Q1 2025 American Water Works Co Inc Earnings Call

Good morning, and welcome to American Water's first quarter 2025 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.

A webcast archive will be available for one year on American water's Investor Relations website.

I would now like to introduce you your host for today's call.

Erin Musgrave: Erin Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Speaker Change: Thank you Danielle 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.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: 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 first quarter earnings release and Form 10-Q, each filed yesterday with the SEC.

Speaker Change: And finally, all statements. During this presentation related to earnings and earnings per share refer to diluted earnings and diluted earnings per share.

Speaker Change: John Griffith, our president will share year to date highlights our affirmation of 2025, EPS guidance and long term targets and our dividend increase David Miller, Our executive Vice President and CFO will discuss our first quarter financial results provide rate case and legislative updates and we'll review our affirmation of growth drive.

Speaker Change: <unk> and financing plans.

Speaker Change: Cheryl Norton, our executive Vice President and CFO will then discuss our capital investment program, our acquisition outlook and will conclude with comments on the state of infrastructure in the U S.

Speaker Change: After our prepared remarks, we will then close by answering your questions. Our C. E O. Susan Hardwick is also with us and will be available for Q&A with that I'll turn the call over to American Water's President John Griffith.

John Griffith: Thank you Erin and good morning, everyone.

John Griffith: As we announced yesterday, we started 2025 with solid financial results.

John Griffith: On slide five earnings were $1.05 per share for the quarter, a nearly 11% increase compared to 95 cents last year. The increase results are on track to achieve our full year earnings guidance, which we are pleased to affirm representing our expectation of 8% EPS growth in 2025.

John Griffith: Compared to our weather normalized 'twenty 'twenty four E P S.

John Griffith: First quarter 2025 results included three cents per share of additional interest income from the 'twenty from the February 'twenty 'twenty four amendment of the seller note related to the sale of homeowner services here.

John Griffith: Here you can also see a recap of some of our other key accomplishments so far in 2025, and David and Cheryl will add to these in their remarks, we continued our track record of regulatory and capital planning and execution in the first quarter with new rates effective in several states and investments in infrastructure are progressing well.

John Griffith: I'm proud of our team's efforts supporting two key priorities in Missouri. This year, we achieved a constructive settlement in the general rate case in Missouri and are awaiting a final order and through a collaborative effort with many stakeholders future test year legislation was signed into law in the state both outcomes.

John Griffith: It's supportive of important utility infrastructure investments and aligned with our focus on providing safe clean reliable and affordable service to our customers and.

John Griffith: In addition, we were pleased to see S&P and Moodys again recognized our strong balance sheet and cash flows and our low risk profile as they both have affirmed our strong investment grade credit ratings and stable outlook.

John Griffith: Turning to slide six this quarter, we are again affirming our long term targets for both earnings and dividend growth at 79% driven by 8% to 9% rate base growth. This affirmation is based on our clear top tier capital growth plan, and our strong regulatory and operational execution that I believe is a pause.

John Griffith: Positive differentiator from our peers, we expect to consistently grow earnings and dividends at an industry, leading pace over the next five years and beyond leading to a very competitive value proposition for our shareholders.

John Griffith: Moving on to slide seven as we announced yesterday, our board of directors approved an increase in the company's quarterly cash dividend from 76, and a half cents per share to <unk> 82, and three quarter cents per share and 8.2% increase we have grown our dividend consistently over the last decade significantly outpacing.

John Griffith: Virtually all of our utility peers looking ahead, we continue to expect to grow our dividend at 7% to 9% per year in line with our compelling 7% to 9% EPS growth target, our board and management team understand and appreciate how important the dividend component of our total shareholder return.

John Griffith: One is to our investors.

John Griffith: Finally, I would like to note that today is our last earnings call with Susan at the helm.

Speaker Change: You recall, we announced in February with the Q4 release, the Susan will be retiring upon our annual shareholders' meeting on the 14th of this month, Susan We will Miss your presence your leadership and your wisdom and are grateful for everything that you've done for American water, you've had a long and very distinguished career in the utility sector and we.

John Griffith: Wish you much happiness and a lot of relaxation in your retirement.

Speaker Change: With that I'll hand, it over to David to cover our financial results and rate case in leathers legislative updates and further detail David.

David: Thanks, Sean and good morning, everyone turning to slide nine I'll provide some further insights into our financial results for the quarter consolidated reported earnings or dollar five per share up <unk> 10 per share versus the same period in 2024.

David: Revenues were higher by 44 cents per share primarily due to authorized rate increases to recover investment across our states revenues were also higher from closed water and wastewater acquisitions.

David: And organic customer growth.

David: And looking at operating costs O&M was higher by 15 cents per share driven primarily by employee related cost and other increases to support growth in the business and costs related to acquisitions completed in 2024, as we expected dupree.

David: Depreciation increased 11 cents per share and financing costs increased 10 cents per share both as expected in support of our investment growth and finally, we have one cent per share of additional interest income from the February 2024 note that related.

David: Related to the seller HOS, which is included in the other net column.

David: Turning to slide 10, I'll cover the latest regulatory activity in our states. The two key developments this quarter, where or rate cases in Missouri in Virginia, and Missouri, We entered into a settlement agreement with several parties, including Commission staff and the office of public counsel, where he agreed to an annualized revenue increase of $63 million.

David: As compared to our most recently revised request of $107 million.

David: New rates are expected to go into effect on May 31, 2025.

David: And once the final order is received from the commission, we will give our view on our OE and capital structure.

David: In Virginia, The commission issued an order approving our settlement of the of the general rate case, the order approved a $15 million annualized increase in water and wastewater revenues compared to the original filing that here had requested a 20 million dollar increase.

The order also approved a return on equity of nine 7% and a higher equity component of the capital structure than in our previous case at nearly 46%.

David: Since interim rates were implemented in May of 2020 for results in 2025 won't be meaningfully impacted by this case.

David: Turning to active cases, the preceding in Iowa is progressing as expected and we expect to receive a final order this month.

David: In Hawaii, we filed a partial settlement agreement subject to regulatory approval that results in a 1.5 million dollar increase based on a 9.75% our OE, we expect to receive a final order midyear 2025.

David: And finally later today, what we're making an initial submission related to our next general rate case in California, which is in keeping with the states three year cycle. The California case will seek to recover nearly $750 million in planned investment in pipe replacement resiliency and other important system needs.

David: Slide 11 outlines three important pieces of priority legislation for us that were signed into law already in 2025 first Missouri passed Senate Bill four as a result as a result, beginning July one 2026 water and wastewater utilities may request to use of a future test year and a general.

David: Our rate case for rate base and certain expenses.

David: As you know our current Missouri General rate case was filed on July one 2024, so we expect that our Nextgen a rate case in Missouri, where quest this future test year treatment.

David: This is a positive step with our regulatory and business environment in Missouri.

David: Turning to Indiana legislators there passed Senate Bill 426 in March, which modifies the existing distribution system improvement charge allow for the deferral of depreciation and postal service carrying cost from the in service state the eligible investments until they are included for a recovery in rates.

David: The language also provides important protections from lawsuits when utilities are meeting applicable water quality standards.

David: Then in Virginia Senate Bill 850 was passed and will permit a water or wastewater utility to petition the Virginia Commission for the recovery of an expanded list of eligible infrastructure costs outside of a base rate case.

David: Collectively these three laws represent progress towards achieving our allowed returns in each state and are supportive of further investments.

David: I'd like to congratulate our government government external affairs teams, who worked alongside many others to help achieve these constructive policies in 2025.

Speaker Change: And finally on slide 12, as John mentioned, we've affirmed our 2025 EPS guidance, which again represents 8% annual growth our outlook and plans for 2025 remain unchanged from our February call.

Speaker Change: Cheryl will speak to we don't expect any of the recent tariff related announcements to have a material impact on our 2025 plan or financial results.

Speaker Change: I'm confident in our team's ability to execute on our financial and operating plans and cost management strategies. This includes delivering cost effective financing, while maintaining our balance sheet strength and credit profile as we announced in late February we completed our success successful long term debt issuance of $800 million.

Speaker Change: At a 5.25 coupon that attracted strong demand.

He came and did a great job of timely executing part of our financing objectives for the year amidst a challenging market environment.

Speaker Change: Total debt to capital ratio as at the end of the quarter out of $114 million of cash on hand was 58%, which was within our target of less than 60%.

Speaker Change: Also as John mentioned S&P affirmed our a rating in April which fall Moodys affirmation of our B double way one best friend Crate rate credit rating in January with a stable outlook from both.

Speaker Change: Both agencies note.

Speaker Change: <unk> of our scale.

Speaker Change: Our low risk business profile, our strong regulatory and operational diversity across 14 states and our steady financial performance in their analysis. They also loaded our expected sustained F F O to debt ratios well within our current ratings thresholds.

Speaker Change: We are confident our business and financial profile, including F. F photo that will continue to support either our current or higher investment grade credit ratings.

Speaker Change: With that I'll turn it over to Cheryl to talk more about our capital program. Our recent acquisition activity and I'll look at the state of infrastructure in the U S. Cheryl.

Cheryl Norton: Thanks, David and good morning, everyone on Slide 14, our capital program is off to a good start this year investing $518 million in the first quarter, our state and corporate leaders and their teams did a great job working through a particularly harsh winter across many of our states.

Cheryl Norton: This result keeps us on pace to hit our goal of approximately $3 $3 billion of capital investment in 2025.

Cheryl Norton: We continue to expect these capital investments in infrastructure and in acquisitions will grow regulated rate base at a long term rate of 8% to 9%.

Cheryl Norton: As our capital investments related to P fast remediation and lead service line replacement began to ramp up we've been asked by investors if the amount or timing of our investments will change our answer is still the same we haven't changed our plans.

Cheryl Norton: P as rules around P. Fasten lead and copper are final regulations. Some of our states also have existing regulations for P fast and lead and copper.

Cheryl Norton: So while we'll continue to monitor for any potential changes in this realm for now we're moving forward.

Cheryl Norton: As I'll note a bit later in my comments is the capital spend needed to address P. Foss <unk> lead and copper goes down we would redeploy it to other important system needs such as pipe replacement.

Cheryl Norton: This quarter, we also thought it would be helpful to share a few comments about the potential impact of tariffs on our capital and operating expenses.

Cheryl Norton: Our teams analyze the potential cost increases that could come from tariffs on various raw materials or finished goods that we purchased to serve our customers. The good news as David alluded to is that our supply chain is predominantly sourced domestically and therefore, our exposure is very limited on things like fleet purchases pumps and some construction related material.

Cheryl Norton: Yes.

Cheryl Norton: Of course, we'll work to mitigate even that small exposure through our supply chain team and our purchasing power.

Cheryl Norton: Related to operating costs, we don't expect any significant tariff related impacts as most of our key expenses such as labor power and chemicals are primarily sourced domestically.

Cheryl Norton: So again, even with the uncertainty around tariffs and that's other uncertainties.

Cheryl Norton: I believe the high degree.

Cheryl Norton: The market is seeing how resilient American water is I'll say it again I believe the high degree of visibility to our capital investment plan combined with the low risk nature of the plan uniquely positions American water and the utility sector and is fundamental to our investment thesis.

Cheryl Norton: Turning to slide 15, we continue to be well positioned for growth through acquisitions across many states with about 37000 customer connections under agreement I want to highlight three states in particular today as we think about our acquisition outlook first in Pennsylvania already this year, we've received multiple unanimous approvals.

Cheryl Norton: From the commission to acquire water and wastewater systems, we remain confident in our Pennsylvania acquisition pipeline and we are continuing to invest in regulated acquisition opportunities in Pennsylvania, driven by the need for system consolidation in upgrading a great example of this is the east hunkered water system, which we just closed.

Cheryl Norton: This week that system was out of EPA compliance since 2014, and the residents in that community could not trust that the water coming out of their caps with safe to drink. The system was placed into a receivership under Pennsylvania American water last year and our team has done a phenomenal job and rectifying approximately 75 violations for.

Cheryl Norton: The state D P M.

Cheryl Norton: In Pennsylvania, and then all of our States American water will continue to be the solution provider to communities, who deserve high quality water and wastewater service.

Cheryl Norton: Next you can see that West Virginia has nearly 15000 customer connections under agreement our business development team. There is doing an excellent job in identifying consolidation opportunities and converting them to signed asset purchase agreements and finally in New Jersey, we have a signed purchase agreement for the South Orange water system.

Cheryl Norton: Which pass devoted referendum last fall that system is in need of significant follow up follow on capital over the next decade, which in particular includes a great deal of lead service line replacement.

Cheryl Norton: To close on Slide 16, the American Society of Civil Engineers latest report card for America's infrastructure issued every four years. Since 2001 recently gave the nation's drinking water systems are C minus grade and wastewater systems, a D plus grade both of which are unchanged from the 2021 report card.

Cheryl Norton: E P. A estimates that our country's water infrastructure needs total $625 billion of investments over the next 20 years and that estimate keeps going up not down each time. They update their estimates we believe even that estimate is way too low by a factor of two or three.

Cheryl Norton: Aging infrastructure extreme weather events and costs associated with regulatory and environmental compliance continue to place increased strain on the nation's water systems and this strain is genuinely felt is generally felt most acutely by small to medium sized municipal systems that don't always have the cap.

Cheryl Norton: It'll or the expertise to address the issues at hand, the need for consolidation of the fragmented U S water industry to help solve these problems as dire.

Cheryl Norton: Within the communities, we already serve we need to invest $36 billion to $37 billion over the next 10 years to help ensure a safe clean reliable and affordable water and wastewater service the solutions needed across the country will require the public and private sectors to work together.

Speaker Change: Together, we can safeguard public health incentivize economic investment and ultimately create American jobs with that I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Speaker Change: Thank you we will now begin the question and answer session to ask a question you May Press Star then one on the touchdown phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

Speaker Change: If at any time a question has been addressed and you would like to withdraw your question. Please press Star then two.

Speaker Change: The first question comes from Richard Southern at Sunderland from J P burn rate excuse me from Jpmorgan. Please go ahead.

Speaker Change: Hi, good morning.

Speaker Change: Good morning Rich.

Speaker Change: Well first congrats again to John Susan and the whole team Susan I Hope you enjoy your retirement.

Speaker Change: Thanks, Rich I certainly appreciate it I plan to.

Speaker Change: Great.

Speaker Change: Starting off any thoughts on pulling forward your 2026 equity issuance given the recent share price strength or just financing thoughts overall on approach to equity.

Speaker Change: Hey, rich. Thanks for the question you know you know, we'll continue to evaluate our the market and opportunities, but at this point no plans to pull that forward, we're going to issue equity when we need the financing.

Speaker Change: And Oh, well leave it at that.

Speaker Change: Understood very clear and then circling back to some of the earlier M&A acquisition outlook commentary.

Speaker Change: So keep standing under a scenario where recession puts pressure on Muni finance is do you think this could bolster some of the medium term opportunities for you.

John Griffith: Rich its John here I'd say, our prior narrative that we expect to see continuous flow of of acquisition opportunities is still in place it's possible that whether it's a recession or just less federal funding could drive some sellers.

John Griffith: Our or potential sellers to want to transact.

John Griffith: It is an opportunity and we think about that as part of a broader list of reasons why sellers could so you know, whether it's environmental remediation or deferred capital investment spend retiring operators things like that.

John Griffith: Or all point to continued activity.

John Griffith: Great. Thank you for your time today.

Rich: Thanks Rich.

Speaker Change: As a reminder, if you have a question. Please press star one and next question comes from Anthony called out from Mizuho. Please go ahead.

Anthony: Hey, good morning, and I Echo Richard's comments congrats to all just if I could just quickly just hit on one state on California, I think you mentioned, you're going to file I guess, the I noticed that you're planning to file a rate case I'm curious if you could just talk about maybe percentage increase or do you think you'll be asking in that case and then also I just apologize I feel.

Anthony: It's the timing of when you guys would far though I think you do it separate as a cost of capital proceeding in California.

Anthony: Hey, Anthony this is David So southern California case that we're filing you know there's a requirement to file a case every three years, we are aware of it to disclose the the percentage increase and we'll disclose that at this time.

Anthony: As far as the cost of capital for saying that described there's a separate proceeding we requested that that'd be delayed until 2026 that was approved earlier. This year. So the 10, 2% we have in place will stay in place until through 2025.

Speaker Change: So through 'twenty through 'twenty, four but do you have to file it this year than to have a new cost of capital in 'twenty six or you begin to filing in 26 for a new cost of capital and 27.

Speaker Change: Filing in 26 for a new cost of capital in January 27, Anthony.

Speaker Change: Great. Thank you so much that's all I have thanks.

Speaker Change: Okay.

Speaker Change: The next question comes from Greg <unk> from UBS. Please go ahead.

Speaker Change: Yeah. Thanks for taking my question.

Speaker Change: Susan I appreciate all your help.

Speaker Change: Thanks, Greg.

Speaker Change: I'm just.

Speaker Change: Maybe a little different topic, just do you could you provide an update on the California DC.

Speaker Change: Desalination project and then how that that's going to help you there.

Speaker Change: Oh sure Greg I think on an D. So as you recall, we got our.

Speaker Change: Last major permit approval back in November of 'twenty, 'twenty, two which was the California Coastal Commission Oh, we've got a a C. P C N a.

Speaker Change: From the California, PUC will need to provide updates to the to the PUC, but as we had noted in our 10.

Speaker Change: 10-K, we expect to break.

Speaker Change: Break ground this year on on DSO.

Speaker Change: That's not a part of the rate case.

Speaker Change: Correct, that's a separate docket.

Speaker Change: Got it thank you.

Speaker Change: Thanks, Greg.

Speaker Change: I don't know if you have a question. Please press star one. The next question comes from Paul Zimbardo from Jefferies. Please go ahead.

Speaker Change: Yeah.

Paul Zimbardo: Hi, Thank you team and congrats again, everyone, especially Susan.

Speaker Change: Thanks, Paul one from <unk>.

Speaker Change: No of course of course, just one for me on the the Legislative progress that you talked about the three states I think you've mentioned potential for stronger earned returns and incremental capital is there any way that you could frame the opportunities. There I know some states are larger in your mix versus some others just any.

Quantification would be helpful. If you can.

Speaker Change: Yeah.

Speaker Change: Paul This is David we have we haven't really framed up how much of an opportunity is the future test year, and Missouri will provide to us.

Speaker Change: Nor have we for the other states I mean, obviously it will incrementally help help.

Speaker Change: Our earned returns in each state.

Speaker Change: Okay. Okay I'll leave it there thank you very much.

Speaker Change: Yeah.

Speaker Change: This concludes our question and answer session.

Speaker Change: And the conference is now concluded. Thank you for attending today's presentation you may now disconnect.