Q1 2020 Earnings Call

Reconciliations for non-gaap financial information discussed on this conference call including adjusted income adjusted earnings-per-share just to return on equity in our adjusted Reagan efficiency ratio can be found in our earnings release and in the appendix of the slide deck for this call. Also the slide deck has been posted to our investor relations page on our website statements in this call related to earnings and earnings per share referred to diluted earnings and earnings per share.

I would now like to introduce your host for today's call and Vallejo vice president of investor relations, Mister Blake you maybe

Thank you. Shawn. 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 during this phone call both in our prepared remarks and and answers to your questions. We may make forward-looking statements that represent our expectations regarding our future performance or other future events with these statements are predictions based upon our current expectations estimates and assumptions however, since these statements

I should also note that consistent with our efforts to ensure the safety and health of our team were conducting this call while practicing social distancing and from remote locations as an example Walter and Susan are in separate locations. We don't anticipate any technical issues. But if for any reason technical issues do arise Walter will take over and lead us through the full presentation with that being said, I will now turn the call over to American voters president and CEO Walter Lynch. Thanks a good morning everyone and thanks for joining us today. I'll start by giving you a brief update on our covid-19 response and then provide key updates on our business Susan Hardwick our CFO will cover the first quarter Financial results and provide a few additional comments related to the implications of covid-19. As you know, American Water provides Clean safe reliable Water and Wastewater services and has continued to do so throughout this pandemic American water is dead.

I was clear priorities across our organization focused in three areas. The first is the care and safety of our employees and their families. The second is the safety of our customers and the communities we serve in the third area of focus is the execution of our preparedness plans so we can continue to provide essential services and help our communities get through this crisis.

Let me give some examples of the measures. We've implemented because safety is our top priority. We've implemented required work from home policy where possible as well as social distancing and other enhanced safety measures for employees and customers for example, we've suspended all non-emergency and on the appointments and limited the amount and nature of contact with customers during field appointments. We've also worked hand-in-hand with labor across the business and supported our employees with paid leave for covid-19 diagnosis quarantine and childcare. We suspension related service shut offs suspended late fees in every storage service to customers who were previously shut off for non-payment.

We're also working with customers who are experiencing Financial hardships by offering customer assistance programs and access to low-income programs. Susan will cover this a bit more later. But we've implemented actions to strengthen our liquidity and ensure access to Capital. We also continue to execute on our core strategies such as making needed capital investment. We've increased Communications with Public Service commission's customers and public officials as a covid-19 impact continues to be assessed American Water will work constructively with Public Service commission's as they look to address utility that measures customer protection and cost recovery for all regulated Utilities in their jurisdictions. Finally. We provided a $500,000 donation to The American Water charitable Foundation to help fund covid-19 relief efforts across the United States.

this was in addition to a

$100,000 donation made to feeding America to help support food banks. We understand. We have a very important role during this crisis. We provide water and wastewater services for Hygiene hospitals sanitation and Fire Protection. We thank all our employees for continuing to provide these essential services.

Moving on a first-quarter results the employees of American water delivered solid results and further strengthen our low risk profile and predictable growth story. Our first quarter twenty-twenty just earnings per share increased 9.8% compared to first quarter 2019. We invested capital of $457 million dollars in the first quarter of 2020, which is a 36% increase over the same period last year this increase is driven by the continued investment in our systems and the communities we serve along with more favorable construction weather this year versus as you know, we work hard to minimize the customer bill impacts of these Investments through a continued focus on controlling the o&m costs. I'll talk more in a moment about our regulated operations are continuing progress and regulated Acquisitions and their contributions to our long-term growth story. Our Market based businesses were up a penny and earnings-per-share. This was due primarily to birth

customer contracts from home owner services

as a reminder in the third quarter of 2019 or military services group was awarded to military contracts Joint Base San Antonio and Texas and the United States Military Academy at West Point. We're on track to assume operations by the second quarter of 2020.

Moving to slide seven the foundation of our earnings growth continues to be the capital investment. We make in our regulated operations to provide Clean safe and reliable service to our customers. We believe that long-term financial success depends on effectively executing the fundamentals of our business every day. We plan to invest twenty to twenty-two billion dollars in capital over the next ten years to ensure the quality and reliability of our services and to bring water and wastewater solutions to communities across the country. We're affirming or long-term EPS compounding growth rate in the 7th to 10% range. We also expect our 2020 adjusted earnings to be in the range of $3.79 to $3.89 per share with this is the same range. We communicate in February which should have been identified as an adjusted EPS range or gaap earnings are expected to be in the range of $3.85 to $3.95.

Share in her comments Susan will provide additional information about the difference between our gaap and adjusted guidance ranges also consistent with our previous dividend guidance an April 29th, or board of directors increased our quarterly cash dividend payment from fifty cents per share to $0.55 per share a 10% increase. We understand that a secure and growing dividend is important to our shareholders. Well striking the right balance with continuing investment in our regulated operations turning the slide 8. Let's walk through some of the regulatory Hi-Life the first quarter 2020 Pennsylvania American Water filed a general re case last week requesting $92 in the first year and $46 in the second year. That's our last case in 2017, Pennsylvania. American Water will have invested 1.6 $4 billion dollars in infrastructure upgrades for the four-year period of 2019 through 2022 age.

including replacing more

427 Mi of Aging water and sewer pipes the case also includes enhancements to our customer assistance program traditionally the public utility commissions review of the following month me take up to nine months and new rates would not be effective until twenty Twenty-One also in Pennsylvania, the Public Utility Commission approved that companies revision to its Wastewater decent wage action allows the decent to be applied to another 50,000 Wastewater customers effective May 1st.

We also have 3 pending rate cases in New Jersey, Virginia and California, New Jersey American Water filed a general re case in December 2019 requesting an overall Revenue wage increase for approximately $88, excluding the revenue from decent since our last rate case. We've invested more than $1 billion dollars in system upgrades Virginia American water fowl. The general re case requesting an overall Revenue increase of five point six million dollars in November 2018. This case was driven by approximately 98 million dollars in infrastructure upgrades since April 2017 interim rates became effective on May 1st, 2019, and we expect the decision later this year.

Moving West California American Water file for new rates in July 2019 the case covers 2123 and request an increase in authorized revenue of 56.6 million dollars over three years. The request seeks $197 for infrastructure improvements planned for 20 21 and 22 due to age 19. The evidentiary hearings were moved from April and May to early June with final hearing dates expected in late August. We now expect a decision on this case as early as first quarter of 2021 in addition. We filed a motion for interim rates to be effective back to January 1st 2021.

On the legislative front during the quarter Indiana Governor Holcomb signed two bills the first one authorizes recovery for above ground infrastructure without a full re case. And the second is dead is an appraisal process for non Municipal Utilities to establish fair value and a reasonable purchase price in West Virginia governor just assigned the water and wastewater investment and infrastructure Improvement act effective June 5th, this legislation creates a voluntary process to use fair value assessments to determine the value of the water or Wastewater systems in a volt combine water and wastewater ratemaking and expands how municipalities can use the proceeds they receive from selling utility assets to better address needs in their communities finally in Virginia. Governor, Northam signed fair market value legislation, which will go into effect on July first. This is now the 9th state that is adopted fair market value legislation across our footprint dead.

All this legislation is focused on helping communities in utilities address Water and Wastewater challenges.

Moving to slide nine customers customers remain at the center of every decision we make today and into the future. This means smart Investments balance by efficient operations and capital gains appointment as I mentioned earlier in the first quarter. We invested $457 with the majority in our regulated businesses, including 430 two million infrastructure investment Club, 21 million and regulated Acquisitions as we make these critical Investments to maintain reliable service. We must also ensure affordability for our customers will continue to focus on on and efficiency and work toward our own inefficiency goal of 31.3% by 2020 for for the 12 month period ended March 31st, 2020 our own M efficiency ratio improved 34.5% compared to 35.5% for the 12 month period ended March 31st, 2019.

Now to put this into perspective or adjusted own expenses are just slightly higher today than they were in 2010 since then we've added approximately 276000 customer connections. Well expenses only increased at a compound annual growth rate of 7% We're very proud of our employees focus and commitment to controlling costs on behalf of our customers, especially given the current situation and economic challenges. Some of our customers are now facing moving on a slight n we believe our commitment to putting customers first is a key to growing a footprint so far in 2020, we've closed on five Acquisitions enforced different states adding about 6,200 new customer connections. We've also added more than 3,200 customer connections to organic growth in the first quarter. We look forward to adding another 45800 customer connections through currently signed agreement in eight states most of which wage

Expect to close this year in 2020 these new agreements reflect our commitment to provide water and wastewater solutions to communities across our footprint and with that let me now turn it over to Subaru.

Thank you Walter a good morning everyone. Let me first start on slide twelve with a bit more detail on results for the quarter first quarter 2020 Consolidated Gap earning a $0.68 per share compared to $0.62 per share in 2019 in the first quarter of 2020 gaap earnings were adjusted for depreciation expense. That would not been recorded in the quarter related to the New York. Subsidiary assets had they not been classified for accounting purposes as assets held-for-sale. Also, 2019 gaap earnings were adjusting a reduction in the settlement liability related to the freedom Industries chemical spill, excluding these two adjustments earnings per share as adjusted increase $0.06 per share or 9.8% driven primarily by growth and the regulated business.

the regulated business segment results

Increase eight cents per share or an increase of 13.6% compared to 2019 earnings the market-based business results increase the penny per share and the parent company decreased $0.03 per year compared to 2019 primarily reflecting higher interest expense to support growth in the business.

Moving on to slide thirteen regulated operations increased $0.08 per share in total. We saw a $0.14 per share increase from additional authorized revenue and surcharges to support infrastructure investment acquisition and organic growth o&m expense increased $0.06 per share and depreciation increased $0.03 per share both to support regulated Acquisitions wage growth also results reflect a $0.03 per share benefit primarily related to lower pension expense from a higher assumed return on assets used to set expense for 2020.

The market based businesses first quarter results increased compared to 2019 primarily by the homeowner Services groups organic growth and contract price increases also offer. Well Walter already mentioned we expect Joint Base San Antonio in the United States Military Academy at West Point New York to assume operation by the second quarter of 2020. And finally the parent was off decrease three cents per share primarily reflecting higher interest expense to support growth in the regulated business.

Moving on to slide 14 the regulated businesses received $53 in annualized new Revenue in 2020 and this includes $18 million from Step increases with thirty-five million dollars from infrastructure surcharges.

We have also filed requests on our waiting final orders on the portrayed cases and three infrastructure surcharge proceedings for a total annualized revenue request of $224 billion dollars. They continued successful execution of a regulatory strategy is a key element to our ability to consistently deliver on these Financial results.

Before I wrap up on flight 15, let me add a few additional thoughts related to the expected implications of covid-19 first as it relates to demand for our services American water has a predominantly wage residential customer base residential revenues including bulk sales are about 69% commercial is 21% mostly in the food and beverage sector and Industrial is only 4% of our total revenue are very early indications are that are residential load is higher and our commercial and Industrial loads are trending down as business closed businesses closed and suck other slowdowns occur.

Disconnections and late fees have been suspended and disconnection notices and stopped as Walter mentioned earlier. We have also reconnected customers previously disconnected for non-payment and suspected reconnection fees. This is critical to our customers as they work through this difficult situation and we currently don't expect the impact of this temporary measure to be material. It's too early to tell her customers overall ability to pay will be impacted by covid-19. So estimating uncollectible accounts exposure to this risk is not yet possible as it as is evidenced by rep reactions across the country today. We expect issues like this will be addressed timely and certainly in future rate cases at the very least. We will work closely with Regulators in our jurisdiction how the cost of this pandemic will be treated for Recovery purposes.

as well

We invested capital of $457 billion in the first quarter of 2020 to better serve our customers at this point. We believe our regularly scheduled capital projects will continue as planned perhaps with some slowdowns that could be made up later in the year. So I don't believe we'll have any adjustments to our 2020 capex levels at this time.

We continue to monitor our key suppliers and today and have had no major disruptions to our supply chain. Our key Distributors are reporting in excess inventory and materials like pipes valve hydrants coupling off and our chemical providers are meeting our needs and our reporting no shortages as of this point.

And we think about the impact of covid-19 on our Market based businesses for military services, o&m operations currently continued as normal subject to each installations individual requirement. As you know, our services are deemed essential. So we continue to do what the Department of Defense has hired us to do which is to deliver safe clean and reliable water to our military base partners.

For Homeowner Services while development of new partner relationships may be delayed somewhat, we believe we can maintain our customer base during periods of Economic downturn and then home owners really do see value in these products that protect them against large unexpected expenses and perhaps maybe one final comment before I talk about how we've address liquidity. I'd simply mention that our pension plans were funded at just over 80% off of your 2019 and though there has been much volatility in the equity markets as you all know, I'd remind you that the pension obligation remeasurement will be done at the end of 2020.

Moving to slide 16 as it relates to liquidity. Obviously the covid-19 pandemic has caused great deal of uncertainty and volatility in the debt Capital Market and like many others. We experienced some constraints in a commercial paper market and we have now seen a large a general loosening in that area.

We've been focused on liquidity Since the situation really accelerated in addition to our existing two and a quarter billion dollar revolving credit facility that supports working capital needs and capital spending on March 28th. We entered into a $750 364-day Term Loan at a very favorable rate of Libor plus 80 basis points, and we have drawn on that term loan at five hundred million dollars for holding that amount in cash currently.

It's part of our plan financing for 2020 we executed on the issuance of 1 billion dollars in long-term debt on April 14th, the issue consisted of 500 million and 2.8% Coupon Samsung Note do 20 30 + 500 million. + 3.45% coupon senior notes do 2050 the proceeds from the long-term debt issuance were used primarily to repay out for commercial paper obligations and outstanding draws against our revolving credit facility. We're confident we have sufficient liquidity available for the foreseeable future with two point eight billion dollars available a month of April.

moving on

The slide 17 let me summarize now as well. As you said we expect our 2020 adjusted EPS to be in the range of $3.79 to $3.89 per share, which is consistent with the guidance range. We last announced in February 2020. And which should have been identified as an adjusted guidance range at that time. Our 2020 gaap earnings guidance range is $3.85 to $3.95 per share the difference of six cents relates to the expected annual depreciation on the New York subsidiary assets, which have been presented as assets held-for-sale off with the accounting treatment of assets held-for-sale Gap requires a depreciation seats on those assets and the only adjustment currently anticipated between are expected Gap results and are expected adjusted earnings-per-share result is that sixth sense of depreciation expense. We have reflected $0.01 per share of that in first quarter reconciliation of gaap eps to adjusted eps.

Slide eighteen while working through these very different difficult and turbulent times. We continue to deliver strong Consolidated results are total company Consolidated actual return on Equity is 10.6% off 12 months ended March thirty, first, two thousand and twenty regulatory execution along with strong results from our Market based businesses allows us to consistently deliver on our earnings commitment wage believe that delivering on results combined with our strong earnings growth and Superior dividend growth expectations continue to provide excellent value for investors. We continue to be a top leader dividend-growth announced increase of the dividend of 10% We have grown our dividend at a compound annual growth rate of approximately 10% or more over the last five years, and we expect to continue that growth well into age seven to 10% range.

Is Walter also mentioned? We are affirming our long-term earnings compounded annual growth rate expectation on an earnings per share basis of a range of 7 to 10% while investing capital in the range of 8.8 billion to 9.4 billion over the next five years. The Decades of capital investment need continued and drives are twenty to twenty $2 billion dollars in investment over the next ten years. I admitted Water and Wastewater landscape continues to provide what we see as a growing pipeline for acquisition the cab.

Also, we continue to Target a dividend payout ratio of fifty to sixty percent of earnings and with that. Let me simply turn it back to Walter for a few additional remarks.

Thanks Susan. It's been a month since I've had the honor of leading this company a CEO. I want to take a moment to thank all the employees of American Water their response to the current Health crisis has been sick. Incredible. Not only are we providing essential Services while keeping safety is our top priority. We've invested in our water and wastewater systems. Welcome new customers who closed Acquisitions and off with State leaders regulators and other key officials. We've also had a significant increase in customer satisfaction. We've achieved all this since the beginning of the year. Our company will emerge strong covid-19 pandemic how we work together throughout. This crisis will have a lasting positive impact on our culture of trust and teamwork. I personally can't wait to once again get out to our business plans to our operating centers to our call centers and say thanks to our employees. They're Simply the Best with that. We're happy to take your questions.

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press * then 1 on your touchtone phone if your question has been addressed and you would like to withdraw your question, please press star then to our first question today will come from Turkish. Chakra with evercore is I please go ahead.

Hey, good morning team. Thank you for taking my question morning. Hey Walter and Susan maybe appreciate all the color just any quantifiable Trends. I know it's early on the regulated side in terms of you mentioned residential design being higher and commercial industrial Perhaps Perhaps slower. But any quantifiable Trends on the into April and in in your regular regulated subsidiaries, and then also are you seeing any non-payments on no payments in your in your Market based businesses? I know it's Charlie on but any color you could provide I appreciate it. Okay. Thanks. So you want to take that and then I'll jump in at the end.

Sure.

We make just a few comments, you know, and again, I would reiterate it is rarely and as we think about across all of our jurisdictions, the various States implemented wage restrictions and stay-at-home orders at different times. So obviously depending on when that occurred in each of our jurisdictions that's going to impact, you know, when we really started to see a shift in wage demand expectation, you know again reiterate what I said in our prepared remarks, you know, roughly seventy percent of our load is residential and as you can imagine obviously folks are at home. So we are seeing in our in our early data that residential sales are up and again, I I hesitate to quantify it because it's still so early. I know in some cases we may have six weeks worth of of of demand data. In other cases. We may only have three or four weeks again, depending on when those measures were put in place and in South

It says, you know, we have real-time meters some cases. We don't so we have to wait until we have actual billing data, but we certainly are seeing residential usage usage up on the commercial side again, it it depends on the jurisdiction of the depends on the mix of customers in a particular state but as you can imagine commercial is is trending down because of business closures rep clothing et cetera and on the industrial side while you know in a particular state, it could be a material change and and I'll give you an example in Kentucky. You know, we've got a large Plant Their Own no manufacturer. So in the state of Kentucky, we're seeing a pretty substantial decline in Industrial Sales because of the concentration there but overall or Industrial Sales make up his own life 4% of our total. So, you know again as you sort of role all that together residential is up the other two are down, you know, our current thinking is that they they they may

Tend to offset each other, but at the it also depends on how long this goes. It depends on, uh, you know, sort of a variety of factors in each of the jurisdictions so from