Q4 2022 American Water Works Company Inc Earnings Call

Good morning, and welcome to American Water's fourth quarter and year end 2022 earnings conference call.

As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation. So the company's investor Relations website.

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 Marine Duffy Senior Vice President of Communications Ms. Duffy you may begin.

Thank you good morning, everyone and thank you for joining us for today's call I'm filling in today for Erin who is a bit under the weather at the end of our prepared remarks, we will open the call for your questions.

Let me first go over some safe Harbor language today, we will be making forward looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations estimates and assumptions. However, since these statements deal with future events. They are subject to numerous known and unknown risks.

Uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.

Additional information regarding these risks uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the fourth quarter earnings release and in our 2022 Form 10-K, 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 comment on our successful 2022, and our longer term performance expectations and shareholder value John Griffith, Our executive Vice President and CFO will cover our 2022 financial results in more detail provide an update on acquisition activity.

And we'll close with a review of our outlook for 'twenty, 'twenty, three and beyond including financing plans show Norton, Our executive Vice President and C. O O will then discuss our capital investment plan rate base growth expectations and active general rate cases, before concluding with some ESG recognition. We recently received we will then close by.

During your questions with that I'll turn the call over to American water's, President and CEO Susan Hardwick.

Thanks, Maria and good morning, everyone. Thanks for joining us today.

As we announced yesterday, we finished 2022 with strong financial results that were just ahead of our plan as shown on slide five earnings were $4.51 per share for the year, which included six cents per share of favorable weather. We had previously discussed excluding weather earnings of $4 45 per share we're just above.

The midpoint of the guidance range, we shared originally back in November of 2021.

Think about what has occurred globally since November of 2021, including widespread inflation interest rates on a significant climb upward Russia's invasion of Ukraine and many people are returning to the office as the world began to stabilize following recurring waves of Covid outbreak.

When I reflect on how much has changed in the world Since November of 2021, I'm very proud of our company's ability to stay focused on serving our customers safely and reliably reliably which gave us the ability to confidently execute on the plan, we shared a year and a half ago.

I'm also proud of the resilient service, we consistently deliver and especially over the last few months during an active and better bitter cold storm season across the country.

I want to thank our employees for safely providing reliable service to the 14 million people, we serve and their homes businesses and communities.

You can see here on slide five a check list of some of our key accomplishments in 2022, and John and Cheryl will add to these in their remarks overall, we believe the takeaway today for investors and analysts is that our strong execution in 2022 amid a challenging backdrop.

Coupled with our clear capital growth plan demonstrates American water's ability to deliver on our long term plan I'm very confident we can execute our plans in 'twenty, three and beyond and the great with the great momentum we have from 2022.

Turning to slide six as you can see we have delivered an exceptional total shareholder return over the past five years, including our growing record a significant dividend increases.

We're very proud of this history, which also compares favorably on a three year look back for T. A S. R.

I want to acknowledge though that our stock and water utility stocks in general did not perform as well in 2022 compared to the broader utility sector.

Valuations have high PE stocks fell rapidly in the first half of 2022 as actual and expected interest rate hikes changed the landscape of investment opportunities.

As a result, the p/e multiple gap that had greatly expanded between water utilities and electric and gas utilities in recent years narrowed in 2022 all of that while we continued our very strong performance. This chart shows clearly the impact of the macro environment, we've been in and how it affected valuation without regard to specific performance.

And as we've seen so far in 2022 2023. This revaluing of the market has stabilized as many other macroeconomic economic drivers of stabilize including interest rates.

This continues to hold true I'm confident our company's fundamentals and the execution of our strategies will drive shareholder value and very competitive total shareholder returns for many years to come.

Which takes us to slide seven.

The comments that will share today are an affirmation of the financial plan targets and guidance, we laid out last November .

John will recap the drivers for growth in 2023, but big picture, we believe the combination of our EPS growth, our strong dividend and ESG premium and the affordability of our service continues to be rewarded by investors and distinguishes us from others in the utility sector.

I'll remind you that we believe the runway for our growth and for achieving these targets is very long certainly through 2027, and our five year plan and beyond.

This is primarily of course due to significant investments in infrastructure and regulated acquisitions and as we get further into the plan and see the full effect on earnings from the increased capital spending and continue our track record of success in the regulatory arena, we will deliver on our earnings growth plan and within the target range.

And with that I'll turn it over to John to cover more detail on 2022 financial results, our twenty-three outlook and our financing plans John .

Thank you Susan and good morning, everyone turning to slide nine I'll start by providing more details on our financial results for the year in 2022 earnings were $4 51 per share compared to $6 95 per share in 2021 fourth quarter and full year 2021 results included a gain of two.

70, <unk> per share from the sale of homeowner services and the 19th per share contribution to the American water charitable foundation from the proceeds of the sale exclude.

Excluding this net gain in 2021 earnings grew by 26 per share in 2022 earnings on infrastructure investment were the key driver of the growth.

In 2022, we saw an increase of 89 cents per share related to higher revenues from new rates acquisitions and organic growth also as discussed last quarter weather was favorable by an estimated six cents per share in 2022, and four cents net year over year, due primarily to warmer and drier conditions.

<unk> in 2022.

Revenues in 2022 were favorable to plan for the year due to healthy organic demand and favorable and timely rate case execution. In addition to the favorable weather. These factors combined with expense management and lower pension costs as compared to plan helped offset the impacts of inflation, we experienced in 2022.

Specifically O&M and other expense increased by <unk> 31 per share year over year with an estimated 23 of inflationary costs on chemicals power and other fuel and higher interest rates O&M and other also increased due to interest expense on new debt state level revenue tax.

As an insurance depreciation expense also increased 14 per share in support of growth in the regulated businesses and as a reminder, 2021 results included <unk> 12 per share of operating earnings from our former New York subsidiary.

Other operating segment results decreased in 2022.

31, <unk> per share of operating earnings from HOS, and 2021 was mostly offset by <unk> 24 per share of earnings in 2022 from interest income and revenue share agreements.

Finally, I want to note that we have a slide in the appendix that provides some additional details on fourth quarter results, which were also on plan.

Turning to slide 10, you'll see that in 2022, we had a strong year of business development growth as we closed on $335 million of acquisitions, which represents 70000 customer connections across seven states I think it's worth pausing for a minute to acknowledge the tremendous amount of work it takes across our state teams.

Elaboration with our corporate team to develop these opportunities execute purchase agreements and most importantly, close on such a sizable number of acquisitions. The final statistics on any one calendar years worth of acquisitions are often the result of many years of groundwork. We are confident we are the right choice for communities.

In search of solutions to their challenges and we will continue to drive that vision.

We are set up well for 2023 to be a strong year for growth through acquisitions to start the year, we had $326 million of signed purchase agreements across nine states, which includes the Butler area, a sewer authority wastewater system in Pennsylvania, we talked about last quarter, the integration work to add Butler's customer.

Operations and employees onto the American water platform is progressing as planned we expect to close on that acquisition by the end of 2023 pending regulatory approval and look forward to serving these new customers of course as we close on transactions the work to build and refill the acquisition pipeline is continuous.

Across our footprint our pipeline of over $1 3 million customer connections is a strong leading indicator that supports this piece of our earnings growth triangle.

Moving to a discussion of our financial health on Slide 11, we provide a summary of our strong financial condition as we head into 2023 as a sign of continued financial strength, both S&P and Moody's have recently affirmed our credit ratings of single, a and <unk>, respectively, and with a stable outlook for both we believe.

Our debt maturity levels, along with our planned debt issuances are very manageable our ladder approach to long term debt financings over the years is important to minimize interest rate risk in a rising rate environment I expect us to continue to issue fixed rate long term debt to protect against interest rate volatility for total debt to <unk>.

Capital, which at year end was just above our target of 60% or less we expect a meaningful decrease in 2023, when we issue equity and finally on liquidity. We continue to remain confident that we will have sufficient access to capital for the foreseeable future.

Moving on to Slide 12, as Susan mentioned, we are affirming our earnings guidance for 2023 in the range of $4 72 to $4 82 per share with a record of execution. We are confident in our ability to achieve our earnings expectations for 2023.

The factors behind our 2023 guidance and long term outlook are consistent with our messaging when we initiated 2023 guidance in November of 2022. This year's growth builds on the accelerated Capex plan, we put forth in November of 2021, which is driven by capital investment to serve our customers.

Acquisitions that are being incorporated into active rate cases are just completed rate cases will also drive revenue and earnings growth this year.

The regulatory solutions, we pursued in our recent cases and are pursuing and our active cases, such as cost deferrals and expense recovery mechanisms are closely aligned with the interests of our regulators and customers. This approach helps to manage affordability and limit variability of customer bills, which ultimately aligns with our investors.

Interests as well we are confident that we have in place regulatory solutions for over 75% of the elevated costs, we anticipate in the near term, including certain production costs interest and pension costs as it relates to pension costs with our year end pension obligation Remeasurement completed we now know that.

<unk> expense for 2023, and it is fully reflected in our unchanged 2023, EPS guidance range. Finally, 2023 results will benefit from Msg's. Successful addition of its first Navy contracts that we announced last summer, which will be fully transitioned in March of this year moved.

Moving on to our financing plan, we continue to expect to issue an estimated $2 billion of equity for 2023 through 2027, consistent with our prior messaging subject to market conditions, we plan to raise a significant portion of the total planned equity in 2023, the remaining portion of the 2 billion.

A planned equity not completed in 2023 is expected to be issued near the end of the current five year plan.

As we've said for several quarters now we expect equity will be irregular financing tool to fund incremental growth in the investment plan and to maintain a strong balance sheet. We also continue to expect to raise capital annually in the debt markets, including later this year.

On slide 13, we are affirming some more specifics regarding the key drivers for 2023 that I. Just discussed. These drivers are also generally consistent with what we shared last quarter and demonstrate the importance of our ongoing regulatory execution recent new revenue in Pennsylvania, New Jersey, and Illinois, together with them.

Restructure surcharge mechanisms account for a significant majority of the $1 10 to $1 20 per share revenue increase in 2023 shown on this slide also reflected or the financing plans, we expect to execute in 2023 that I just reviewed.

Wrapping up on slide 14, I'll Echo Susan on how we drive our growth strategy and our operating plans to achieve to achieve our company's targets and goals.

For the communities, we already serve and the communities we hope to serve in the future. The capital investment needs that are required to deliver more sustainable water and wastewater services are very large it's up to us to find ways to balance these investment needs with the affordability of services for our customers as you've heard today, we are affirming our long term earnings.

<unk> and dividend growth targets and our other long term financial targets remain unchanged, we believe our 7% to 9% EPS and dividend growth targets are compelling and maintain our position in the top tier of growth in the industry. The combination of our growth outlook supported by our significant low risk capital investment plan is.

Well as our ESG leadership premium and constructive position on affordability should continue to be rewarded by investors based upon this and our history of executing on our strategies. We expect it to continue to deliver a very competitive sustainable shareholder return for many years to come with that I'll turn it over to Cheryl to cover our Capex.

And rate base growth plan rate case updates and more on ESG Cheryl.

Thanks, John and good morning, everyone on slide 16, I want to start by acknowledging that our entire company did an excellent job of safely executing on our accelerated capital plan and safely performing our day to day work in 2022.

Well, we didn't reach our ultimate goal of zero injuries, we did record our best year ever in terms of safety performance. That's quite an achievement. Since 2022 was also a record year of total investment American water and we experienced some extreme weather conditions we.

We slightly exceeded our $2 5 billion goal for the year by making prudent investment decisions across our footprint and by acquiring many new systems, which John spoke about earlier.

Looking ahead to 2023 and as we told you in November we increased our investment plan. This time to $2 9 billion overall and roughly $2 5 billion for capital expenditures. This will likely be our new annual threshold for the next few years, coupled with detailed project plans, we expect this pace of investment.

To drive improvements in water quality and reliability for the benefit of our customers.

These investments also generate significant economic benefit to the local and regional economies, while improving the environmental compliance of the systems. In these communities. These investments should also favorably impact our pipe replacement cycles, which are much better than the industry average taken together these actions demonstrate.

How the values of ESG are integrated into our everyday work.

Turning to slide 17.

I won't spend much time here, but this graph simply illustrates the result of our continued execution on capital investments the combination of infrastructure projects and acquisitions is succeeding in growing our rate base at a long term rate of 8% to 9%.

Rate base growth of course will drive earnings growth as we make prudent investments in our systems with constructive regulatory outcomes.

Let's move to slide 18, and review the major components of our 10 year capital investment expenditure plan.

Our focus continues to be infrastructure renewal at 68% to 70% of the plan through 2032.

These investments are primarily for pipe replacement and upgrading water and wastewater treatment facilities.

We also expect to allocate 10% to 12% of our capital expenditures to resiliency in order to harden, our systems improved cyber and physical security and address climate variability.

This allocation has increased over where we've been historically our.

Our resiliency has been tested over the past few months with floods in California, and the bitter cold temperatures in many of our service territories over this past holiday season, as Susan said earlier, our systems and our teams did a great job of weathering the storms and preventing any major service disruptions. During these recent events it shouldnt be long.

<unk> on our investors or other stakeholders that our employees in the field have the best skills training and expertise in the industry, which leads to these great results when were tested.

Our commitment to make needed investments to enhance water quality remains very strong including steps, we're taking to improve our comprehensive source water protection programs and upgrade our treatment facilities every water provider must be prepared to address a broader range of contaminants and be ready to meet more stringent regulations.

Finally, we will continue to invest in new technologies to enhance our customer experience and enable our employees to drive efficiencies.

Overall, our capital plan is very much aligned with our environmental goals and other ESG related values that we prioritize as a company.

Let's go to slide 19, and cover the latest regulatory activity in our states.

On this slide is a summary of pending or recently completed general rate cases, with some key facts for each in the appendix. You'll also find some details related to infrastructure surcharges as well as a snapshot of the key outcomes from the most recent general rate case, and our top 10 states.

As Susan alluded to in her comments earlier for us the ability to execute on our regulatory strategy is a critical success factor for continuing to grow our business every year.

However, we know that customer affordability is especially on mines at many utility investors and analysts heading into 2023, a topic I'll speak more about in a few minutes.

Because of these concerns we believe our constructive rate case outcomes in 2022 should be tangible evidence of the support we have from regulators for needed infrastructure investments to deliver high quality service to our customers.

The common thread in all of these general rate cases is the focus on recovery of infrastructure investments made since the last round of cases totaling over $4 billion and in some states. The rolling of acquisitions as we said, though there are infrastructure mechanisms and several of our states that are reducing the lag of regulatory recovery.

This works alongside our timeframe between general rate cases of about two years and our bigger states.

Turning briefly to active rate cases, or cases in California, and Missouri were filed in July and are progressing as expected. So far in January of 2023, we filed an update in Missouri for costs and other needed elements of the case with hearings to be held this month, we expect the case to reach conclusion by the end of.

The second quarter of 2023.

In California, we recently applied for a water resources sustainability plan, which is an update to the general rate case. This plan requests the continuation of a decoupling mechanism that stems from legislation. The governor recently signed that allows the California public utilities Commission to consider a decoupling mechanism.

We believe decoupling is of ratemaking strategy, that's good for both our customers and for the environment because it rewards customers for conserving water as we make investments to renew and improve our drinking water infrastructure the.

The filing has also been updated with more timely customer demand estimates and to reflect present rates approved by the commission effective January one 2023.

The application itself includes infrastructure renewals wildfire mitigation climate resiliency efforts and strengthening affordability programs. In addition to the new water resources sustainability plan.

And in Virginia, we have a settlement on file and expect a final decision in the first quarter of 2023.

On the regulatory front outside of general rate cases, there were a few notable developments since our third quarter call.

Saying in California, and relating to the Monterey water supply project in November the coastal Commission approved our desalination coastal development permit application. After many years of community discussion and in light of some additional commitments from us to the community.

Then in December the California Public Utilities Commission issued its decision that authorizes us to enter into an amended water purchase agreement and addressed rate recovery for the associated facilities. Subsequently, we filed an application for rehearing requesting inclusion of all infrastructure costs in the cost.

Cap for the groundwater replenishment project expansion and requested <unk> that was not included in the decision we are awaiting a ruling on our application.

American water is committed to being a solutions provider to the communities in Monterey County, both through the advances in the water supply project and through maintaining our current level of operations in the area.

Last month, several communities in Monterrey, where impacted by evacuations due to flooding that occurred there because of our amazing employees and reliable assets, California American water maintain normal service to its customers during this challenging time.

Finally in California, we're still awaiting a ruling from the commission on the pending cost of capital case.

Switching gears to Pennsylvania last month, the department of Environmental Protection issued a maximum contaminant standard for two P. Fast chemicals based on our proactive testing we've identified one American water location in Pennsylvania that requires action based on the new regulations.

The treatment upgrade for that facility was already in process and is anticipated to be online later this year in the meantime, we've taken the contaminated well out of service temporarily to manage P. Fast levels in the water provided to our customers and ensure early compliance with the new regulations. We are still awaiting the new U S EPA standards.

Which we anticipate will be delivered later this year, we've already performed significant testing and analysis across our systems and compliance with state level guidance and have been acknowledged for that work, which will help inform our action plans when the EPA issues at standards. For example, our short Hills station project in New Jersey with <unk>.

<unk> to meet New Jersey State regulations and was recognized with the Governor's Environmental Excellence Award in 2020 for its leadership in water treatment related to P. Fast removal broadly. We believe we are the leaders in the industry on this topic as evidenced by our work with the water Research Foundation on P. Five communications and other projects.

Our research scientists are frequently invited by the EPA neighborhood, AWD <unk> and the water Research foundation to speaking engagements that inform stakeholders and colleagues in the water industry.

Finally, we were honored to be the only private utility invited to a recent event at the white house, focusing on reducing lead exposure, replacing both the companies and customers portions of lead service lines is a part of our current capital plan. Our goal is to replace a significant majority of known lead service lines in our service areas by the year.

2030.

The show the magnitude of our regulatory execution efforts you can see on slide 20 that we have $416 million in annualized new revenues in rates since January of 2022. This.

This includes $308 million from general rate cases, and step increases and $108 million from infrastructure surcharges, we have $181 million of total annualized revenue request pending which includes two infrastructure surcharge proceedings.

About the remainder of the year, we expect to file additional general rate cases to cover infrastructure investments and acquisitions since our last cases as always execution.

These regulatory priorities is key to our plan for growth in the business, because we make prudent investments and have skilled and dedicated employees working on these cases, we're very confident in obtaining constructive outcomes as we did in 2022.

On slide 21, as I mentioned earlier customer affordability is front and center in the utility industry in 2023, 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.

Thankfully as we now have another full year's data to reflect on our company is still in a very good relative position in terms of affordability or wallet share at less than 1% of median household income. We continued to believe that our affordability proposition is an important differentiator.

And finally on slide 22, I'd like to highlight an ESG story that is a bit different than others than the others. We have shared this past year, we're proud to say that American water earn the safety Act designation from the department of Homeland Security in 2020 to the first water and wastewater company to do so.

Not only is this great recognition of the work we do every day to keep our employees and community safe, but it also gives us the opportunity to strengthen our processes and increase knowledge sharing with the U S government.

So with that I'll turn it back over to the operator and begin Q&A and take any questions you may have.

Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're on speakerphone, please pick up the handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble the roster.

And the first question comes from Richard Sunderland with Jpmorgan.

Hi, good morning, Thanks for taking my question.

Good morning Rich.

<unk> started with.

The equity update.

You reiterated the similar language to <unk>, but just you know we're getting into 2023 just wanted to see if there's anything else you could share on kind of timing of your message is.

As we're into the calendar year now.

Yeah, Hey, rich thanks for the question I'll ask John to comment on that.

Rich no update in terms of timing, we will issue the bulk of the $2 billion in 2023, and then whatever we don't issue in 'twenty three we will issue in the back end of our 2023% to 2027 planned period.

Okay got it very clear thank you and then.

You noted the stabilized food chemical costs and I see the differences in the 'twenty three walk from <unk> and then the current tech but just.

Is that really the looking out I think is a one revision there on the the total range is that really the change youre seeing versus the initial assumptions I guess, what I'm really getting at is across that intention.

Any kind of movement within the guidance range now that you have final marks in more line of sight on the chemicals front relative to your initial outlook.

Yes, rich I would say no change from what we've previously discussed both in terms of our results in 'twenty, two and expectations for 'twenty three.

As we talked last quarter pretty successful in the regulatory arena to really.

Mitigate most of that exposure going into 'twenty three.

And now that we finished our pension remeasurement as John commented on certainly.

Anticipate no change to our guidance relative to that issue.

Got it very clear as well thank you for your time today.

Thanks Rich.

Thank you and the next question comes from Greg <unk> with UBS.

Yes, hi.

Thank you Greg for taking the question.

Hey, just to follow up on on the equity just how does that position you for incremental.

Acquisitions is there sort of a.

Any element of pre funding there and then if there's a follow up just on the rate base, how did that come in.

For 2022 versus your expectation and how does that.

Its different how does that impact your <unk>.

Your guidance going forward.

Let me take the first or the second part of that first no.

Surprises relative to rate base as we ended the year and again as we look out.

Really into this five year period don't expect any changes from what we've previously shown you around rate base.

John you want to comment on the equity question, George Greg I would just say that.

The amount of equity that we're raising in the cadence of the equity does capture the various scenarios that we've run around regulated acquisitions.

I appreciate it.

Thanks, Greg.

Thank you.

And this concludes our question and answer session Conference call has now concluded as well. Thank you for attending you may now disconnect.

Yes.