Q3 2020 American Water Works Company Inc Earnings Call
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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.
He is 2020 form 10-Q, each S filed with the SEC.
Reconciliations for non-GAAP financial information discussed on this on 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 decks for this call.
Also this let this slide deck has been posted to our Investor Relations page on our website.
All statements in this call related to earnings earnings per share referred 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 waters, President and CEO Walter Lynch. Thanks.
Thanks, and 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 moved to key updates on our business, including our continued focus on the implications of COVID-19.
Was awarded a contract for the operation and maintenance of the water and wastewater utility systems at joint base Lewis Mccord in Washington State.
We are now honored to provide water and wastewater services to more than 425000 military men women and their families at 17 installations across the United States.
Alright, and the Pennsylvania Public Utility Commission Bureau of investigation and enforcement entered into a settlement agreement providing for a total annualized revenue increase of $75 million over a two year period the.
The terms of the proposed settlement had been presented for review to the P. C administrative law judge.
Until the administrative law judge and Commissioner able to review the proposed settlement and render their decisions it would be premature to discuss the terms of the settlement any further.
As you recall, Pennsylvania American waters General rate case requested $92 million in the first year and $46 million in the second year, Pennsylvania American water will have invested $1.6 billion in infrastructure upgrades for the four year period of 2019 through 2022.
We also have pending rate cases in Missouri, Iowa, California in Virginia in those cases are moving along on schedule.
Also in California, The California Public Utility Commission released the decision in September under it's low income repair assistance program rulemaking.
These proceeds from the sale of a water wastewater system.
Moving on to slide eight.
In addition to legislative action to help community solve water and wastewater challenges, we believe our commitment to putting customers first is key to growing our regulated footprint as.
0.2% compared to 34.8% for the 12 month period ended September 32019.
Our adjusted operating expenses are just slightly higher today than they were in 2010. Since then we've added approximately 317000 customer connections while expenses only increased at a compound annual growth rate of 0.9%. This is incredible work by our employees.
Finally, before I turn the call over to Susan I want to thank all American water employees for their commitment to safety as we continue to provide essential services. During this pandemic.
I also want to send a special thanks to our employees in California, who once again, our safely and successfully providing critical water service as EPS state deals with catastrophic wildfires and with that let me turn it over to Susan.
Thanks, Walter and good morning, everyone, let's.
Let's start on slide 11, with a bit more detail on the results for the quarter third.
Third quarter 2020 consolidated earnings were one dollar and 46 cents per share compared to $1.33 cents per share in 2019 as.
As Walter mentioned included in earnings is an estimated six cents per share favorable weather impact.
Our charges to support infrastructure investments acquisitions and organic growth.
As I mentioned previously results reflect an estimated six cents per share increase from favorable weather in various parts of our service territory.
I would have expense increased by six cents per share in depreciation increased five cents per share net of the one cents per share for depreciation not recorded as required by assets held for sale accounting.
The market based business third quarter results in 2020 were consistent with 2019 and the parent results decreased one cents per share reflecting higher interest expense.
And lastly, there is an estimated three cents per share favorable net impact from the COVID-19 pandemic as demand revenues in the regulated business improved primarily in the residential customer class.
Alright, New York going into full operation as of June 1st 2024 military services as well as price increases inorganic growth and homeowners services.
Parent results decreased 12 cents per share largely driven by three cents per share due to the tail of a legacy investment in 2019, and if I sent for sure increase in interest expense.
The estimated net impacted the COVID-19 pandemic is two cents per share unfavorable for the year to date period is mentioned in the regulated business increased demand in the residential customer class has largely offset decreases in revenue from the commercial and industrial classes today.
So the second quarter trend was a bit more negative as we discussed our initial intuition was at this off that would ultimately be the case.
Yeah unknown remains though as we as to how long and to what degree. The pandemic continues as we continue to watch. These rate case. These case rates increase in many of our territories. It's possible that additional restrictions are put in place that that could again negatively impact demand for a commercial customers.
Moving on to slide 14, the continued successful execution of a regulatory strategy is a key element of our ability to consistently deliver financial results as of October 31st the regulated business received 127 million an annualized new revenues in 2020.
This includes $57 million from the right <unk> from right cases, including step increases and $70 million from infrastructure surcharges included in this numbers the outcome from my most recent rate case in New Jersey is Walter mentioned at the start of the call.
We've also filed a request and are waiting final orders on the five rate cases previously discussed by Walter and three infrastructure surcharge proceedings for total annualized revenue request of $212 million.
Then at a compound annual growth rate of 10.1% over the last five years against the target of the high end of the 7% to 10% range.
Also we continue to target a dividend payout ratio of 50% to 60% of earnings.
As we've discussed all year, our total company consolidated actual return on equity is 10.6% now for the 12 month period ended September 32020.
Regulatory execution, along with the strong results from our market based businesses allows us to consistently deliver on our earnings commitments. We continue to believe that delivering on results combined with our strong earnings growth and superior dividend growth expectations provides excellent value for our investors.
The decades of investment need continues and drives our planned 20% to $22 billion of capital investment over the next 10 years.
With the fragmented water and wastewater landscape and a state and local communities continue to face added challenges from impacts of the code 19 pandemic. We believe we can provide those dates and towns water and wastewater solutions to help mitigate those impacts.
We see our business as resilient and we have built it in a way to endure challenges like we are seeing with the current pandemic.
And with that let me turn the call back over to Walter for few additional remarks.
Yes, Thanks, Susan let me cover tumor items before taking any of your questions first.
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 EPS goals in anticipation of that you can expect that our plan of focusing on growth from infrastructure investment will continue.
Additionally, we will 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 five 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 two veterans publications US Veterans magazine and military times, receiving the honors a top veteran friendly company for having a top supplier diversity program being among the top 100 best for vets employers.
And most recently American water received the highest recognition given by the US government to employers 2020 Secretary of defense employer support Freedom Award for exemplary supportive 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.
With that we're happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Ryan Greenwald with Bank of America. Please go ahead.
Good morning, everyone.
Good morning, Thanks for taking our questions.
So maybe if we could start with the military business can 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 could materialize in the near term.
Well, let me take then 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 we just don't do that but I can also talk to we're in four different solicitations right now and we expect to hear back on to in the near term.
So.
Just a reminder, we won the last three major awards from the military and we're really proud to be able to support the military and their families.
Got it but not that 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.
Yeah. This is Susan we have not changed our.
Timing and really that the timing that we had laid out in the plan and you're right we had indicated.
In December when we roll.
Rolled out this current plan that we had anticipated and issue somewhere in the middle of that five 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 after the five year period, and then obviously rolled out our 10 year plan and they and the equity issue. We have in the current plan really supports the timing of when we think the.
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 sales process can you dive a little bit more into that in terms of the milestones from there and the process going forward in terms of the timeline.
Yes, as I said in the remarks, Ryan we still expect to close this in the <unk> in early 2021.
And so we're working on an established timeline, 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.
Got it thanks for the time.
Okay. Thanks, Ron.
Our next question comes from Insoo, Kim with Goldman Sachs. Please go ahead.
Thank you.
First question is for.
Susan remind us in the results and the guidance what.
Good related costs, including the fact that is included or excluded from from the results given the various.
Pending regulatory approvals for those.
Yes, our.
Our guidance overall as we as we indicated we changed guidance this quarter increased debt and included in that guidance range of eight.
An assumption of three cents to six cents unfavorable for the year.
And that really.
I think reflects.
Our current trends, we saw a fairly substantial impact through the second quarter and its recovered some in the third as we saw the commercial business.
The commercial sector come back a bit.
In the end 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 due to businesses across our service territory do they go into some additional.
Phases shutdown.
So again, we tried to capture some assumptions around that in our guidance range of the three distant three to six cents unfavorable Jim.
Just difficult to predict obviously, we see this thing continue to unfold and it is included in that guidance range that we that we established and I mentioned on the regulatory front. We now have a deferral orders and 11 of the 14 jurisdictions and that really does cover.
Any exposures to bad debt expense increases.
Direct costs associated with the pandemic et cetera, so really the impact that fall through if you will is just the demand revenue changes.
That we might see across the service territory everything else to Madrid. Other direct costs are direct impacts are captured in those deferral.
Orders.
Got it and could you quantify just year to date, what those what the defer cost on now too.
It's disclosed in the Q.
I think if you go to that footnote in the Q, where we talk about kind of it specifically we've laid out the the Greg.
Greg assets recorded.
Net up some Greg liabilities I don't have that number right in front of me, but its laid out in the Q4 you under.
Understood.
Second question Walter I know you talked about increased communications with.
Various municipal utilities curbing the potential.
M&A and I know thats been ongoing every year, but just given the current environment and your point earlier on potential.
Our focus on nationally on on water quality and water infrastructure are you do you think all sequel, a year you should see an acceleration of any acquisitions by it because over the next two to three years versus the rate that you've seen over the past few years.
Yes, that's a great question and we're in many conversations with municipalities around the country. Its one of the reasons is the cobot impact, but there's still a lot of challenges around water and wastewater infrastructure and were solutions provider. So we're going to continue to talk to municipalities that were providing solutions.
Our pipeline continues to grow and we continue to talk to numerous apologies. So we'll see where that takes us typically it takes two to five years a complete these deals. So there was a delay from the time, you youre sort of talking to them to the time you take ownership, but we're we're very well.
We're very confident in our ability to provide solutions for communities.
Understood. Thank you so much.
Hey, let me just quickly tag on to that question. There. We do have a net regulatory asset of $26 million recorded at the end of September related to building.
Got it thank you.
Yeah.
Our next question comes from Angie Storozynski with Seaport Global Please go ahead.
Thank you so so long as you're in your prepared remarks, you had a comment about some one of the states I admitted you forget which one that has a legislation that.
That would provide for some adjustments.
Adjustments or non municipal systems water systems being acquired.
Remind me, which one it is and also in light of that I'm just looking.
Looking at your New Jersey Reiki settlement you any original filing you ask for this.
Acquisition adjustment mechanism.
Mechanism I don't see it in the settlement so.
So I just wonder if it means.
It's still going to be a dress or oh, the settlement basically doesn't cover it I <unk>.
The three acquisitions.
Well not to be left the goodwill is not going to be added to make space in new Jersey. Thank you.
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 the nine.
90 days after the emergency order is lifted is when they have to render a decision. So we don't have an exact time on it yet, but we're expecting that after the executive or after the emergency order is lifted.
Okay. That's in New Jersey, and you mentioned, some which are the state has has this potential.
Potential adjustments from non municipal system I know you mentioned that.
Yes, no its Indiana.
Okay. There is there is an appraisal process yet for the non municipal utilities and really around stabling fair market value and a reasonable purchase price. So yeah, Indiana has been a.
Leading state and 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.
Working with in Indiana legislature, and coming up with with bills that really affords us the opportunity to do that.
Okay.
I think that's all I have thank you.
Great. Thanks Angie.
As a reminder, if you have a question. Please press Star then one to be joined in the question queue. Our next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, good morning, Walter and Susan how are you all doing.
Good how are you.
Not bad so.
So.
Question around guidance midpoint to midpoint, you're raising that by four cents.
However, you know you're signing kind of a net seven eight cents benefit you know functions that were originally embedded in your guidance range.
So that kind of implies or core results were actually tracking down three to four cents.
From the original midpoint, what's kind of the driver cause of that.
Jonathan Let me, let me make sure I follow the question and maybe correct one thing I.
I think the midpoint, we're up six cents.
Rather than three four midpoint of four went out threeninety okay.
Yeah, and and that really just is driven by the weather implications you know that's that's the big driver of the of the change in midpoint I would say I think we we obviously didn't narrow the range a bit.
We again have continued to see a little bit more.
Recovery from the covered cost than we had anticipated when we were discussing this with you at the second quarter recall that our range was five to eight cents unfavorable we're now three to six cents. A is our current best guess at that obviously the business continues to perform fundamentally very very well, we've not seen any real slow.
So down in our investment opportunities so.
So that the underlying business is performing very well.
Okay, well, let me ask it maybe a little differently like historically, I guess investors have kind of been conditioned ADW can't coming in more.
More in the top half of their guidance range from you guys have done a good job executing so you know if it's.
The midpoint is being raised six cents you know despite seven eight cents a favorable items. So it kind of puts you.
Just a little below that original midpoint so.
Is there anything.
Anything you know that is causing that that headwind or you know expenses not not quite as good as your hoping or you know rate reliefs delays anything like that or.
No no not like just a couple of pennies, but just kind of curious no really no drivers of that nature. I mean again I think we are continuing to understand the impact of Cove. It from a short term and a long term perspective, but as I said the underlying business continues to perform quite well there. There's always you know a number of good.
And tanks 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 did you guys are going to roll out guidance in February should we anticipate you roll in the base year and forward one year from you know two.
2018 to 2019 or is there a chance you guys use 2020.
We're still looking at that Jonathan and I think Oh, you'll.
You'll just have to wait in February when we come out and give you a sort of the full plan I think as Walter indicated in his remarks, though you know you can expect to see a continued focus on investment in infrastructure and 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 and then I know, it's hard down nearly as much in Q3 EPS. It wasn't Q2, but how did the trends exactly shakes out on the residential side I think Q2 was up you know.
Only 5%, which was somewhat puzzling Aqua America, which have some general overlap with your service territories was up 10%, where where it was residential and Q3.
Oh I think we quoted that was the no and you can check to meet their team I think we said roughly 13%.
In the quarter and again, we'd laid out by quarter in the you can't can't yet residentials up 13.6%, 13.6%.
Okay. So that really came back strong or whatever and you really did and then commercial again, we saw as a you know on a year to date basis is really flat to the prior year. So obviously, you would expect growth right, but we.
We think back flat to year over year as an indication that you know across much of our territory, which again, we like the geographic diversity of our territory I'm as this thing rolls through the country different parts of the country are responding differently in terms of the.
Business Reopenings and we've seen that occur ER visits during the quarter.
Okay, Great I appreciate the time and talk to you guys soon.
Great. Thanks, John Yes, thanks, Thanks, Jonathan.
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 in the work you do on behalf of your clients. We hope are 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 will be happy to answer any questions. You have so again, thanks again and be safe for everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.