Q1 2023 American Water Works Company Inc. Earnings Call

Speaker 1: In looking at operating costs, higher pension expense of about 3 cents per share and inflationary pressure on chemical, fuel and power costs of about 4 cents per share were largely mitigated by the higher revenues. Our proactive strategy last year to seek rate case recovery in many of our large jurisdictions of rising production costs.

Speaker 1: and expected higher pension costs, has positioned us favorably to limit the bottom-line impact of those higher costs in 2023. As with the rate case we just filed in Indiana, we will be looking to recover higher operating costs in other jurisdictions over the next year through earning a full return on rate-based investments.

Speaker 1: supporting our investment growth.

Speaker 1: Interest expense in the quarter also reflected about 4 cents per share from higher short-term interest rates. I would also note that the EPS impact of the higher share count from our equity issuance was essentially neutral to EPS when considering the avoided interest cost in the first quarter by paying off commercial paper.

Speaker 1: We expect dilution from the higher share count net of avoided interest expense to be approximately neutral to EPS for the full year as well. Finally, other net consists primarily of favorable post-close adjustments recorded in the first quarter of 2022 from the sale of HOS.

Speaker 1: additional earnings in 2023 from our new military services group contract with Naval Station Mayport in Florida that we were awarded last summer.

Speaker 1: Turning to slide 11, you'll see that we are set up for strong growth through acquisitions in 2023 and beyond. We had 27 transactions under agreement across nine states through the end of March, including the Butler Area Sewer Authority Wastewater System in Pennsylvania we previously announced.

Speaker 1: as well as the Talamanson Township wastewater system in Pennsylvania, we are purchasing for $104 million as announced in March as part of an agreement to assume that asset purchase agreement from Nexterra. Then, just a few weeks ago, we were pleased to announce the purchase of the wastewater treatment plant in Granite City, Illinois for $83 million.

Speaker 1: which puts us at over $550 million of acquisitions under contract. We hope to close on Granite City by the end of 2023 and expect to close on Town of Benson by mid-year 2024, both pending regulatory approval, and we look forward to serving those customers.

Speaker 1: 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. Before I turn it over to Cheryl, I'll echo Susan's comment that we're off to a very good start to the year.

Speaker 1: I'm confident in our ability to achieve our 2023 EPS guidance of $4.72 to $4.82 per share. Looking ahead, I am pleased that we have the right fundamentals in place, including our newly strengthened balance sheet to achieve our long-term financial targets, which we are also affirming today.

Speaker 2: updates. Cheryl? Thanks John and good morning everyone. Slide 13 shows that our state and corporate leaders and their teams did a great job in the first quarter executing on our increased capital plan. It required significant effort to safely and efficiently deliver the dozens of projects.

Speaker 2: that improved our systems and drove capital investment higher by nearly $100 million in the quarter compared to the same period last year.

Speaker 2: This result keeps us on pace to hit our goal of approximately $2.9 billion of capital investment spending in 2023.

Speaker 2: To show the magnitude of our regulatory execution efforts in timely recovery of these investments, you can see on slide 14 that we already have $279 million in annualized new revenues and rates since January of 2023.

Speaker 2: This includes $229 million from general rate cases and step increases and $50 million from infrastructure surcharges. We also have $144 million of total annualized revenue requests pending, including two infrastructure surcharge proceedings. Moving on to our regulatory strategy on slide 15.

Speaker 2: Our theme here is around timely, consistent recovery of investments and operating costs.

Speaker 2: We have consistently engaged with policy makers and regulators to find the best ways to invest in water and wastewater infrastructure and achieve timely recovery. When we achieve timely and consistent recovery, it levels out bill increases to our customers, making those bills more manageable. The pie chart on the right side of the page also speaks to timely recovery of our investments across our footprint.

Speaker 2: not only to earn our lab return, but also to mitigate the size of general rate increases for our customers. We expect about 75% of capital investments over the next five years to be recoverable through infrastructure mechanisms and through the use of forward test years.

Speaker 2: which is the key to unlocking a more consistent annual earnings growth pattern for the long term. The ability to execute our regulatory strategies is a critical success factor for continuing to grow our business each year.

Speaker 2: As water and wastewater industry challenges grow, we'll continue to focus on constructive regulatory and legislative outcomes to help us work through those challenges.

Speaker 2: Let's go to slide 16 and cover the latest regulatory activity in our states.

Speaker 2: Shown on the slide is a summary of our pending general rate cases with some key facts for each.

Speaker 2: In the appendix, you'll also find some details related to infrastructure charges, as well as a snapshot of the key outcomes from the most recent general rate cases in our top 10 states.

Speaker 2: At the end of March, we filed a general rate case in Indiana reflecting $875 million in water and wastewater system investments to be made through 2025 to continue providing safe and reliable service.

Speaker 2: The revenue request also includes an increase in the cost of chemicals and other operating costs that we continue to see.

Speaker 2: In California, our case was filed in July of last year and is progressing as expected so far. We're seeking increased revenues of approximately $95 million over a phased three-step process with rate changes expected to be effective in 2024, 2025, and 2026.

Speaker 2: We are also still awaiting a ruling from the Commission on the pending cost of capital case. In Missouri, on March 3, we were pleased to file a settlement agreement with the Missouri Public Service Commission. The settlement reflects an increase of $95 million in annualized revenues, including $51 million for previously approved

Speaker 2: approved infrastructure surcharges. A final decision on this matter is expected in the second quarter of 2023.

Speaker 2: And finally, earlier this week, the Virginia State Corporation Commission approved the settlement of our rate request authorizing a total annualized revenue increase of approximately $11 million.

Speaker 2: Outside of general rate cases, there were a few notable developments since our fourth quarter 2022 call. In California, related to the Monterey Water Supply Project, we signed the Pure Water Monterey Expansion Agreement following an order issued by the CPUC.

Speaker 2: We are now allowed to standard ratemaking treatment for the construction funding of the pumps and pipes that were built to support the expansion.

Speaker 2: Together with the desalination and water reuse projects in process and aquifer storage and recovery online, we believe that a secure water future for the Monterey Peninsula is now possible once the approval process is complete.

Speaker 2: On the legislative front in Indiana, Senate Bill 180 passed the State House and Senate with bipartisan support and is awaiting the Governor's signature where it will become effective immediately.

Speaker 2: This bill allows for consolidated rates and wastewater systems through Indiana's Service Enhancement Improvement Recovery Mechanism. Turning to PFAS, I'll expand on Susan's earlier comments on EPA's proposed rulemaking. While American Water has long been anticipating and preparing for the rulemaking, our initial analyses were primarily based on a federal PFAS standard that would be more in line with the higher treatment limits set by...

Speaker 2: assume that the significantly lower treatment level, the number of facilities that will require treatment will be larger as will the cost.

Speaker 2: One of our early concerns is that EPA's cost estimates are materially understated. Our analysis continues and upon completion of our preliminary assessment, we'll submit comments on the proposal to the EPA by May 30th.

Speaker 2: As the EPA develops its final rule, which is expected by the end of 2023, we'll have more information to share based upon further review and analysis.

Speaker 2: To be very clear though, American Water joins other water organizations in support of the EPA, Congress, and other decision makers in implementing reasonable policies aimed at keeping harmful PFAS out of drinking water supplies in communities.

Speaker 2: In addition to the comments we intend to provide on the proposed rule itself, we also expect to provide comments to the EPA and others on many related issues, including the following.

Speaker 2: We'll ask for an exemption of water and wastewater systems from financial liability for PFAS under CERCLA.

Speaker 2: We'll also ask to ensure all water and wastewater utility providers, regardless of ownership, have equal access to any and all federal and or state funding related to treating PFAS.

Speaker 2: In addition, we'll request permanent federal funding for a water and wastewater low-income customer assistance program.

Speaker 2: Providing safe, reliable, and affordable water is American Water's business.

Speaker 2: We'll continue to work productively with the EPA, Congress, regulators, and policymakers to ensure that the implementation of any final standards protect customers, communities, and the general public. So with that, I'll turn it back over to our operator to begin Q&A and take any questions you might have. Thank you.

Speaker 3: We will now begin the question and answer session.

Speaker 3: To ask a question, you may press star and one on a touch tone phone.

Speaker 3: If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker 3: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Speaker 3: At this time, we will pause momentarily to assemble our roster. The first question today comes from Richard Sunderland with J.P. Morgan. Please go ahead. You're the first person to ask the following question.

Speaker 4: Hi, good morning and thank you for the time today. Appreciate all the commentary on the PFAS side, but just wanted to dig in there a little bit more. Any way to frame the magnitude of capital versus O&M that's particularly levered to an outcome here? At a minimum, is this more of a capital opportunity than an expense concern or you're kind of flagging both as

Speaker 5: potential impacts to rates on a go-forward basis? Good morning, Rich. Yeah, it's a great question. Obviously, as Cheryl indicated, we have a lot of analysis to do with this proposed rule at these treatment limits that are proposed. And you know, Rich, how this works. I mean, there's a process to be...

Speaker 5: worked here in terms of comments and feedback to the EPA about the proposed rule. And as Cheryl said, obviously we're quite supportive of what they're trying to accomplish here. And in fact, even at the four parts per trillion, we don't have huge issue with that. I think the issue is around cost. As Cheryl said, our early...

Speaker 5: expectations here that the EPA estimates around costs are understated. So I think that'll be part of the response that the industry generally provides back to the EPA. For us, as I said and Cheryl said, we're continuing to evaluate the impacts and as you know we've talked about this many times, we use a risk based approach to our capital planning. So as we work these projects into our capital plan.

Speaker 5: So there will be capital requirements to have facilities that are able to facilitate the treatment. And then of course there will be an ongoing operating cost associated with the treatment itself. Lots to be learned yet on this and again direct impacts to our plan yet to be.

Speaker 4: recovery of those higher costs. You speak a little bit more to the recent trends you're seeing there, and maybe bridge that back to your expectations last fall when you laid out the latest plan. How do you think about these expenses impacting customer bills over the next few years?

Speaker 5: Yeah, Rich, good question. Cheryl and John certainly can weigh in on this too. But we have seen, I'd say, a continuation of the impacts that we started seeing, you know, really in the second quarter of last year. While some of the increases in certain costs may have started to level out a bit, they still are all elevated.

Speaker 5: as a result of those cases we did last year. And as Cheryl mentioned, or maybe John did, in the prepared remarks, in the Indiana case we just filed, we've addressed it there too. So we think we have done as good a job as could be done to address these costs early on so that they don't have bottom-line impact. But we continue to see a fair amount of pressure here on the cost side.