Q2 2023 American Water Works Company Inc Earnings Call
Good morning, and welcome to the American Water's second quarter 2020, creating conference call. As a reminder, this call is being recorded and is also being webcast lead have a companion slides 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 Ms. Grace Vice President of Investor Relations. You said got it must be you may begin.
Okay.
Thank you Sasha 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 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 second quarter earnings release.
And in our June 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 diluted earnings per share.
Susan Hardwick, our president and CEO will share highlights of second quarter and year to date results and thoughts on our affirmed 2023, EPS guidance and longer term targets.
John Griffith, our executive Vice President and CFO will discuss our successful financing activities in the first half of the year cover our financial results in more detail and we'll close with an update on our acquisition activity.
Cheryl Norton, our executive Vice President and CFO will then discuss our capital investment plan regulatory updates and will conclude with a review of our recently published sustainability report and other new disclosures 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, let's turn to slide five and I'll start by covering some highlights of the first half of the year as we announced yesterday, we delivered strong financial results in the second quarter and the first half of 2023 earnings were $1 44 per share for the quarter compared to $1 20 for the same period last year.
<unk> in the first six months of 2023 earnings were $2.37 per share compared to $2 seven per share in the same period of 2020 to.
The results were in line with our expectations as we knew the first half of the year would be strong compared to last year due to revenue increases from several general rate case proceedings completed in 'twenty, two and early 'twenty three and from infrastructure mechanism filings.
We continue to execute on our regulatory strategy with which continues to be the key driver of our results.
Revenues in the second quarter were also higher due to increased usage from warm and unusually dry weather in several several of our states Tim.
<unk> results were higher operating costs, which John will elaborate on further.
Moving onto some of our other key accomplishments so far in 'twenty two 'twenty three we invested nearly $1.2 billion in capital projects year to date, reflecting great work by our teams responsible for planning and completing these investments.
Also as you will recall the total capital investment plan for 2023 includes approximately 400 million for acquisitions, including two sizeable transactions, we expect to close in the fourth quarter.
Our outlook for future acquisitions remains very strong as we have over $550 million of acquisitions under agreement, including those two sizable deals.
As we announced in March we completed a very successful equity issuance of $1 $7 billion of American water common stock. This delivered on the highest priority in our 2023 financing plan.
And as we announced last month, we completed a convertible debt issuance of just over $1 billion that achieved the other key element of our 2023 financing plan.
Finally earlier this week, we were pleased to publish our company's latest sustainability report share.
Cheryl will share a few highlights of the report, but it at its core. It tells the story of how we are fulfilling our mission of providing safe clean reliable and affordable water and wastewater service in a very sustainable way to American water customers and this has been our mission for over 135 years.
Turning to slide six we are affirming our 2023 EPS guidance range of $4.72 per share to $4 82 per share on a weather normalized basis.
And once again, we are affirming our long term targets.
Continue to believe that our regulatory our strong regulatory financing and operational execution is the differentiator from our peers.
Our track record of executing on these fronts gives us confidence and should give investors confidence in our ability to achieve our short term and our long term financial targets.
As we've done in the past, we expect to consistently grow earnings and dividends at a top tier pace over the next five years and beyond.
And with that I'll turn it over to John to cover some second quarter highlights and financial results in more detail John .
Thanks, Susan and good morning, everyone turning to slide eight I'll start by reviewing the successful completion of our 2023 financing plan.
Susan mentioned and as I covered on the last call earlier. This year, we completed an upsize to equity offering for proceeds of $1 $7 billion. The remaining portion of the $2 billion of our currently planned equity is expected to be issued near the end of this five year plan as we've previously communicated.
Then last month, we issued just over $1 billion of exchangeable senior notes due in 2026 with an annual interest rate of 3.625% as we previously disclosed this exchangeable debt issuance supports our long term growth as a diversified low cost funding source that benefits customer affordability.
<unk> and shareholder value.
Upon any exchange of the notes the principal amount will be settled in cash with flexibility to settle any remaining value above the principal amount in cash shares or a combination thereof at our election, we used the proceeds from both of these transactions to bring our commercial paper balance to zero by quarter end.
With almost $800 million of cash yet to be utilized that is earning interest with our 2023 long term financing needs now complete our balance sheet is well positioned to fund our robust water and wastewater investment growth on.
On slide nine we provide a summary of our continued strong financial condition, our total debt to capital ratio net of cash on the balance sheet remains at 54% as of June 30th which is well below our target of 60%. We believe our current debt maturity levels in conjunction with future debt needs are very manner.
<unk> and I would remind you as shown on this slide of the $720 million of no proceeds that we will receive in 2026 from the sale of HOS completed in 2021.
Our ladder approach to long term debt financings over the years is important to manage cash flows and minimize interest rate risk and finally on liquidity. We remain confident that we will have sufficient access to capital for the foreseeable future.
Turning to slide 10, I'll provide some further insights into our financial results for the quarter earnings were $1 44 per share for the quarter of 24 cents per share versus the same period in 2022 and up 17 cents per share on a weather normalized basis. As you know we've completed rate cases recently and our larger stay.
<unk> and are seeing the increased revenues as a result. These additional revenues are driven by the significant investments we have made and continue to make in our systems. As noted earnings were higher in the quarter by an estimated seven cents per share due to weather in 2023 due to warm and dry conditions, primarily in Missouri, New Jersey.
In Pennsylvania, but.
But we did see unusual weather in the quarter, resulting in higher throughput, which we typically don't see during this time of year, our investments in resiliency and our proactive communications to customers around water conservation ensured that we did not experience any significant operating issues during the quarter.
And looking at operating costs higher pension expense of about four cents per share and increased chemical costs of about <unk> <unk> per share, including inflationary pressures were largely mitigated by the higher revenues.
Based on our current outlook, we are not expecting the cost of chemicals to decrease in the near term as demand remains elevated our operating costs in the second quarter also increased due to higher employee head count to support growth in the business.
As we've said our proactive strategy last year to seek.
Rate recovery of rising production costs and expected higher pension costs has positioned us favorably to limit the bottomline impact of those higher costs. In 2023. This approach continues in our recently filed cases.
Supporting our investment growth depreciation expense increased <unk> <unk> per share in the cost of additional long term financing increased to <unk> 11 per share primarily related to share count dilution.
As I mentioned last quarter, the EPS impact of the higher share count from our equity issuance offsets the avoided interest expense in the current interest rate environment, we expect the impact to be approximately neutral to EPS for the full year as well based on the current outlook.
Turning to slide 11 earnings increased 30 cents 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 second quarter on a weather normalized basis earnings have increased 23 cents per share year to date, which as Susan mentioned is in line with our expectations for the first half.
Half of the year.
Before we look at our expected full year 2023, EPS details I should note that as you would expect in the year of an equity issuance or quarterly EPS results may not sum to equal the year to date EPS results. Each quarter. This is simply due to a different amount of average shares outstanding used in the EPS calculation.
<unk> as the year progresses.
Turning to slide 12, I'll Echo Susan's comments that our results remain on track to achieve our 2023 EPS guidance of $4 72.
To $4 82 per share on a weather normalized basis.
Here, we provide some updated details related to 2023 guidance that reflect our results. So far this year.
Including the completed 2023 financing plan you can see for example that our implied revenue growth for the second half of the year will be strong, though somewhat less than the first half growth as new rates became effective in new Jersey last September .
Looking ahead I am pleased that we have the right fundamentals in place, including our strengthened balance sheet to achieve our long term financial targets, which we are also affirming today.
Turning to slide 13, you will see that we are set up for strong growth through acquisitions in 2023 and beyond we closed on 10 acquisitions totaling $33 million across five states in the first half of 2023, which demonstrates our continued ability to close deals in many states. We also had 32.
Actions under agreement across 10 states through the end of June totaling $555 million and includes both the Butler area, a sewer authority wastewater system in Pennsylvania, and the granite city wastewater treatment plant in Illinois, We previously announced we now expect to close both of these transactions near the end of 2000.
23 pending regulatory approvals for each also included in our acquisitions under agreement as the talents in township wastewater system in Pennsylvania, we expect to purchase for $104 million as announced back in March we continue to expect to close on tower mentioned by midyear 2024 pending regulatory.
<unk> and we look forward to serving all of these customers.
Of course, as we closed on transactions the work to build and refill. The acquisition pipeline is continuous our pipeline of over $1 3 million customer connections is a strong leading indicator that supports this piece of our earnings growth triangle.
With our track record of closing on acquisitions and executing on our Capex plans. We are confident that we will achieve our capital investment plan of $2 $9 billion for 2023, and when you combine that with the financing we have already completed to fund growth. We believe our outlook for 2023 and beyond is very attractive for investors.
With that I'll turn it over to Sheryl to talk more about our capital investment rate case, and other regulatory updates Cheryl.
Thanks, John and good morning, everyone I'll start by commenting on our continued focus on investing in our systems Slide 15 shows a recap of our capital investment so far in 2023.
As John said, we remain on plan to meet our goal of approximately $2 $9 billion of total capital spending for the full year. Our state teams continued to execute each quarter on a multitude of projects that improve our systems. Two examples of the types of projects, we're working on our improvements to the line softening system.
<unk> facilities and filters at the Jersey, though, Illinois water treatment plant and enhanced <unk> capabilities and other digester improvements at the coatesville water treatment plant in Pennsylvania.
Renewal and improvement projects are typical examples of how the capital we deploy is essential to our mission of providing safe clean reliable and affordable drinking water and wastewater services and finally as John mentioned, our larger acquisitions in 2023 are expected to occur in the second half of the year as compared to <unk>.
22, when the first half of the year included our largest acquisition for the year over $200 million for the city of York's wastewater system.
Let's go to slide 16, and cover the latest regulatory activity in our states.
On this slide is a summary of our pending general rate cases, with some key facts for each 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 case, and our top 10 states.
Sharing with our starting with our general rate cases in California, and Indiana, both are progressing as expected and Indiana hearings are expected in early fall, which follows testimony filed by all parties in July and August in California, We expect hearings in the fall as well.
At the beginning of May we filed a general rate case in West, Virginia, reflecting $340 million in water and wastewater system investments covering 2020 through 2025, we are seeking $45 million of additional annual revenue excluding infrastructure surcharges, we would expect an order in February of.
<unk> next year.
At the end of June we filed a general rate case in Kentucky, reflecting $330 million and water system investments since the last rate case order in 2019, we are seeking $26 million of additional annual revenue excluding infrastructure surcharges to support continued safe and reliable service and recovery of.
Increased production costs, we would expect an order in this case in February of next year.
Missouri, we were pleased to receive a final decision from the Missouri Public Service Commission in May the negotiated settlement reflected an increase of $95 million in annualized revenues, including $51 million for previously approved infrastructure surcharges.
Not specifically noted in the order our view of the return on equity allowed is 975% and the equity ratio is 50%.
Outside of General rate cases, the California Commission issued a decision on June 29th on California American water is 2021 cost of capital application authorizing an $8 nine 8% ROE with an equity component of 57.04% the decision was not retroactive.
And will be effective through the end of 2024.
Following day, we filed an advice letter as authorized by the state's water cost of capital mechanism seeking at 52 basis point increase to our ROE in 2023, which was approved on July 25, increasing the return on equity to 950% effective July 31.
As Susan mentioned, our regulatory execution is a key driver of our results and our team continues to do an excellent job.
As we previously discussed we submitted written comments on the federal EPA has proposed P. Fast rule in May the key concern that we voice is that EPA is cost estimates are materially understated, our internal and preliminary estimates show that capital investments in excess of $1 billion will be needed by American water.
<unk>, along with nearly $50 million of annual operating expenses in order to comply with the rule as currently proposed we.
We are still evaluating the potential impact of our five year capital plan, including whether P. Fast will drive incremental capex in the planned or if some currently planned projects will be completed later beyond the five year horizon or both we expect to have more to share on that in the third quarter earnings call.
Related to ongoing <unk> litigation and the announcement of some settlements with manufacturers of <unk>. We are a long way from knowing what these settlements mean for our customers, including if how and when funds from these settlements or other litigation may ultimately be distributed we will continue to advocate that the.
Ultimate responsibility for the cleanup of these contaminants should fall to the polluters and we will continue to work cooperatively with the EPA and with Congress regulators and policymakers in support of water quality standards that protect customers and communities balanced with affordability.
Another topic that's been in the news recently is around certain telecommunication companies and their historical usage of led insulated cables. While these stories don't relate to American water, we'd remind you to review the disclosures we've had for many years and our Form 10-K around the replacement of lead service lines in our regulated service.
Territories, we are in great shape related to that replacement program.
Finally on slide 17 earlier. This week, we released our latest sustainability report covering the years 'twenty 2021, and 2022. This report highlights our commitment to excellent water quality customer affordability and continued investing in water and wastewater infrastructure and our.
<unk> business practices and values that align with these commitments.
To demonstrate our ESG leadership and commitment to transparency. We also continue to expand and update disclosures related to how we operate the business some of which we've referenced here.
And we're pleased to continue to be recognized by leading ESG rating services, such as MSCI for our actions and our disclosures in this space.
One final comment before I wrap up as you know there've been several weather events this quarter, including the severe flooding in New York State.
While we no longer have regulated utility operations. There, we do operate the water system and two wastewater treatment plants at U S Military Academy West point through our military services group business. Our teams there went above and beyond to ensure west point could continue to operate and have continued access to safe and reliable.
Liable water and wastewater services and we did so safely.
Our teams across the entire business are experts at what they do every day, we thank them and are grateful for their commitment and expertise in delivering to those we serve and doing so in a safe and sustainable way.
With that I'll turn it back over to our operator to begin Q&A and take any questions you may have.
We will now begin the question and answer session to ask a question and then pass on and one on your Touchtone telephone if you're using a speakerphone. Please pick up your answer before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press star two.
The first question will come from the line of Paul Zimbardo from Bank of America. Please go ahead.
Hi, good morning, Thank you team.
Good morning, Paul.
The first question I had was I know there was a good number of changes on the key.
Drivers within full year 'twenty three guidance, if you could just unpack like wherever you're seeing that better revenue net O&M strain.
The year to date or second half wherever it lands.
Yes, let me comment first and certainly John can add to it I think really it's.
You can look on the revenue side primarily.
Timing of rate cases, and.
The resulting revenue increases and then.
Also additional costs.
That we have built into those rate cases, you know, we've been talking quite a bit about inflationary impacts and higher chemical costs and production costs and we've been successful in getting those higher costs built in to a number of the cases, we did last year.
And as those cost increases have gone up the associated revenue recovery has gone up so I'd say those are the primary drivers.
On the.
Sort of financing cost side, those changes really driven by just the timing of AR.
Primarily this long term debt issue, we just did and then higher costs associated with short term debt financing and thank John that probably covers the mainland any other items to add I think it does that's right. Paul we started to pick up New Jersey revenue last September so that moderates year over year growth and I'd say from an inflation perspective, where.
Starting to see production costs moderate as we've come through the second quarter here.
Okay, great. Thank you.
Then on the balance sheet side, I know great job cleaning uptick not all of that short term debt on the long term. One question I had was I noticed you changed the language slightly too.
Two are less than 60% debt to total cap versus before is just less than 60%. So does that mean, you anticipate that trending up closer to 60, just overall thoughts on kind of where you stand on that go on to the long term plan.
Thanks, Jeff.
Paul No real change there as we're thinking about it.
As you know we are raising.
Financing.
In our periodic sort of manner. So we do expect to trend up over time until we reset again.
With equity, but no significant change there.
Okay, great. Thanks, a lot.
Thanks, Paul.
The next question comes from Angie Sedita.
Yuniesky from Seaport. Please go ahead.
Thank you.
So first maybe.
You mentioned the AD the rainy July in New York State I mean, it's <unk>.
Living in the mid Atlantic It seems like it's been.
The weather pattern in New Jersey, and Pennsylvania as well so is there any sense, how if there is an offset to that Kevin.
While the benefit from the second quarter, thus far in the third quarter.
Yes, Andy we don't have any sort of prediction, so far and impacts in July I, just remind you again that our outlook for the year remains on track to hit our expectations again on a weather normalized basis.
So just a bit early to tell what impact July July may have across the entire territory.
Okay Secondly.
The exchangeable bonds you guys did I mean.
They came out at a low coupon likely I mean, probably not something that you had considered in your guidance. So should I think that it's actually a benefit to guidance and also how does that tie up too.
The financing of those two big acquisitions that you expect to close later this year, where they always planned to call.
Hum.
It's still in 'twenty three.
Again, I'm just trying to see if there's any benefit from an interest expense perspective.
I'll answer the second part first and then as John just sort of comment on the financing impact and.
We continue to look very closely at the timing of those two transactions and we've always expected them to be sort of at or close to year end. That's still our expectation that's been built in our plan all along.
The regulatory process is a bit unpredictable, but we feel confident about the ability to get those wrapped up.
Right towards the end of this year, John you want to comment on the financing piece of our Angie I would just say on the financing piece that we said are.
Our plan last fall at a time, when we can't predict interest rates and I think where we've come out on the convert is consistent with.
With our our guidance in our affirmation of 2023.
Okay and my last question on the municipal M&A, So you've been very successful at those very large acquisition.
Even though some other companies have.
Both of them note is this very much.
Sort of a deal specific issue.
There is no.
Any deterioration in the regulatory environment or the terrorist activity of municipalities to sell large assets I mean again.
Trying to see if there is a.
Trend you seem to be way more successful than others and large municipal M&A.
Yeah, I think Andy you know I'll I'll say, what I always say here I think we are.
Very good at it.
We spend a lot of time in these communities.
Cultivating the relationships our teams are very much embedded in these communities.
I think they work closely with communities to define the need.
And to come up with the best solutions to meet those needs I think that is continuing to be our are our strongest asset as it relates to acquisitions I think the prospect for deals.
Also continues to evolve and I'd say these larger deals have come about.
I think because circumstances warranted it doesn't signal a change in our strategy.
It doesn't signal a change in what I believe to be the environment, either for opportunity or regulatory acceptance or.
Our enthusiasm for deals generally so I, just say theres circumstantial.
And our expertise I think continues to be.
A real advantage we have here.
Okay. Thank you.
Thanks Angie.
Next question will come from Greg <unk> from UBS. Please go ahead.
Yes, Thank you and good morning.
Good morning, Greg.
Regarding the Indiana rate case.
Proceeding on schedule are you.
We're expecting revenue recommendations from intervenors, so is that coming up.
Well I think the normal process would be to have testimony filed with all the parties in the case of sort of later this summer early fall.
So I think the normal process, we would expect to see sort of full recommendations were positions taken by the various parties through that process.
Okay sort of traditional process.
Okay, Yes, yes, really nothing different.
Got it.
Thank you.
Alright, Thanks, Greg.
The next question is from Shar <unk> from Guggenheim Partners. Please go ahead.
Hey, guys. Good morning, it's actually James on for sure.
Hey, good morning.
First question is just on the PFS of yours with at the.
The $1 billion I guess.
Could you just speak to maybe the puts and takes as it relates to your ability update with the capital plan third quarter call.
What I.
I guess, a little bit more color on how we should think about what all of that 1 billion enroll into the forthcoming.
Yes, it's a good question and something obviously, we're continuing to work on.
And Sheryl alluded to this in her comments, we would expect to have quite a bit more visibility on our protocol, partly because our evaluation is certainly ongoing.
Our continued.
Analysis of our various facilities to see where we may have exposure and what sort of treatment may be necessary. So that process is continuing but I'd also just say this is the time of year.
We're doing all of our work relative to our financial plan.
All the various updates throughout the business and in our capital planning is certainly a big part of that so our normal cadence would be to continue to work through that planning process and be complete with it.
In the early fall with the expectation that we would.
Rollout our guidance and expectations for the next year and then the next five year and even 10 year outlook relative to capital when we get to that third quarter call. So we're just on sort of a normal cadence.
From a planning perspective, and then as I said on the evaluation.
Of.
Potential exposure, we're just still in the process of doing network.
Cheryl anything to add there no I would just say that we also continue to collect samples at all of these locations to just verify what the levels are and look for any seasonal kinds of variations and such as that so so we're still drilling into the details, but as Susan said as we go through our regular planning.
Process, we are using our prioritization models.
Deciding what could we move out or not move out and so it's just it's a lot of work and the teams really dug into the details right now yeah and I think that is the key we just need to complete that risk analysis piece in and we'll see how much of this $1 billion ultimately results in incremental <unk>.
Capital.
Expansion of the planned versus just shifting to later periods.
Shifting other work to later periods.
And I guess.
Follow up to that too is just the.
So we've got a few different regulation EPA little uncertain over the circular designations, but.
Has any of this changed your near term approach to wastewater M&A.
No I don't think so.
We're continuing to look at that as a very important part of our strategy.
And continuing to look at those opportunities we think there is a.
A good set of opportunities in that space, largely driven again by just the aging infrastructure.
And how many of those systems were were built initially and then many of them coming to sort of the end of their useful lives. So we think the opportunities are plentiful.
I would say it doesn't change our strategy relative to that but I do think as we think about sort of total capital allocation.
And from a.
A risk perspective, and a growth opportunity perspective.
Manage all of those opportunities within our.
Capital and financing capabilities.
Thanks, guys.
Thank you.
As a reminder.
You have a question please press star one.
This concludes our question and answer session. The conference call has now concluded. Thank you for attending you may now disconnect your lines.
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