Q3 2022 American Water Works Company Inc Earnings Call
Good morning, and welcome to American Water's third 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 Erin Musgrave, Vice President of Investor Relations. Mr. Musgrave you may begin.
Thank you Sarah 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.
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.
Formation 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 September 30th 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 earnings per share.
Susan Hardwick, our president and CEO will discuss third quarter and year to date highlights and touch on 2023 guidance and our long term targets.
John Griffith, our executive Vice President and CFO , who will cover our financial results in more detail provide an update on active general rate cases, and acquisition activity and we'll close with further details on our 2023 and longer term outlook, including the overall financing plan.
Cheryl Norton, our executive Vice President and CFO will then discuss our capital investment plan rate base growth expectations and our focus on affordability.
Cheryl will then conclude with a review of some important new operating goals and disclosures that align with our focus on ESG will 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 as Aaron said, we have a lot to discuss this morning. In addition to third quarter results and specifically, we also want to cover today, our outlook for 2023 and our longer term targets.
As you know last year at this time, we shared some significant news when we sold our homeowner services business to transition to a pure play regulated water and wastewater utility.
In that update we announced a new five year plan and acceleration of capital investments and some adjustments to our financial targets.
The updates that will share today are largely an affirmation of last year's plan and targets with adjustments, primarily reflecting the shift out to 2027 and our five year outlook.
We will also share additional thoughts and plans around our continuing ESG journey.
So, let's dive in and turn to slide number five where I'll start by covering some highlights of 2022 to date.
And the first nine months of 2022 earnings were $3 70 per share compared to $3 40 per share in the same period of 2021.
Organic growth and increased earnings from infrastructure investments continue to be our year over year drivers for the quarter and year to date periods.
Favorable weather also added to results in the third quarter.
Though we generally like others are experiencing a higher cost environment. Our team continues to deliver on our financial and operating plans. This includes staying on track to achieve our total capital investment goal of $2 $5 billion in 2022, and executing on significant regulatory activities, including constructive settlements in two.
Of our outstanding General rate cases.
Further we continue to effectively manage and mitigate cost increases and have been successful in recent regulatory efforts to further lessen the impact of inflationary pressures into the future.
Regulatory solutions are very important to our ability to manage inflationary headwinds as we move into 2023.
So I'm pleased that we've successfully executed our plan so far this year in a challenging and very active period.
John and Sharon will provide additional details on financial operating and regulatory results later in today's call.
I move on let me comment about how excited we were to sign an agreement a few weeks ago to serve the nearly 15000 customers of the Butler area sewer authority in Western Pennsylvania. This is another great example of how partnerships with municipalities can lead to positive outcomes for customers employees and the community at large.
Our team worked very hard to understand the communities objectives and created an opportunity that we believe benefits all stakeholders.
Turning to slide six as announced yesterday, we affirmed our 2022 earnings guidance. We continue on track to meet our expectations for the year as we've indicated throughout the year and in addition, we haven't had the incremental contribution from weather this quarter.
So yesterday, we initiated our 2023 earnings guidance and $4.72 to $4 82 per share. This near term plan as well as our longer term plan remains very strong and with our record of execution. We are confident in our ability to achieve our earnings expectations for 2023.
Later, John will talk more about the drivers of our growth in 2023, but our expected growth builds on the accelerated Capex plan, we put forth last year as we've said many times the full effect on earnings growth from the increasing capital spending will ramp up over time John .
John will talk further about our updated financing plan, but this plan reflects our prior discussion that the growing investment plan will result in regular access to equity capital.
As we've illustrated on this slide we expect our investments in infrastructure and regulated acquisitions to drive significant earnings growth through 'twenty seven and beyond.
Finally on slide seven I want to make a few comments about our purpose here at American water and how that drives our growth strategy, our operating plans and our company's targets and goals.
Our mission is to provide safe clean affordable and reliable water and wastewater services to the communities across the country. Our services are vital to sustaining life. So.
So while much has said in the news about the clean energy transition that's happening what drives US every day as an equally important need in our country. We believe that everyone should have access to safe clean affordable and reliable drinking water and wastewater services and that communities are stronger because American water has the privilege to serve them.
It is true that we have many similarities to other utilities and we embraced the knowledge sharing and best practices that can come with those similarities in fact, we joined <unk> as a strategic partner a few years ago because of common values around customer service safety and cyber security to name just a few and as many of you know I've spent most of my career in the gas and alike.
Electric industry, so I have a deep appreciation for the utility industry as a whole how.
However, the water industry and American water also have some important differences from other utilities are capital projects. For example are much smaller on average than those in the electric and natural gas industries, even though they add up to a similar and very significant investment need.
Another difference is our greenhouse gas emissions footprint, which is very small compared to most other publicly traded electric and gas utilities.
That said, we are seeing the impacts of climate variability.
Can have through more extreme droughts or more severe floods. We strongly believe we must do our part to reduce overall greenhouse gas emissions. We have now set ambitious greenhouse gas reduction goals.
Including achieving net zero by 2015.
Along with our goals for system, resiliency and water use and efficiency, we see our greenhouse gas reduction goals as part of our commitment to provide superior and affordable service to our customers.
We believe American water is the leader and a clean water and wastewater transition in the United States.
The communities, we already serve and the communities. We hope communities, we hope to serve in the future the capital investment needs that are required to deliver more sustainable water and wastewater services are immense.
It's up to us to find ways to balance those capex needs with the affordability of services for our customers. That's why we've added a customer affordability targets to our list of key drivers you see here as a company. We also continue to raise the bar on our efforts to create a fair and equitable place to work in addition to making sure our operations align.
The spirit of environmental Justice.
Two recent examples of our broad focus where the recognition through the 2022 water since Excellence award from the Environmental Protection Agency and the 2022, leading disability employer by the National organization on disability.
Sheryl will provide some examples later of the good things we're doing internally in these areas.
Finally on this slide you can see we are affirming our long term earnings growth targets and most of our other long term financial targets remain unchanged.
During our planning process. This fall, we decided to narrow our long term dividend growth target to 7% to 9%, which maintains our position in the top tier of dividend growth and payout ratio in the industry.
Our long term dividend growth target now fully aligns with our compelling EPS growth target of 7% to 9% and the significance of our capital investment plan and related financing.
This minor adjustment rounds out our strong long term plan and will help us achieve our other important financial targets over time.
In summary, we believe the combination of our EPS and dividend growth supported by significant and yet low risk capital investment plan as well as our ESG leadership premium and constructive position on affordability will continue to be rewarded by investors based on the long term plan and our history of executing on our strat.
<unk>, we expect to continue to deliver a very competitive sustainable shareholder return for many years to come.
And with that I'll turn it over to John to cover more detail on our 2022 financial results, our 2023 and longer term outlook and our financing plans John .
Thanks, Susan and good morning, everyone turning to slide nine let me provide a few more details on third quarter results regulated results in total increased <unk> 16 per share compared to the prior year. We saw a 32 per share increase related to higher revenues from new rates acquisitions and organic growth.
Also weather was favorable by an estimated seven cents per share year over year, due primarily to warmer and drier conditions in 2022.
O&M and other expense increased by <unk> 10 per share, which reflects an estimated seven of inflation on chemical power and fuel costs and higher interest rates depreciation expense also increased <unk> per share in support of growth in the regulated business and as you know 2021 third quarter results.
Included <unk> <unk> per share of operating earnings from our former New York subsidiary.
Finally, the market based business and other results decreased in the third quarter of 2022 is the <unk> per share of operating earnings from HOS and the third quarter of 2021 was offset by the <unk> <unk> per share of earnings in 2022 from interest income and revenue share agreements moving to slide 10.
Consolidated results increased <unk> 30 per share for the year to date period compared to the same period last year driven by many of the same factors as in the third quarter, while I won't go through all of the details of the year to date results in short we are pleased with our financial performance over the first nine months of the year.
Our leaders across the business have adjusted to the changing economic environment in 2022 their ability to do so has put us in a good position to achieve our full year operating results. We laid out in our initial 2022 guidance a year ago.
Let's turn to slide 11, and cover the regulatory activity and 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 efforts reflect susan's comment on our team's ability to execute our regulatory strategies, which is a critical success factor for continuing to grow our business as we've said before the common thread in all of these cases is the focus on recovery of infrastructure investments made since the last round of rate cases totaling.
Over $4 billion and in some states the roll in of acquisitions as we continue to ramp up capital investments in 2023, it will take time to see recovery of those investments and rates. We continue to expect to file general rate cases, generally every two years and our bigger states as.
As we have already communicated in August 2022 through New Jersey, <unk> approved the settlement of our rate request authorizing a total annualized revenue increase of approximately $61 million. The new rates became effective on September one 2022.
Two key outcomes in this case, where the incorporation of our request to update estimates of production costs, including chemicals fuel and power costs and the approval of deferral accounting for pension expense beginning January one 2023, the success of our proactive regulatory approach to these pressures will lessen the risk.
To shareholders into the future.
Turning back to active cases, you can see we have general rate cases in progress in five jurisdictions and two of these states, Pennsylvania and Virginia, We have reached settlement agreements with the parties and have on file petitions for approval of the settlements in Pennsylvania, We filed a general rate case in late April <unk>.
Recovery of $1 $1 billion of investments since the prior case. The settlement provides for a total annualized revenue increase of $150 million and incorporates updated estimates of pension and <unk> expense similar to New Jersey. The settlement also includes increases in production costs.
<unk> chemicals fuel and power costs.
In the coming weeks and administrative law Judge will review the settlement filing and render a recommendation to the Pennsylvania Commission regarding approval of the settlement.
After its review the commission will issue a final order we expected the order by January 2023, with new rates to be effective as of January 28 2023.
Moving onto Virginia in late September a settlement agreement supported by all parties, except one was filed with the Virginia State Corporation Commission and provides for a $12 million annual revenue increase compared to our original request of $15 million. A final decision. In this case is expected in the first quarter of 2010.
<unk> III and.
In Illinois, where its been about six years since our last general rate case progress has been steady since our February filing and last Friday, a proposed order was issued by the cases administrative law judges. We view the key terms of the proposed order is very constructive including recommended approval of our updated revenue request.
To capture a higher production costs and expected higher pension costs, we expect a final order in the case by January at the latest our cases in California, and Missouri were filed in July and are progressing as expected. So far in January of 2023, we will file an update in Missouri for costs and other elements.
<unk> of the case as needed with hearings to be held in February we expect the case to reach conclusion by the end of the second quarter 2023.
On the Legislative front, there was one additional notable piece of legislation signed since our second quarter call, California Senate Bill of $14 69, which allows the commission to consider and authorize the implementation of a decoupling mechanism.
<unk> was signed by the Governor on September 32022, and will become effective on January one 2023, our California subsidiary is grandfathered into the previous water revenue adjustment mechanism through the end of our current rate case or 2024, and the team is working to renew decoupling under the new Mecca.
And the general rate case that was filed July one for our next rate period, beginning in 2024.
Turning to slide 12, and the acquisition piece of our growth triangle as Susan mentioned, we were excited to announce in October our agreement to purchase the Butler area sewer authorities wastewater system for $232 million. This agreement was executed under Pennsylvania is fair market value legislation, which is a framework.
That exists across 11 of the states in which we operate.
Through September we have closed on $308 million of acquisitions in 2022, which represents about 65000 customer connections and we're excited to have nearly $350 million of signed purchase agreements through October which sets us up for 2022 and 2023 to be.
Wrong years for growth through acquisitions with a pipeline of over $1 3 million customer connections. We expect it to continue this track record of success.
On slide 13, we provide some considerations regarding our outlook for 2023 results and our EPS guidance range of $4 72.
To $4 82 per share.
First as you would expect our growth will be driven by capital investment to serve our customers and earning a return on that investment as we've talked about previously 2022 is year one of our accelerated Capex plan. So it will take some time to ultimately see the ramp up reflected in earnings recent regulated acquisitions.
That are being incorporated into active or just completed rate cases will also drive growth next year I would like to add that our military services group does add incrementally to our earnings growth expectation as we have continued to show on our growth triangle.
23 results will benefit from Msg's successful addition of its first Navy contract that we announced earlier this summer.
Just as critical to our strategy is our ability to recover in rates the operating costs. It takes to run the business, which goes to my final point on the slide the regulatory solutions, we are pursuing such as cost deferrals and expense recovery mechanisms are closely aligned with the interests of regulators and customers and managing affordability.
<unk> and limiting variability of customer bills, which ultimately aligns with our investors' interests as well.
As we conclude this current round of rate cases, we expect to have in place regulatory solutions for over 75% of the inflationary costs, we anticipate in the near term, including pension interest and production costs.
And as always our team remains vigilant and disciplined on cost management.
Finally related to pension I would simply remind you that our pension obligation remeasurement will be done at year end 2022, and that will drive the determination of our 2023 pension expense.
Wrapping up the 2023 outlook on slide 14 here, we are providing some more specifics regarding the key drivers for 2023 that I just discussed this slide demonstrates the importance of our regulatory execution and the results. It drives. It also reflects the financing plans, we expect to execute in 2023.
To support our capital investment plan, which is an additional $1 billion over the next five years as compared to last year's plan. You will notice that we have included a bar for incremental debt and equity financing, which reflects the cost of incremental debt issuance in 2023 to support our growth as well as <unk>.
Equity to be issued in 2023, which I will address on the next slide our cost of increased interest rates on 2022 debt balances is captured in the cost inflation and interest rates bar. The majority of which is being recovered through the current round of rate cases. As just described we are confident in our ability to look to do.
<unk> on this plan for 2023.
Turning to slide 15, I'll provide a financing plan update before closing with a look at our balance sheet and liquidity profile. Our financing plan. Now includes an estimated $2 billion of equity issuances from 2023 through 2027, which is an update to the $1 1 billion of equity financing need through 2000.
26, we have previously discussed consistent with our prior messaging on mid plan timing subject to market conditions, we are likely to raise a significant portion of the total planned equity in 2023, the increase in the anticipated total equity need is driven largely by the $1 billion of increased capex that extent.
Through 2027, and this new plan, along with adding some incremental balance sheet capacity. The remaining portion of the $2 billion of planned equity not completed in 2023 is expected to be issued near the end of the five year plan as we've said for several quarters now we expect equity will be irregular financing tool going forward.
To help fund our growth and maintain a strong balance sheet.
Let me conclude by turning to slide 16, with a reminder, that we have a strong balance sheet and credit profile I'm confident our new five year plan is supportive of our current credit ratings as well as our long term financial target of less than 60% debt to total capital another.
Another thing I'll point out is our debt maturity profile at the bottom left of the slide we believe these levels along with our planned debt issuances are very manageable in a rising interest rate environment. It's important that the company has taken a ladder approach to long term debt financings over the years in order to minimize interest rate risk.
And as a utility that predominately invests in long term assets I expect us to continue to exclusively issue fixed rate long term debt to protect against the risk of interest rate volatility on liquidity. We continue to remain confident that we will have sufficient access to capital for the foreseeable future in fact, we just.
<unk> announced that we increased our commercial paper program and our revolving credit facility by $500 million each to $2 6 billion and $2 $75 billion, respectively, and we extended the maturity of our revolving credit facility to October 2027, we believe these actions where appropriate to support our growing.
<unk> and increased capital investment plan.
With that I'll turn it over to Cheryl to cover our Capex and rate base growth plan affordability, and some new sustainability goals in more detail Cheryl.
Thanks, John and good morning, everyone on slide 18, I'll start by talking about our updated capital plan I want to first acknowledge that our teams have done a great job executing on our accelerated capital investment plan in 2022, we're on pace to meet our overall capital plan of $2 $5 billion. This year, which includes acquisition investments.
Looking ahead to 2023, we plan to again step up our investment level. This time to roughly $2 9 billion.
Which will generally be our new annual threshold for the next several years as John just mentioned over the next five years, we expect to invest approximately $14 billion to $15 billion, an increase of about $1 billion over our previous plan.
This increase is mostly driven by including the increased investment for 2027 in the five year window as well as about $250 million of inflationary impacts expected in the near term.
We expect this pace of spend to drive our current pipe replacement cycle plan, lower and much better than the industry average on the longer horizon, you can see that we plan to spend approximately 30% to $34 billion in our regulated business over the next 10 years.
We see this capital plan to be largely in line with last year's plan, reflecting the higher annual run rate as well as modestly higher cost for pipe and other capital goods.
Turning to slide 19, this graph illustrates that our continued execution on capital investments both infrastructure projects and acquisitions are succeeding in growing the regulated business at a long term rate.
Of 8% to 9%.
Rate base growth of course will drive earnings growth as long as we continue to prudently invest in our systems and successfully execute the regulatory process.
Moving onto our regulatory recovery strategy on slide 20, our theme here is around timely consistent recovery of investments and operating costs when.
When we achieve timely and consistent recovery it levels out bill increases to our customers, which helps promote affordability.
It's beneficial to our customers that we operate in states that have constructive regulatory mechanisms.
We've engaged with policymakers and regulators for well over a decade to find the best ways to invest in water and wastewater infrastructure, while putting the customer first in the states, where we operate 27, new mechanisms have been added over the past 12 years as water and wastewater industry challenges grow will continue to focus on.
Constructive regulatory and legislative outcomes.
I'd also like to discuss timely recovery of our investments across our footprint with the Pie chart on the right side of the page.
Through capital recovery mechanisms and forward test years were able to reduce regulatory lag and lessen the reliance on general rate cases.
This enables us not only to earn our allowed return, but also to mitigate the size of the general rate increases for our customers.
We expect about 45% of capital investments over the next five years to be recoverable through infrastructure mechanisms, which is the key to unlocking a more consistent annual earnings growth pattern for the long term.
Turning to slide 21, our focus on operating efficiency has been a part of our company's DNA for many years as you know, we've historically used O&M efficiency as one of our benchmark metrics to measure our success at managing costs as we grow the business.
This focus positioned us well to manage through much of the pressure over the last couple of years on the supply chain and even cost increases brought about by the effects of the pandemic as.
As we look ahead, we've been asked if we can go below the 30% efficiency threshold while.
While we're continuing to evaluate that question. We've continued to emphasize that revenue growth has been just as important to our success with O&M efficiency as managing costs. So with that realization in mind, there may very well be additional opportunity to go below the 30% threshold. However, we're analyzing whether this is the best <unk>.
Trick by which to judge our effectiveness at managing costs and running an efficient business.
Moving to slide 22, one of the most difficult challenges we face in the water and wastewater industry is balancing customer affordability with the magnitude of the system investments that are needed thankfully as we sit here today, our industry and our company are in very good relative positions in terms of affordability or wallet.
Sure.
In fact as investors and analysts study the sustainability of American water's long term earnings growth potential we believe our affordability proposition is an important consideration.
We realize though that we must continue to evolve our strategies around rate design in programs to assist our customers who are challenged with affordability.
Just also consider our focus on technology.
Efficiencies of scale and a sharp focus on cost management in order to deliver on values around customer affordability.
Moving on to slide 23, and as Susan mentioned earlier, we are excited to announce our new science based greenhouse gas emission reduction goals and our first disclosure of estimated scope three emissions before we dive in I will walk you through our greenhouse gas emissions profile in a bit more detail.
As an essential service provider American water is often compared to the broader utility sector emissions included which can be misleading.
As Susan noted earlier is an important distinction that our emissions footprint as a water utility is much smaller than most publicly traded gas and electric companies on both an absolute and per customer basis to help put it into context American water represents just 0.1% of the total scope one and.
Scope two emissions produced by the top 20 largest U S utilities measured by market cap.
As we show on this slide our total emissions footprint is made up of 7% direct scope, one emissions such as heating cooling and fleet.
<unk>, 44% indirect scope, two emissions or our purchase power and 49% estimated scope three emissions, which for US largely includes purchase goods and services capital goods and fuel and energy related activities.
Framing it in a different way more than 90% of our overall emissions footprint is generated from external sources, which is another key differentiator from most other utilities.
Turning to slide 24, there is a lot to unpack here.
Let me say first at a high level. We believe it is prudent for our company to focus our efforts on environmental initiatives that are in the purview of a water utility and aligned with our core mission.
Our view is that greenhouse gas emission reductions fit as part of our sustainability strategy that over time will help protect customers against service disruptions from more severe weather patterns, such as droughts and floods.
We believe we've set forth new compelling goals to support this strategy.
First we expect to reduce our absolute scope, one and scope two emissions, 50% by 2035 from a 2020 baseline.
Second we expect to achieve net zero scope, one and scope two emissions by 2050.
We believe these new medium and long term emissions goals are rooted in science and aligned with the Paris agreement. We also believe our approach is a responsible path that considers all of our stakeholders interest, including doing our part by setting ambitious reduction goals.
Our approach here will allow us to stay on course with our customer affordability metrics as we continued to deliver clean safe affordable and reliable water to our customers.
This was a foundational component of our analysis and recent discussion with our board level Sito Committee, which oversees our safety environmental technology and operations efforts.
It's also important to note that as we deliver water and wastewater solutions to more customers over time through acquisitions and organic growth our energy usage is going to increase.
We will re baseline each year to account for our growth through acquisitions of systems, which is an acceptable practice under the standards of the science based targets initiative or <unk> we.
We did consider making a commitment to <unk> as part of our analysis. This year. However, we concluded that some of <unk> expectations around scope three commission commitments, mostly around timing, we're not in the best interest of our stakeholders. We do expect though to continue to work with our suppliers and vendors to <unk>.
Consider what can be done to reduce scope three emissions over time.
And as I stated, we are confident that our new medium and long term scope, one and scope two goals are science based and aligned with the Paris agreement.
As you can see at the bottom of this slide these are more than just goals, we have plans in place and capital ready to deploy to achieve these goals, obviously with greater visibility to the path to 2035.
Since our footprint is heavily weighted by scope two emissions. The continued greening of the electric grid is a significant component of our reduction plan, we hope to see that transition continue by our fellow utilities and other providers for us, though we know that it is cost prohibitive and outside of our core competence competencies.
To self generate all or even a significant portion of our power needs.
We will though continue to look to enter into clean purchase power agreements or partner on renewable investments where appropriate similar to our engagement with new Jersey resources on the floating solar array at one of our treatment plants in New Jersey.
Lastly, we will continue to focus on emissions reduction activities that we can control within our operations. This includes water efficiency and operational efficiency gains in order to reduce the energy and emissions associated with the pumping of water, which we disclosed previously is by far the largest driver of our purchase power needs.
Capital projects will include the deployment of additional leak detection technologies and more efficient water pumps across our systems as well as converting some of our fleet vehicles and other assets to more efficient options. These are small but important pieces of our plan.
And in large part these capital investments will align perfectly with some of our existing reliability and resiliency goals.
Next let's turn to slide 25, and discuss some new disclosures related to our continued ESG journey.
First soon we will release summary results of our most recent pay equity study on our <unk> website diversity at AWS Dot com.
This is our third such pay equity study and each time, we have engaged a third party consultant to conduct an objective pay equity analysis.
I'm pleased to share that you will see that we're very close to achieving pay parity across employee groups, including gender. Our performance is a testament to American water's commitment to fair and equal pay and how our teams have leveraged findings from these regular assessments to correct any qualities and update processes around compensation.
We will also share some initial summary findings of our internal labor market analysis that began in 2021.
This analysis was also led by a third party firm and was commissioned because we believed a factual and statistical analysis of our workforce was needed to support our holistic evidenced based inclusion diversity and equity strategy.
Lastly, I'd like to touch on two of our new goals that were established earlier this year in our annual performance plan. The first is to increase representation of female employees at American water and the second is to increase ethnic and racial diversity among American water employees.
Both of these goals complement existing safety and environmental sustainability goals that are tied to annual performance plan compensation for all employees as mentioned earlier these goals reflect our company's focus on social benefits that we believe will help us operate as a stronger company ultimately for the benefit of our employees and to help us better reflect.
The customers and communities we serve.
Whether it's our ESG leadership or our consistent execution on our earnings growth goals or our leading safety culture. Our team in American water has consistently raised the bar for success in the water and wastewater industry.
We have full confidence in our ability to achieve the goals, we talked about today for 2023 and beyond.
So with that I'll stop and turn it back over to our operator to begin Q&A and take any questions you may have.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys.
And withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Andrew <unk> with <unk>. Please go ahead.
Thank you.
So so first of all on 'twenty three guidance.
It's.
I guess, it's a relief all of us to see that your messaging to get to.
Consensus expectations, even with the increased.
Basically equity needs that you're addressing in 2023. So so I mean is it basically that your front.
Front end loading equity to finance Capex that will materialize in the latter part.
Of that five year plan and as such it.
It's not only that the capex is back.
And loaded but it's also that there is some incremental dilution that sort of weighs on those 23 results.
Well good morning Angie.
A lot in your question there and let me maybe just comment high level and then I'll have John jump in and talk a little bit more around our.
Thinking around equity in.
The plan there.
Recall from our I guess really the last few years as we've talked about.
Our equity needs in our expectation around that we've been signaling sort of mid plan and we released that guidance.
Two plus years ago. So I think this 23 timing now that where.
We're giving a little bit more insight into is consistent with our prior messaging.
The increase in the size of the equity that we now have in this plan I think as we've highlighted really has to do with the increased capital.
Over the course of the five years and Cheryl indicated that we're kind of stepping up to roughly a $2 $9 billion investment per year over that five year period.
So there is more capital coming in throughout the entire five year focus of the plan and then we've also.
<unk> added a little bit of additional equity expectation here just to.
Create some additional balance sheet capacity as we think about that going forward.
The important thing I would comment on around your opening comment around.
Hitting expectations for 'twenty three.
I just want to underscore again, what we said in our prepared remarks around our regulatory approach to these inflationary costs, we have been very proactive.
In trying.
Trying to get our hands around what we thought those impacts might be and we have worked very closely with regulators to try to build in.
In these existing cases, we're working on the coverage for those costs and I think we've said something well over 75% of those expected costs in the near term. We have built in these cases that were ramping up now so I think.
I'd say again, just summary, the equity plan is pretty much on track with what we've said historically.
And the increase in capital is driving the bulk of that need.
Of additional equity in the plan and then.
Our proactive approach on regulatory is absolutely part of our ability to to be confident about our expectations for 'twenty three.
So John anything to add on the equity piece.
Good morning, Angie I would just add that as we think about how we are delineating delineating the equity.
As we said in our prepared remarks.
We'll issue or we expect to issue a significant portion of the equity in 2023.
As we think about the consequences of that.
Based on how we trade I would characterize that the <unk>.
Dilution associated with that is relatively modest and then as also we pointed out in our remarks, whatever we don't.
Issue in 2023, we would expect to issue.
In the back end of our plan.
Good Okay, and then changing topics a little bit and I know, it's not your core competence, but but you are a cash taxpayer. So you do have cash appetite I mean, now toxophilite I'm, sorry, so why not.
Develop or at least one some of those renewable power plants that you are currently contracted under a PPA so again.
<unk> strategy as opposed to.
Like a true growth driver.
Yes, I think it's a good question, Angie, but I think Cheryl hit on it.
And you did even in your remark there we just don't view it as our core competency there are folks that are.
Sort of in that business and we believe we have the opportunity to work closely with them to develop solutions and take advantage of those renewable sources that are out there without owning them.
We've got enough to do when you even acknowledge it's not really a growth driver.
We've got plenty to do on just our investment side to continue the growth. So we don't need it from that standpoint your observation around tax I think is also a good one but.
I would tell you we think we have.
The right strategy here too.
Finance this plan and manage all of the elements of the requirements in that plan with what we've laid out here. So while we're always interested in and it's been a quite a bit of time on tax planning and tax strategy. It just does not.
<unk> it.
It doesn't fit our profile.
Okay and last one really quickly. So you have had some big Muni Muni deals announced since the second quarter earnings call I think we've all been concerns about some of those high profile at privatizations.
All of that wastewater systems falling through so.
Are you seeing that there is any sort of a systemic change to how municipalities look up sales of our water.
Water and wastewater systems or is it just very much.
Kind of system specific.
Yes, Andrew let me just turn it to John and have him sort of weigh in on that question.
Yeah, Angie I would say I'm glad you asked the question because our answer is no. We haven't really seen a fundamental change in the landscape for making acquisitions. So there's certainly been some noise out there around particular deals, but really nothing has changed there is a huge number.
<unk> systems out there.
Many of which are under invested and are ripe for a potential acquisition and when we think about the footprint that we have and the focus that we have.
We continue to very much like our relative position, there and regulated acquisitions will continue to be.
A key focus area for us and I, just would add to that simply that.
We work very hard.
In cultivating these opportunities to make sure we're developing the right solution for these communities.
And I think that's a big advantage for us.
Our next question comes from Shah <unk> with Guggenheim Partners. Please go ahead.
Hey, guys good morning.
Good morning Shar.
Couple of quick ones here.
If I recall correctly, the HOS sale ate up a lot of your I think NOL carryforwards, and you've been a cash taxpayer. This year is it your expectation that youll be subject to the minimum tax going forward does this latest financing plan kind of embed an ongoing assumption for that.
Well the first part of your statement is correct yeah, the gain on the HOS transaction.
Sort of advanced us to being a cash taxpayer.
Evaluating what the IRR means.
And you know the alternative minimum tax and financial income greater than $1 billion, there's still lots to be sorted out in terms of what the final rules are in the final interpretation of those so we're monitoring it closely we've obviously modeled a variety of scenarios around it and I would just say.
In all of those scenarios this plan.
Adequately covers any exposure, we think we might have there.
Got it okay, perfect and then I think John May have touched on this a little bit but it looks like the amount of capex dollars allocated to regulated acquisitions. The same as the prior plan. So slightly smaller overall proportion anything to sort of read into here is the opportunity set fairly fixed are you getting more.
Active just maybe a little bit of an elaboration on John's comments. Please.
John you want to take that sure Shar.
Say the smaller proportionality is really just a function of the increase in the.
The regulated our organic capex.
I'd say the.
Which has more visibility attached to it as you know than regulated acquisitions. So in no way are we kind of decreasing our thoughts around putting dollars to work on it regulated acquisitions.
We continue to feel very good about that and I don't think we highlighted it really much on this call but are.
Our pipeline remains in excess of $1 3 million connection opportunity, so still very very strong.
Lots of good work in that area.
Got it and then just.
Just last one for me is just the shape of that 7% to 9% I mean, obviously you guys youre executing on the regulatory fraud, you've got a good footprint.
Some dilution, but I guess, what else should we assume I.
I guess as we're thinking about modeling and the extension what are you sort of within that range as we're thinking about like the near term versus the longer term as we're just thinking about the profile of that shape.
Yes, I think it's a good question and I'll just repeat what I've said several times now and I do think you can tie it back to the HOS sale recall, our discussion about a year ago that.
When we sold that business in this transition to sort of full utility.
The the opportunity created by that sale.
Would result in a ramp up of the spin so it takes us a while to get that spend fully deployed and get it fully and rates.
So I'd say in the near term like you see a little bit in 'twenty, two and in our guidance for 'twenty three which we think is quite strong. There is obviously a ramp up still reflected there and we've got the proceeds that will come in from the note on the HOS sale at the end of 2006.
So again, you think about that sort of working its way into the plan I just say what we've laid out in 'twenty two and 'twenty three is reflective of that ramp up our view continues to be this long term growth rate of seven to nine.
We see that extending well into the future.
And we just got to get through this sort of ramp up period.
And you'll see that that.
That growth rate continue.
Terrific. Thanks, guys ill see in a couple of weeks I appreciate it.
Alright, Thanks Shar.
Our next question comes from <unk>, Kim with Goldman Sachs. Please go ahead.
Hey, Thank you first just going back to the your comments on the financing, especially the equity.
I appreciate your commentary on the bulk of it potentially being and 0.3 I guess is it.
Possible that when you assess the various equity options that you could potentially look to price that equity in 2000, and 2022, but look to draw that down in theory, just given market volatility.
Yes.
Yes, I think market conditions, certainly play into our decisions here around timing and ultimate size in the tool that we use.
So that's obviously still in all of our discussions internally.
John anything you want to add to that no.
Right.
I'd say that we're not.
Expecting to issue in 2022 into.
So as I said everything is subject to market conditions.
Got it.
And then that 79% EPS growth rate should we assume that it's now kind of basing off of 'twenty three guidance or should we still use.
'twenty, one or 'twenty two.
Yes, it's a good question and obviously, we get this question a lot and.
I'm confident in my answer will frustrate you argue is that it is a long term growth rate.
We would expect that 7% to 9% to two.
B the guidance regardless of the period that you are looking at.
<unk>, we actually don't really use a base year to do the math off of.
Our view is it's a long term growth rate I know in the past we have used sort of prior year actual your latest actual information to base off of but again, our view would be it doesn't really matter. The long term growth rate is really the driver.
Got it thought I'd try.
And then just one more I apologize maybe for Cheryl.
The EPA may be sold this year.
You're on track to put out some mandates related to people up the fos and other contaminants.
At the macro level just based on your operations in your jurisdictions how would that.
Gift giver.
Given what could come out how could that impact your capex or O&M strategy a bit.
Yes.
Great question, and we do anticipate that EPA is going to release those.
Those regulations later this year and because we don't know exactly where theyre going to fall.
A little hard to to kind of put a specific dollar amount on it but we have a really good.
Handle on what we have across our system and what the needs will be depending on what those EPA regulations come out at and we're prepared to invest the capital needed to put treatment in place right away. We have gotten we found it to be a very quick.
Quick process to design and get treatment online wherever we may need to so we know what we've what we've got out there and we kind of know what to expect depending on what EPA comes out with so we just have to wait and see we don't want to spend more capital than we have two but we also want to make sure that we're meeting the regulations as quickly as possible and protecting.
Our customers.
Got it thank you.
Thanks Sue.
Our next question comes from Julien Dumoulin.
And Smith with Bank of America. Please go ahead.
Hey, good morning team.
How are you guys congratulations sir.
Thank you guys. Thank you guys Hey, just wanted to follow up I know, there's a lot of questions about the growth rate. What's the base here is the starting point here are we talking about $3 23 at this point or where are we.
Rolling forward to 2003 for the 7% 9% outlook, if we could just start there.
Well Julien as I said to ensue.
Don't really look at it that way our view is the long term growth rate of seven to nine is the answer.
So our view is you can start within a year, you want and you're going to get the same result.
Okay, Alright, sorry, I, just I wanted to just press a little bit alright.
Alright, and then if I appreciate it's a little bit.
I'll always checking here.
If I can speak a little bit about the trajectory, though as you think about the commentary I heard your earlier response on equity dilution for 'twenty three what does it say for 'twenty four vis vis within that range, obviously 'twenty three being at the lower end of the seven to nine.
Think about rolling forward that dilution it seems like more so into 2004 do you think that again to seven Tonight is quote unquote back half weighted regardless of whatever time period, you want to use.
Yes, I think John's comment about the impact of dilution is really the right. One our view is that the dilution is pretty minimal from.
From the issue that we're anticipating in 'twenty three I think the real driver is.
<unk>.
The ramp up of the Capex I mean, we.
We're just putting these dollars all to work we've got the proceeds coming in again from HOS and 26.
As we.
Continue to see that ramp up work its way through the plan you'll start to see towards the back end of the plan more consistent growth rates.
Alright excellent no fair enough and then just lastly.
Just to clarify some of the earlier conversation about the the cash tax rate what are the planning assumptions reflected in the guidance here as you think about 'twenty two 'twenty three et cetera, just trying to baseline ourselves here if you can.
Well I mean, obviously, we are a full cash taxpayer now.
So this five year plan reflects that the comment earlier around what does <unk> mean to us in terms of the alternative minimum tax I mean again theres still many rules.
And definition still to be done around that.
I don't think any of us know exactly how it will work, but I would just reiterate what I said a minute ago, we've modeled a variety of scenarios all of which fit in this plan that we've laid out here.
Excellent well. Thank you so very much for the time, all the vessels <unk> alright.
Thanks Julien.
Our next question comes from Richard Sunderland with Jpmorgan. Please go ahead.
Hi, good morning, Thanks for the time today, just starting on <unk>.
Already in 2023 guidance.
The 25 to 2009.
Inflation and interest rates.
75% of that covered in rates.
On the pension side, because that kind of baked in your estimate of the current marks and so fair to think about extreme market moves from here and the interest rate backdrop.
Much of upside or downside versus this outlook just curious what you've baked in on the assumptions are.
Yeah, It's a good question.
And as John said in prepared remarks, obviously, we will measure at the end of the year and determine what our actual 23 expenses once we get to the end of the year, but how we've handled this from a regulatory perspective is for the most part what we have gotten achieved accomplished here is whatever the 'twenty three expense ends up being that's what we will.
Get reflected in rates.
So.
We've lifted a little bit open ended in the regulatory arena, where we will actually set it at that the number once we know what the number is and in other situations. We've estimated what we think the impact will be based on.
Year to date performance and expected performance for the balance of the year.
Okay.
Okay understood and a gift to tackle the other side on chemicals fuel power.
Is that effectively a reasonable assumption in terms of rolling forward to 'twenty four as well.
The current environment persists or is there specific.
Shouldn't kind of incremental regulatory activity.
Coming down the road here.
To mitigate even more of that in the 24.
Yes, I think what we have accomplished so far in the regulatory arena, obviously will will.
<unk> be in rates until we adjust rates again.
And I think we'll have continued opportunity in the regulatory arena to address.
These cost impacts in other jurisdictions and again in some cases the ability to adjust for what the actual costs are in existing cases or in existing jurisdictions.
Just depends on how we addressed it in each in each specific.
State.
I think again overall conclusion here is we've got the vast majority of these costs covered and should not really be a drag on our expectations going forward.
Got it that's very clear understood and if I could just sneak in one more on 'twenty. Three is there any step up that you expect on the revenue share related to the homeowner services transaction or I guess, just curious in terms of walking with year over year on the hot side it looks like effectively.
Steady contributions less.
Post closing adjustments of 22, it's like we've got the right way to be thinking about it.
Yes, I think that's probably the right way to think about it we are continuing in the jurisdictions are states that don't have those agreements in place, we're continuing to evaluate those opportunities and working very closely with with now the HOS ownership or leadership to see if opportunities exist. So it's.
Very active part of our business plan.
Great. Thank you for the time today.
Sure. Thanks rich.
Our next question comes from.
<unk> Chopra with Evercore ISI. Please go ahead.
Hey, good morning team thanks for.
Squeezing me in here.
Good morning, Good morning, Susan just.
Congrats by the way on the on the revenue execution here year to date.
You guys have done.
Put a phenomenal job and great outcomes.
Hum.
On the acquisition side of things can you update us.
On where you stand year to date were seer targets I think this year.
Planning on hitting $500 million in acquisition. So could you just update us there and then I'll follow up.
Sure John do you want to handle that.
Yeah sure good morning, Josh.
We're on track.
I think we've closed about 65000 customers today.
With another five or so thousand customers to come I would say that.
On a dollars basis as we disclosed in our.
In our slides are expected.
Closings.
For the year will be in the neighborhood.
Of of $350 million.
Which as you know we target.
$3 million to $400 million a year, we've said over five years, we're one $5 billion to $2 billion.
On a run rate basis.
10, 15 looking for this year, Okay, and then maybe I was just.
And I don't want a frontrunner equity process, but just anything John you can share in terms of.
What are you looking for in terms of valuation or our price ranges for this equity I understand significant portion is expected to land next year I mean, any additional color that you can share with us there.
No I wouldn't say we.
We think of in terms of specific price range is obviously will.
We'll be very cognizant of market conditions.
But I would say, we just we think of it more in terms of what we've messaged in the past which is.
The equity from our mid plan perspective.
We approach 2023 here.
Is mid plan relative to our historical messaging.
Got it thanks for the time guys I appreciate it.
Thanks for that.
Our next question comes from Steve.
Fleishman with Wolfe Research. Please go ahead.
Yes, hi, good morning, Thank you.
Good morning, So hi, Susan so just on the.
Couple of questions related to the.
Equity and balance sheets and the.
2023 guidance are you kind of assuming.
That is kind of average.
<unk> over the year or beginning of the year just.
Just kind of.
How are you incorporating that in to the 23 guidance.
John you want to take that sure.
Yes, I think Steve that's a fair way to characterize.
'twenty three for modeling purposes, I would say I think that whereas we used to.
<unk> portion of our equity I think you can think of that as is north of a $1 billion of issuance in 'twenty three and.
As you know, we'll have to kind of find the right windows, but I think I think mid year.
Is it a reasonable way to think about it.
Okay.
I would only add that.
Let me just add quickly Steve I think that.
And John said this market conditions of course will drive this but.
We are still looking at how best to do it you've heard us talk in the past about.
It's likely going to be in sort of a.
A single issue or a block, but we do need to evaluate all the options available to us.
So that's still in the works.
Okay. It makes sense and then could you maybe just on the balance sheet could you give more color on the comment about getting.
Some of this for balance sheet.
Turner flexibility, what what's the thinking there today versus in the past is it just.
The volatility of markets is it what you see in terms of.
Kind of acquisition pipeline are regulated investment pipeline are.
Is it tax related just why now for the additional balance sheet capacity, not a year ago or two years ago.
John do you want to take that.
Sure Yeah, I would say, Steve just as we've.
Thought about our our metrics over time, we're in a very strong credit position.
But we do look at our ramping up of capital spend both on the organic side as well as on the acquisition side.
Uh huh.
And so we just think it's.
It is healthy for us to have.
Some cushion there.
I would say just also as we're thinking about the cadence of our equity issuance.
We will do.
Much out of in 2023.
Than waiting until the back end of our plan for another issuance as we thought about it.
There's just a natural consequence of.
Of creating some cushion for ourselves yes.
I would simply add to that I think that.
We've talked a lot about payout ratio.
On the dividend, obviously, we narrowed the dividend range a little bit here.
We just feel the need to continue to really push ourselves on the ability to advance this capital spending as Sheryl talked about the replacement cycle. We just don't want to find ourselves in a situation, where we have to put some constraints on that.
On the investment side. So I think if we can create a little capacity here. It just helps us.
Have that level of certainty around our ability to continue to accelerate and these market conditions, obviously are quite volatile and it just doesn't hurt in this environment to have a little bit of.
Extra cushion there so I think that's really honestly the driver.
Okay.
That's helpful. Thank you.
Thanks, Steve.
The next question comes from Greg <unk> with UBS. Please go ahead.
Yes. Thank you.
Good morning, good morning.
I was wondering.
If your guidance on the operating cash flows.
423% to 27.
That ramp up versus the prior plan if there is anything.
Non operating in there or adjustments or if thats really the growth of the business.
It really is the growth of the business Greg.
Again, we just we feel very good about.
How we are how the investment is being rolled out cash flows from operations and the ability to get.
Good solid timely regulatory solutions.
Okay, Greg I'd, just add to that a significant portion is just a roll forward. So if you think about what's rolling off in 2022 versus what's being added in 2027, there is a pretty.
Because of the ramp the ramp up in Capex through those years that differential is reasonably significant and then in the interim years because of our ramp we're recovering additional depreciation.
Deferred tax contribution to cash flows, but a lot of it is a roll forward by itself.
Okay. Thank you.
Thanks, Greg.
This concludes our question and answer session as well as our conference for today. Thank you for attending you may now disconnect.