overnight and this morning as you all have been digesting the new plan here. I think it's as simple as a continued growing investment plan, as you've noted, and our continued focus on the strong balance sheet. We take very seriously the strength of the balance sheet and the metrics associated with that, and we've been very transparent on what those are. And we'll continue to finance the plan, the growing plan to maintain those expectations. I think it's pretty simple to think about it in those terms. The timing, I think, is maybe what's tripping people up a bit, but I think you just need to think about the size of our plan, the long-term nature of our plan, the outlook that we've provided from a long-term perspective here and our continued focus on that balance sheet. It's all just directly tied to those key objectives we have. And David, John, anything to add from your perspective here?

No, I think you've really covered it, Susan.

Yes. Maybe I'll just add one comment, Rich, which is if we think about the $1 billion increase in our five-year plan investment plan, keep in mind that even if we increased -- we didn't -- if we did not increase the five-year plan at all, right, we would still intend to raise equity in the latter part of the new plan period, right? We are growing the company 8% to 9% rate base growth. We generate a lot of internal cash flow. We raise debt, but we'll always be raising equity periodically to fund what we consider to be a robust capital plan. So I'd say the $1 billion increase in the five-year plan incrementally increased the amount of equity that we will be raising, but we'll always be in the business of periodically raising equity.

Got it. That's very clear. And maybe I'll pick up on that last point and just unpack that a little bit more, because if you look at last year's update and then this year's update on the full balance of sources, the cash flow guidance uptick last year was larger than the uptick this year, maybe $2 billion versus $1 billion. I'm curious, if you could just unpack a little bit more of what's going on there in terms of your assumptions and expectations embedded in that? Are there any factors we should think about the roll forward last year versus the roll forward this year purely on the cash flow guidance?

Rich, I think one factor that we have incorporated in here would be related to alternative minimum tax as a driver where we fully expect to be a cash taxpayer starting in 2025.

And Rich, I would just add to that, that yes, as you recall, Rich, when we first accelerated our CapEx plan back in 2021, what we found is that we are investing even more capital than that accelerated plan. And so the enhanced capital investment that we're seeing is generating additional internal cash flow.

Perfect. Very helpful commentary. Thank you. I’ll leave it there.

Thanks, Rich.

The next question comes from Durgesh Chopra of Evercore ISI. You ahead please.

Hey, team. Good morning. David, congrats.

Good morning.

Good morning, Susan. Nice job batting the closing remarks here. And David, congrats and look forward to working with you.

Thanks.

Yeah, absolutely. So maybe just guys, get your perspective on the strategy in Pennsylvania. As you roll this plan forward, how are you thinking about CapEx in the state versus previous assumptions, and then the rate case filing strategy in light of the order? Just any color you can offer there would be great. Thank you.

Yeah, Rich, probably not a lot to add from our discussion last quarter. As we've continued to emphasize, our capital planning process is really risk-based. We're really looking at where the need is the greatest, and we'll allocate capital first according to that need. And then to the extent there are opportunities to continue to enhance service in those areas -- other areas, we'll look at those opportunities. I think that process has continued, and I think you'll continue to see us make significant investment in Pennsylvania, so no change there. And I'd also say -- and again, we talked about this last quarter as it relates to our rate case outcome there, while the ROE might have been lower than we had hoped for, we certainly have that built in this plan, and you can see us continue to emphasize strong growth rates year-over-year, our 2025 expected growth at 8%, all fully reflected in our plan. So we're moving forward.

That's helpful, Susan. Thank you. And then, David, maybe I could just quickly follow-up. You talked about the AMT and being a full cash taxpayer in 2025. Could you help us with what like dollar amount of cash payments are you expecting in 2025 and going forward?

Yes. I think you can think of it in the range of $100 million, plus or minus a year in cash taxes paid as part of AMT.

Awesome. Thanks, again.

[Operator Instructions] Our next question comes from Angie Storozynski of Seaport. Go ahead, please

Thank you. So just one somewhat of a random question. So I'm just wondering, if you guys are making any plans on any changes in how you procure electricity. I mean I'm looking at the states where you operate, it seems like you will be exposed to quite an inflation in the cost of electricity. And so, are you trying to maybe lock in some of those prices ahead of time? And are you concerned about, for example, the affordability argument when the electricity prices were to go meaningfully up?

Good morning, Angie, yes, good question. And we might have touched on this a little bit, I think, last quarter. But certainly, it's a major focus for us. Electricity costs are a big cost associated with the work that we do. And to that end, we have multiple long-term contracts already in place. I think some as far out as 2029. So we have this risk, I'd say, fairly well mitigated through our current contracting strategy.

Okay. Changing topics. So you've obviously extended your growth rate. I think we're all looking at your earnings power beyond '26, right, when you lose the benefit of interest income. So I mean, what fills up that $0.10? Is it that you sort of step up the level of spending? Is it that you're hopeful for additional municipal M&A? I'm just wondering, again, how you can bridge the gap.

Yes, Angie, we certainly have addressed this, I think a couple of times. I'll ask John to sort of reiterate what our view is here.

Thanks for the question, Angie. As you recall back in 2021, when we put the note into place, we accelerated our capital plan at that point in time, increasing the 5-year plan by a couple of billion dollars at that point. And in the context of another question earlier, what we found is we've not only achieved that, I would say, but more. And so when you -- and we're always injecting equity into our operating companies to generate incremental regulated earnings. And that's really what's driving our ability to replace the interest income from the note. If you think about the interest income from the note, a lot of people look at it on an incremental basis and say, okay, there's effectively $0.20 of earnings going away, and that's from the $720 million note, it's 7% interest that we built into our 7% to 9% guidance forecast back in 2021. What people need to remember is we are bringing in $795 million, which is the original $720 million plus the earn-out payment that was rolled into the note. And if you think about that $795 million as -- that's avoiding incremental capital issuance, whether it's equity or debt. So if you're -- if you assume that we're avoiding long-term debt with that $795 million, pick a long-term interest rate, 5.5%, whatever you want to make up as a long-term debt interest rate. That result -- that offsets that $0.20, not all of it, but it gets you, call it, $0.17 or so. And we're really only filling kind of a $0.03 hole there. Nothing -- and so people kind of can't forget about the right side of the page that, yes, the interest income is going away, but we do have capital that we're avoiding incremental debt with. I would also note, Angie, that it's good for people to keep in mind that the final maturity date on the note is December 2026. But the borrower can call the note as of December 2025. And so it -- we'll see when the note gets taken out, but that's something just -- we could see it earlier than December 2026.

Okay. And then lastly, on the frequency of rate cases. So again, we're trying to sort of understand what happened with the last rate case in Pennsylvania. And obviously, some of it was the frequency of the rate case filings. So I'm just wondering one could argue that you're filing rate cases more often, not just in Pennsylvania, but in other states because you really have to hit your allowed ROEs and the realized ROE has to be close -- as close as possible to the allowed. So I mean, how do you see it in your plan? I mean, are you assuming that in every jurisdiction, you basically hit that allowed ROE and that's what drives the earnings growth? What if there is some either slippage in those rate cases or the negative outcome of some of them?

Yes. Angie, on the rate case strategy, and I think we've been trying to make this point for a couple of years now. What really drives our rate case cycling is the need and the investment. We just continue to believe there is such tremendous need to do the work that we're doing that we've accelerated our capital investment program accordingly. And the more investment we make, the greater the growth in the rate base and the need for timely recovery. Now we have mechanisms and other approaches to get essentially 75% of that investment recovered what we would call sort of more timely, through periodic adjustments, but we still have the remaining investment that is subject to traditional regulatory process and the need to get timely recovery of that investment, along with the size of the investment is what drives that cycling. So our -- we don't build a rate case cycle just to hit a rate of return. We build it because that's how we're investing, and that's what the regulatory process calls for. So that's really what's behind the strategy. It's the need.

Awesome, thank you.

Thanks, Angie.

This concludes our question-and-answer session and American Water's third quarter 2024 earnings conference call. Thank you for attending today's presentation. You may now disconnect.