Operator:

Good morning and welcome to American Water's Second Quarter 2024 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 Web site. 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, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin

Susan Hardwick:

Thanks, Aaron. Good morning, everyone. Let's turn to Slide 5, and I'll start by covering some highlights of the first half of the year. As we announced yesterday, we delivered solid financial results in the second quarter and first half of 2024. Earnings were $1.42 per share for the quarter, compared to $1.44 for the same period last year. In the first 6 months of 2024 and 2023, earnings were $2.37 per share. The results for both periods were in line with our expectations. Our expectations were based on the timing of revenue increases from several general rate case proceedings and infrastructure mechanism filings expected to be effective in the latter half of 2024, which I'll speak more about shortly. With our year-to-date execution and customer usage declines being a bit less than we had planned for so far in 2024, we have raised our 2024 EPS guidance by narrowing it to the top half of the guidance range. Our expectations for 2024 are now $5.25 per share to $5.30 per share. John will share more about our results and guidance a bit later. Moving on to some of our other key accomplishments so far in 2024. We invested $1.4 billion in capital projects year-to-date, again, reflecting great work by our teams responsible for planning and completing these investments. We were also very pleased to add 43,000 customers in our first half of the year from acquisitions and organic growth. Our outlook for future acquisitions remained very strong as we have nearly $500 million in acquisitions under agreement. And earlier this week, we were pleased to publish our company's latest sustainability report for 2023. It reflects how we are fulfilling our mission of providing safe, clean, reliable and affordable water and wastewater service in a very sustainable manner to American Water customers. This has been our mission for over 135 years and counting. Turning to Slide 6 and back to the topic of regulatory recovery, I want to acknowledge the great work of our state and corporate regulatory teams as they continue to successfully execute on our regulatory strategy. We have completed four cases already in 2024 in Indiana, West Virginia, Kentucky, and Pennsylvania, all of which authorized 100% of the capital investments we have made or will make in each state. We also have several other general rate cases and timely infrastructure recovery mechanisms currently in front of regulators that I'm confident will be reasonably decided. Cheryl will provide some additional updates on our active general rate cases a little later. Let's zoom out for a minute, though. I want to remind investors that we strategically choose to operate in a diverse set of regulatory environments that we believe have been and will remain supportive of water and wastewater utility investments and consolidation. As I told you earlier this year, American Water continues to receive tremendous support at the state and federal level for the work that we do across our footprint. Policymakers in our states often understand that historic $20 or $30 per month water bills don't equate to adequately invested systems or the highest quality services for residents. Those relatively low legacy rates often signal significant underinvestment, below average reliability and/or water quality, wastewater overflow issues, or all of the above. That's why policymakers frequently encourage American Water to keep growing, keep investing, and keep solving problems in their states. We often are called on by regulators and policymakers when there is a need for experts to take over a failing community water system. We have a very recent example of just that in the state of Pennsylvania. As you know, we just completed our rate case in Pennsylvania, and the Commission released its order in that case on July 22. It was a case that reflected $1 billion of investment since our last case, which was decided just a short 18 months ago. It's important to note that the Commission approved 100% of the capital invested or to be invested by the end of the future test year of June 30, 2025. There is no dispute about the investments being made and the absolute need for the investment to continue to update our systems to ensure that citizens of Pennsylvania, where we operate, are confident in their water and wastewater service. Certainly, we've received comments about the pace of our regulatory strategy in Pennsylvania. What drives that pace is the need, plain and simple. And of course that pace of investment leads to increased customer bills. We're focused on that issue in every aspect of our regulatory planning and the efforts we continue to drive to ensure customer affordability, from cost management and driving efficiencies, to innovative tariff approaches, to a direct customer assistance. At the end of the day, though, the need for investment is not decreasing. As you assess the recent Pennsylvania order outcome, it's helpful to understand the reconciliation of the order findings to our request. Really there are only two or three things that reconcile the full difference. Recall that we requested a revenue increase of about $200 million and an ROE of 10.95%. An ROE request, which is fully reflective of an increasingly risky business because of higher capital costs, new and emerging regulations, and an increasing need for resiliency, to name just a few of the drivers. The ROE differential between our request and the commission's unprecedented and frankly unsupported finding of 9.45% is $71 million of revenue. Additionally, the Butler Area Sewer Authority acquisition, though fully approved by the commission previously, was removed from the revenue requirement because the transaction is not yet closed. That impact is $23 million of requested revenue. The remaining $11 million delta from our request to the final authorized revenue requirement is made up of a few cost-of-service items. In summary, the order found our request to be fully reasonable, but for the ROE finding. We will continue to be very present in Pennsylvania as we serve our customers, but we will evaluate what is the -- what this result means to our overall allocation of capital investment among our various states. Investors certainly expect a fair return, and it is part of our mission to provide that opportunity while fully serving our customers. Selectively, we believe there is a very long runway of investment opportunities in the communities we serve across our 14 states for organic CapEx and for growth through acquisitions. And further, we believe the regulatory and legislative environments in our 14 states continue to be conducive to earning a fair and reasonable return on the investments we're making and that you, our investors, are counting on. We do all of this while keeping customer bills affordable and staying true to our high value of quality service and sustainable operations, which leads us to Slide 7, and what I believe are the drivers of American Water's very competitive and sustainable shareholder return built on the foundation of the regulatory execution I just discussed. This quarter we are again affirming our long-term targets, including both earnings and dividend growth targets at an industry-leading pace of 7% to 9% over the next 5 years and beyond. This affirmation is based on our clear top-tier growth, capital growth plan, and our solid regulatory and operational execution. Our track record of execution 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. Finally, let me spend just a few minutes on the leadership news we detailed in our earnings release. I'm excited to release [ph] John has been named President of American Water. This is a decision the American Water Board and I have worked on for some time, and it really is about our intentional effort to build a pipeline of talent through career development to ensure we have a strong leadership foundation for the long-term. With this shift, I will continue to lead the overall strategic direction of our company as the CEO, and as an American Water Board member. John will lead the continued execution of our strategies and daily operations. He will continue to report to me and our Executive Leadership team will report to John. Cheryl will expand her COO role and now lead Business Development. When you consider how she has led our increased capital program, her extensive water quality expertise given the ever-increasing regulations, and her reputation in this industry. This is a natural expansion of her role as we continue to bring solutions to even more communities across the country. David Bowler, who you will hear from next quarter, has been named Executive Vice President and CFO, and Nick Furia has been named Vice President and Treasurer. Let me just say a few words about John, Cheryl, David and Nick, as we are really pleased to have all four expand their roles. You know John well. He has more than 25 years of industry knowledge and expertise and significant experience in leading high-performance teams, strategy development, and execution. Most importantly, he has a deep understanding of our company's purpose and a strong commitment to our customers, employees, and shareholders. Cheryl has more than 35 years of experience and expertise. She has led our lab, served as President in three of our states, and does an incredible job leading all areas of our operations. She, too, has a strong sense of the purpose of American Water. David has nearly 20 years of deep experience in the utility industry and has been our Deputy CFO and Treasurer since 2022. He has significant experience in all aspects of financial management and strategy, including finance strategy and planning, treasury, accounting, enterprise risk and capital markets. And Nick Furia has 10 years of experience with American Water and has served as our Assistant Treasurer since 2021, overseeing key treasury-related functions, including financing, cash flow, liquidity, overall cap structure management. He also served as the Director of Acquisitions at American Water and has nearly 20 years of experience in accounting and finance roles. All have a strong commitment to the success of our company and are well suited for their new and expanded roles. We firmly believe we have further solidified an already top talent leadership team. Our leadership team and the American Water Board of Directors are excited about these changes and highly confident this team will support the execution of our plans now and well into the future. And with that, I'll turn it over to Cheryl to talk more about our recent regulatory updates, affordability and the capital plan. Cheryl?

John Griffith:

Thank you, Cheryl, and good morning, everyone. I, too, look forward to all of our new roles. We have a great future ahead of us and much work to do as we continue to make communities stronger through the essential water and wastewater services we provide. Turning to Slide 15, I'll provide some further insights into our financial results for the quarter. Earnings were $1.42 per share for the quarter, down $0.02 per share versus the same period in 2023, but up $0.02 per share on a weather-normalized basis. Recently completed rate cases in Indiana, West Virginia, and Kentucky, in addition to rate outcomes achieved last year, are driving increased revenues. While weather led to a net unfavorable impact on earnings quarter-over-quarter of an estimated $0.04 per share, earnings in the second quarter of 2024 were favorably impacted by an estimated $0.03 per share of weather due to warm and dry conditions, primarily in New Jersey, while earnings were favorably impacted in Q2 of 2023 by an estimated $0.07 per share of weather due to warm and dry conditions, primarily in Missouri, New Jersey, and Pennsylvania. And looking at operating costs, increased employee-related costs caused O&M to increase $0.03 per share, as expected, from normal wage increases somewhat offset by lower headcount. Production costs related to fuel, power, and chemicals costs were flat compared to this period in 2023. Next, depreciation increased $0.07 per share, and long-term financing costs increased $0.11 per share, both as expected, in support of our investment growth. Long-term financing costs include interest on the $1 billion convertible note issuance from last June and the $1.4 billion long-term senior note issuance this February. And finally, we had $0.02 per share of additional interest income from the February 2024 amendment of the seller note related to the sale of HOS. We will continue to break this out quarterly so investors will be able to track the ongoing growth of American Water from its core regulated strategy without this additional interest income. Turning to Slide 16, earnings were flat 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 $0.04 per share year-to-date, which as Susan mentioned, is in line with our expectations for the first half of the year. Turning to our discussion of growth through acquisitions, on Slide 17 you'll see that we successfully closed on five systems for $119 million through June 30, which added approximately 33,400 new customers. The newest additions include the water and wastewater systems in Salem, New Jersey, and Cape Charles, Virginia, which followed the Granite City, Illinois, Wastewater Treatment Plant acquisition we closed in Q1. We've also added 9,600 customers through organic growth through June 30. We continue to be well-positioned for strong growth through acquisitions, with 59,000 customer connections and $483 million under agreement as of quarter end. Many states in our footprint are contributing to this total, which mirrors the broad-based pipeline of opportunities we have in progress across the country. As a reminder, we have received PUC approval for the acquisition of the 15,000-customer BASA wastewater system in Pennsylvania. The PUC's approval is under appeal, and we await a decision from the Pennsylvania Commonwealth Court to proceed with closing. On June 13, the Pennsylvania Commission voted to adopt revisions to procedures around Act 12 fair market value. The provisions in this final order were largely the same as the proposed version we covered on the first quarter call. And as we said on the first quarter call, we believe these provisions are a constructive step for continued consolidation in Pennsylvania as they reaffirm the core principles of Act 12. We do expect the closing of current pending transactions will likely take more time than usual, but to be clear, we are confident in our Pennsylvania acquisition pipeline. Slide 18 is a summary of our continued strong financial position. Our total debt-to-capital ratio as of June 30, net of our $48 million of cash on hand as 56%, which is comfortably within our long-term target of less than 60%. And finally, on Slide 19, yesterday we announced that we are raising our 2024 EPS guidance by narrowing it to the top half of the range we first disclosed in February. The 2024 EPS guidance range is now $5.25 to $5.30, from $5.20 to $5.30 previously, and still on a weather-normalized basis. As Susan mentioned, this change is driven by lower-than-expected declines in customer usage, which is something we track closely and now believe we can count on for the remainder of the year. Coupled with the fact that we have several revenue increases effective in Q2 and Q3, we expect second half 2024 will deliver financial results to achieve this narrow guidance range. This puts us on track to deliver 8.5% EPS growth in 2024 at the new midpoint. Our high-level outlook for 2024 otherwise remains unchanged from what we previously disclosed, and we again affirm our long-term financial targets. We believe our industry-leading EPS and dividend growth, coupled with our affordability position and DSG leadership, will continue to be highly valued and rewarded by investors. We believe these aspects of our business and our position as the largest and most geographically diversified water and wastewater utility in the country distinguish us from all other utilities. With that, I'll turn it back over to our operator to begin Q&A.

Durgesh Chopra:

Hey team, good morning. First off, congrats on all the leadership announcements here to all of you.

Durgesh Chopra:

Good morning, Susan. Susan, thank you for all the color you provided as it relates to Pennsylvania rate case. I'm just thinking about how, if at all, this changes your regulatory strategy in the state, the timing of rate cases, the ask, the capital spending, how should we think about that just thinking about the impacts of the order?

Durgesh Chopra:

Got it. That's very helpful. That's all I have. Thank you.

Operator:

The next question comes from Richard Sunderland from JPMorgan. Please go ahead.

Susan Hardwick:

Thanks, Rich.

Susan Hardwick:

Yes, again, I think there's so many opportunities in all of our states really from a acquisition growth perspective and we know we've got a great pipeline in Pennsylvania, a lot of good opportunities there and our team continues to work very, very hard to identify those opportunities and move them all along. And we're not going to slow that pace at all. I think if there's a pace issue at all in Pennsylvania, it will really be around just the environment-related to fair market value and the commission's process they put in place to review acquisitions, which we think, by the way, is very positive. We think the approach the commission has taken there to really put some guidelines around looking at acquisitions and benefits being provided to customers we think will be helpful. But it's still a difficult environment to get those transactions across the finish line. So again, our view is we don't change anything about what we're doing. We'll see how the process works with all the parties involved in those types of proceedings and how the commission handles all of that through the approval process.

Susan Hardwick:

Yes, I'll probably turn to John on that. John, you want to comment there?

Richard Sunderland:

Got it. Thank you for the time today, I'll leave it there.

Operator:

The next question comes from Paul Zimbardo from Jefferies. please go ahead.

Susan Hardwick:

Hey, good morning, Paul.

Paul Zimbardo:

Great. My first question was just if you could unpack a little bit some of the detailed guidance changes within the subcomponents, like in particular, you mentioned that decline -- lower-than-expected decline of customer usage, like how much of that was the guidance raised and just if that carries forward, also there's some moves in like MSG and other. If you could just help unpack some of the more material pieces in the change.

John Griffith:

If you think about kind of a midpoint to midpoint change, Paul, we're talking about a few cents here. So I think you've -- I think Susan got it right.

Paul Zimbardo:

Okay, great. And then just to follow-up on Durgesh's, Rich's questions about Pennsylvania. Does the commentary about like potentially shift CapEx around also carry to interest in M&A in Pennsylvania? I know it's been kind of a long arduous road and the changes legislative at the commission. Just any change in your views about kind of growing inorganically in Pennsylvania as well?

Paul Zimbardo:

Great. Thank you. Very clear. And also congrats again to everyone on the leadership changes.

Operator:

The next question comes from Angie Storozynski from Seaport. Please go ahead.

Susan Hardwick:

Yes, Angie, I think it's, again, sort of a good question. First I would just remind folks, and I don't know, back in the back of our deck, we've got detail around rate base on the various jurisdictions. Of course, it changes quickly because we are so active in the regulatory environment, but I think you will see the gap closing from Pennsylvania to some of our other larger states pretty quickly in terms of rate base. We have been making significant investments all across our territory. So while Pennsylvania is large, we have many other states that are gaining ground in terms of size of investment. I think the other answer to your question, though, we addressed in prepared remarks that across our 14 states, we have a lot of opportunity to continue to invest. This need is the same across the country. The need for investment in infrastructure and replacement and resiliency, which I think doesn't get enough of a play. The resiliency issue is a huge one as we see climate changing in different ways in different parts of the country. So we need to continue to focus on our resiliency investment. We have a ton of opportunity across all of our states to deploy capital. So as I said, I think in response to the first question, we don't envision any change in our total capital spending. Where we spend it, we will continue to look at.

Susan Hardwick:

Thanks, Angie.

Jonathan Reeder:

Hey, good morning, team, and congrats on the management leadership announcements today.

Jonathan Reeder:

I wanted to build on a couple of the questions that have already been asked, but where exactly does that legal challenge related to Butler, stand? And how soon do you think that's going to get resolved by the Commonwealth Court?

Jonathan Reeder:

Okay. But there's no like precedent in terms of how long from the point that the challenge was filed or are you just waiting on the court order or all the processes played out at this point?

Jonathan Reeder:

Okay. I understand that. On the [indiscernible] deal, I know that's the other kind of large pending one in PA for you. With the fair market value revisions, because that one need to like potentially be recut or what’s the latest thoughts on when that will be filed and potentially approved and closed?

John Griffith:

Yes, Jonathan, we're still moving forward with the approval process on [indiscernible] in terms of going to the PUC. So there's no additional update on that.

John Griffith:

Not Yet.

John Griffith:

Okay.

Susan Hardwick:

John, you want to cover that?

Jonathan Reeder:

Okay. And that's lower weather normalized customer usage, right?

Jonathan Reeder:

Okay. What about the long-term financing headwind? I saw the midpoint there came down by like $0.075. Is that it all relate to the pushback and the expected closing dates are like Butler and [indiscernible]? No, the financing, Jonathan, really just relates to the timing of the financings that we've done today. In terms of the convert that we issued last June and then the straight debt that we issued this year.

Susan Hardwick:

Yes, I think that's the bulk of it. There is a little bit of an impact from just the delayed closing on the BASA acquisition too since we have not financed that essentially. So there's a little bit of contribution there too.

Susan Hardwick:

Well, we've been sort of waiting on the closing of that for a while. So we probably didn't have fully baked in our expectations around that earlier in the year.

John Griffith:

No, that's not an ongoing MSG issue. That's just a collection of smaller modest puts and takes that are one-offs.

Susan Hardwick:

Thanks, Jonathan.

Aditya Gandhi:

Good morning, Susan, Cheryl, and John. Can you hear me?

Aditya Gandhi:

Good morning. Congratulations on the leadership updates. I just wanted to follow-up on one of the Pennsylvania questions that was asked earlier as it relates to the lower ROE and your 7% to 9% EPS CAGR. I understand you just reaffirmed it today, but in the interim, while the rate base in your other states picks up, should we be expecting an impact where you're maybe trending towards the lower end of your range in the near term, or are there any other levels or offsets that we should be considering?

Aditya Gandhi:

Got it. Okay. And have there been any material updates on the PFAS multi-district litigation where you're still waiting for proceeds from some of the defendants there?

Cheryl Norton:

Yes, sure. Yes, so we have submitted all of our data that was requested to determine what that payout would be. And now we're just waiting to hear that they've closed that period. It was supposed to close last week. And it could get extended, but we think that the date will hold firm. But now we just have to wait for them to do all the calculations to determine what the payout will be. We don't know for sure when that's going to happen.

Operator:

Seeing [ph] that there are no further questions, this concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to American Water's First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded and is also being live webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website.

Aaron Musgrave:

Thank you, Betsy. 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.

Operator:

[Operator Instructions] The first question today comes from Richard Sunderland with JPMorgan.

M. Hardwick:

Yes, we can.

M. Hardwick:

Yes. Good questions, Rich. I think first on the rate case, I would say probably just where we are in the process. I'd say settlement is probably unlikely at this stage. And as Cheryl, I think, outlined, we would expect some activity by the Commission here in the next probably several weeks, and then we'll wrap that case up later in the summer. So I don't expect to settle at this point. And again, we're pleased with where we are in the process related to that case.

Richard Sunderland:

Got it. Appreciate the commentary there. And then separately, on Slide 9, the latest around these new circular designations, curious how you view litigation risk under these new classifications or anything we should be thinking about on the litigation front, given the commentary around the liability protections that you also referenced?

Cheryl Norton:

Yes, I would just add that we're working really hard on the legislative front to get the language fixed so that we are protected from those CERCLA rules, and we'll continue down that path. We've had lots of conversations with EPA around this, and their intent is not for us to be impacted by that, but those conversations will continue until we get to a solution that we're all really comfortable with.

Agnieszka Storozynski:

I do want to go back to Pennsylvania rate case. I understand the sensitivity around it, but there are just a number of issues raised in it by I mean many intervenors, the commission itself about how often you file rate cases, the allowed ROE? I mean you guys mentioned a number of other rate cases that seem to be going smoothly, but I'm just wondering if there's -- if there are any thoughts about a change in the strategy of still how often you file rate cases, any impact of these comments that you're seeing on the level of capital investments, especially in Pennsylvania. Again, I don't think that we've ever seen filings like these in Pennsylvania.

M. Hardwick:

Yes. I think it's probably a fair assumption to say that all of this is getting a bit tied together. The landscape around the potential legislative changes in fair market value, I think, do sort of spill over into the rate case analysis a bit. And to be clear, we included in this case, acquisitions that we have approved and expected to close during this period of time. And so as the commission sorts through that, obviously, they've got to take into consideration the status of those acquisitions and their findings in the case, which we would fully expect them to do.

Operator:

The next question comes from Gregg Orrill with UBS.

M. Hardwick:

Yes, it's a good question. Cheryl, you want to talk about any preliminary thoughts we have about potential water usage in some of these large data center moves.

Operator:

[Operator Instructions] The next question comes from Aditya Gandhi with Wolfe Research.

M. Hardwick:

We can.

M. Hardwick:

Sure. Yes. Cheryl, do you want to take that?

M. Hardwick:

And Cheryl, it is stand-alone, right? There's nothing else defined.

Aditya Gandhi:

Right. That's helpful. And maybe just 1 follow-up there. Is there a particular timeline by which you're expecting this legislation to either pass or by when -- by when should we know whether this thing is going to pass or not?

M. Hardwick:

We do think it probably helps a bit that we now have the final rules out. We've been working on this particular angle for quite some time even before the final rule was published. So now that the final rule is here, that sort of eliminates one reason why legislators didn't want to take this issue up. If they were waiting to see what the final rule was, and that was sort of an excuse to not address this issue, I think that's been removed from their list of reasons not to move. So hopefully, that helps, and we'll see continued movement here.

Operator:

This concludes our question-and-answer session. That concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to American Water's Fourth Quarter and Year-End 2023 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for one year on American Water's Investor Relations website. I'd now like to introduce you to your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick:

Thanks, Aaron. Good morning, everyone. As we announced yesterday, we finished 2023 with very strong financial results that were right on plan. As shown on slide five, earnings were $4.90 per share for the year, which included $0.13 per share of favorable weather, most of which we discussed earlier in the year. Excluding the estimated weather impact, earnings of $4.77 per share were at the midpoint of the guidance rates we shared originally back in November of 2022. I'm very proud of our company's ability to stay focused on serving our customers safely and reliably through numerous economic events this past year, which gave us the ability to confidently execute on the plan we had for 2023. I'm also proud of the resilient service we consistently deliver, and especially over the past few months during a cold January and active storm season across the country. I want to thank our employees for safely providing reliable service to the 14 million people we serve in their homes, businesses, and communities. You can see here on slide five an abbreviated list of some of our key accomplishments in 2023, and John and Cheryl will add to these in their remarks. Overall, we believe the takeaway today for investors is that our strong execution in 2023 amid the challenging macro backdrop coupled with our clear top-tier growth plan demonstrates American Water's ability to deliver on our long-term plan. I'm very confident we will execute our plans in 2024 and beyond with the great momentum we have from 2023. Turning to slide six. As you can see, we have delivered an excellent total shareholder return over the past five and ten years, including our growing record of significant dividend increases. We're proud of this history, which compares very favorably to other utilities. I want to acknowledge, though, that our stock and utility stocks in general did not perform nearly as well as the S&P 500 in 2023, which dampened the outperformance we've had versus the S&P 500 over the last decade or so. Relative valuations of utility stocks fell without regard to specific performance, all of that while we continued our very strong performance. I'm confident our company's fundamentals and the execution of our strategies will continue to produce superior shareholder value and very competitive total shareholder returns for years to come, which takes us to slide seven. The comments that we'll share today are largely an affirmation of the financial plan, long-term targets, and guidance we laid out last November, highlighted by 7% to 9% EPS and dividend growth. Later, John will recap the drivers for our growth in 2024, including the increase to our EPS guidance range that we announced yesterday. Big picture, though, we believe the combination of our EPS and dividend growth, our low-risk capital plan, our ESG leadership, and the affordability of our service continues to be rewarded by investors and distinguishes us from other utilities in the sector. I'll remind you that we believe the runway for our growth and for achieving these targets is very long, certainly through 2028 in our five-year plan and beyond that. This, of course, is driven by significant investments in infrastructure and acquisitions coupled with our track record of constructive regulatory outcomes, all with a keen focus on affordability. And on top of all of that, we continue to grow organically, including in our military services business that successfully serves 18 military installations across the country. One final thought I want to leave you with as we begin 2024. American Water continues to receive tremendous support at the state and federal level for the work we do across the country. The impact we are making in communities across our 14 states to improve water and wastewater service is critical to the well-being of the citizens we are proud to serve. And as we've told you many times, we are committed to solving local infrastructure issues while at the same time driving efficiencies in our business to remain very affordable to our customers. Policymakers frequently encourage our leadership to keep growing, keep investing, and keep solving problems in their states. And this includes Pennsylvania, where we applaud the Public Utility Commission's proposal on February 1 to enhance the process around the implementation of fair market value legislation. We believe the spirit of the enhancements is to increase public awareness and establish greater procedural consistency, all in support of much-needed consolidation of the common wealth water and wastewater systems. While the business of providing these critical services can at times lead to enhancements in the way we do business, including in the regulatory construct, we have no doubt about the overwhelmingly positive support we receive from stakeholders as we pursue our company's mission. With that, I'll turn it over to Cheryl to talk more about rate-based growth, our regulatory plan, and some recent news around lead service lines. Cheryl?

John Griffith:

Thank you, Cheryl, and good morning, everyone. Turning to slide 15, let me provide a few more details on financial results for 2023. The appendix also has details of fourth quarter EPS. Consolidated earnings were $4.90 per share in 2023, up $0.39 per share compared to 2022, and up $0.32 per share on a weather-normalized basis. Increased revenues were driven by general rate cases we completed in late 2022 and early 2023 in our larger states. These additional revenues are driven by the significant investments we've made and continue to make in our systems. As noted, earnings were higher in 2023 by an estimated net $0.13 per share as a result of weather in the second, third, and fourth quarters due to warm and dry conditions primarily in Missouri, New Jersey, and Pennsylvania. This compares to net favorable weather in the third quarter of 2022 of $0.06 per share, which related mostly to warm and dry conditions in New Jersey. In looking at operating costs, higher pension expense of about $0.13 per share and increased chemical costs of about $0.11 per share, including inflationary pressures, are being recovered in large part through higher revenues we proactively sought in general rate cases we completed in the last 12 months to 18 months. In the fourth quarter, we also had higher costs of about $0.10 per share related to waste disposal, equipment repairs, tank painting, and other maintenance costs across our footprint. Supporting our investment growth, depreciation expense increased $0.24 per share, and the cost of additional long-term financing increased $0.38 per share, primarily related to share count dilution. As I have mentioned all year, the EPS impact of the higher share count from our equity issuance back in early March was offset by avoided interest on the year. An additional benefit realized this year from the equity issuance is the interest income we have been earning from the cash balance held since March. Other reflects primarily post-closing acquisition adjustments in 2022 from the sales of HOS in New York, which added to EPS. Turning to slide 16, you will see we continue to be set up for strong growth through acquisitions. We closed on '23 acquisitions totaling $77 million across eight states in 2023. We also have 25 transactions under agreement across seven states at year end, totaling $589 million and 88,000 customer connections. This total includes both the Butler Area Sewer Authority wastewater system in Pennsylvania and the Granite City wastewater treatment plant in Illinois. We are very close to completing the Granite City acquisition where we already provide wastewater collection service for approximately 12,000 customers. In Pennsylvania, as Susan briefly discussed, the regulatory environment relating to acquisitions is undergoing change, which we think is ultimately necessary and positive, but will take a period of time to sort out. We are very confident that Act 12 fair market value legislation will remain in place and continue to have strong support. As is often the case, implementation of legislation needs to be worked through in the regulatory arena, and that is what is happening now. In the meantime, closing of our current pending transactions will likely take more time than usual, but to be clear, we are confident that the previously approved Butler acquisition will close soon. We are continuing to invest in regulated acquisition opportunities in Pennsylvania, driven by the continued need for system consolidation and upgrading for the benefit of communities in Pennsylvania who deserve safe and reliable water and wastewater service. As you know, we have a strong track record of closing acquisitions. Over the past five years, we have closed over 100 acquisitions across 12 states, totaling nearly 200,000 new customer connections. Of course, as we close transactions, the work to build and refill our acquisition pipeline is continuous. Our pipeline of more than 1.3 million customer connections with meaningful contributions from across our platform continues to be a strong leading indicator that supports this piece of our rate-based growth outlook. As you recall, in November, we introduced our long-term target of 2% annual customer growth from acquisitions, as shown on slide 7. This equates to about 70,000 acquired customers per year, based on our current customer count of approximately 3.5 million customers. We are proactively investing in our capabilities across our platform to bolster our system-wide contribution to acquisitions to support this growth and are confident in meeting our 2% long-term target. Turning to slide 17, here we show the buildup from 2023 weather-normalized actual to the 2024 EPS guidance range of $5.10 to $5.20 that we introduced last November, which reflects 8% growth at the midpoint of $5.15. Working from that same buildup, yesterday, we announced an increase of $0.10 per share to our 2024 EPS guidance range, which is now $5.20 to $5.30 per share. The increase is due solely to additional interest income we will receive in 2024 and expect to receive annually through 2026 from the amended terms of the secured seller note from the sale of HOS. As we described in the 8-K we filed on February 5, the note balance has been increased to $795 million from $720 million, which satisfies payment of a contingent consideration owed to American Water of $75 million, triggered by the extension of HOS's service agreement with the New York City Water Board. In addition, reflecting current market interest rates and removal of American Water's option to require prepayment of the note at a future date, the annual interest rate on the note has been increased from 7% to 10%. American Water is pleased to see the continued growth of the HOS business under its new ownership, including the service contract extension with New York City, as well as the significant acquisition recently announced by HOS, which will be funded with new equity from HOS's owners. As it relates to future earnings guidance, it will be important for investors to be able to track the ongoing growth of American Water from its core regulated strategy before this additional interest income. Therefore, when we provide forward year EPS guidance each November, we will be sure to note the EPS associated with the additional interest income from the secured seller note in that guidance. To wrap up, slide 18 is a summary of our continued strong financial condition, which we further solidified in 2023. Just last month, Moody's affirmed our solid Baa1 investment grade credit rating and stable outlook and noted our improved FFO to debt ratio. We are confident our FFO to debt ratios will continue to support our current credit ratings. Our total debt to capital ratio as of December 31, net of our roughly $330 million of cash on hand is 55%, which is comfortably within our long-term target of less than 60%. While having moderated somewhat, the current higher interest rate environment continues to be challenging. As I said in November, though, we are in a position of strength on a number of fronts in dealing with this challenge. Our strategy of issuing debt at the holding company level allows us to take advantage of our scale and pricing debt issuances, and we will remain proactive in managing risk and achieving a low cost of capital to the benefit of our customers and shareholders. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Shar Pourreza:

Hey, guys. Good morning. Yes, I don't usually lead off with sort of an M&A question, but I know John loves talking about M&A, and we saw that in the prepared remarks. And obviously, it's timely given the Eversource news yesterday where they essentially put a querying on the block. Can you speak maybe to your appetite for larger inorganic opportunities and specifically any geographic aversions to the Northeast in light of the developments yesterday?

John Griffith:

Well said.

Susan Hardwick:

Yes, Shar, let me again sort of generally answer and then Cheryl can add to it. I think it's -- first of all, it's sort of too early to be able to give any additional guidance around impacts to our overall plan. I think the important thing to remember here is it is over a much longer period of time than what we're seeing with the PFAS rules, for example. So it will give us more time to figure out what the actual impacts are to the plant, give us more opportunity to look at opportunity to move other projects around to sort of accommodate whatever spend we think maybe incremental here for us. So we just probably need a little bit more time to sort through it and then we can give a clearer guidance. Again, as Cheryl said in her prepared remarks, we know it will be significant. I don't think it will have the dramatic impact on our plan for shorter-term windows like we saw with PFAS, for example. Cheryl, anything you want to add to that?

Susan Hardwick:

Yes. I think just to sort of punch line on that one, and Cheryl again made the comment in her prepared remarks, this is about unknown service lines, unknown material, and it is about customer owns. So as we've been working through our own program of replacing our lines, now we have the added requirement to look at unknown pipe and customer service lines. So that's why it gets bigger. And then again, the long-term time horizon to deal with it, I think, is also important to keep note of.

Durgesh Chopra:

Hey, good morning, team. Thanks for giving me time. Hey, just… Morning. Good morning, Susan. Just I hate to go back to the M&A. I know you're kind of going to be very limited in what you can say. But we've been getting a ton of questions on this. So I just want to be clear about something. In your seat, your peers generally describe M&A as a high hurdle rate, right, with the organic growth opportunities that they have as a company. How would you characterize the Connecticut water assets? Are these ones -- one-of-a-kind assets, those large assets that don't often come to markets extremely attractive? Or would you say the M&A opportunity is still a high hurdle rate versus the organic CapEx that you have? And I don't want to put words in your mouth, but I just want to see how you're thinking about it.

Durgesh Chopra:

Understood. Susan, I appreciate that. Maybe then switching gears. Can you just update us on the Pennsylvania rate case, the commission, I think, came out in December, I think they may have suspended the rate case schedule. Maybe just talk to that, what does that mean? What are the next steps there, please?

Durgesh Chopra:

Got it. Just a quick follow-up there, Susan, -- like do does the procedure like the steps in the rate case in terms of testimony, intervenor testimony and all that stuff. Does that go along as planned with the suspension? Or is that on pause? I might have seen something that maybe on pause. I'm not sure if.

Operator:

The next question comes from Angie Storozynski with Seaport. Please go ahead.

Susan Hardwick:

Yes. Again, let me sort of start off here. On Illinois, I would take my answer to Pennsylvania and insert the word, Illinois. We are proceeding there as scheduled with no significant issues in that case. It is about investment, and we'll continue to process that case like we always would. Certainly, there is noise around the electric and gas industry cases there. We think, again, our cases are different in that they are about investment only, and we're confident in our ability to continue to work through that case as well. On PFAS, Cheryl, you might just actually want to comment on Illinois, if you like. And then on PFAS. There's obviously a lot going on here, too. I think the litigation environment around this is probably not surprising. There'll be all sorts of plaintiffs' attorneys looking for an angle here. And I think that's probably what mostly you're referring to and what we're seeing. But Cheryl, anything you want to add on either of these topics?

Operator:

Next question comes from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Susan Hardwick:

Yes. I think we've tried to be clear, Julien, on the sort of duration of this additional interest we'll have on the note. But John, do you want to comment on this further?

Julien Dumoulin-Smith:

Right. Yes, understood. I just wanted to clarify that extra clear. With respect to Illinois here, obviously, you've got this case out there, there's a certain degree of attention. Can you comment a little bit about maybe some of the rate mitigation factors, what other pieces could help offset some of the rate increases to customers in Illinois? And any other mitigating factors and circumstances around that case that we can speak to here, for instance.

Julien Dumoulin-Smith:

Yes. Excellent. And then lastly, just going back to the M&A point you were making earlier. I thought you were pretty clear about this. It needs to be accretive and/or provide robust visible growth. I just want to make sure I'm hearing you right about the growth piece there in terms of a key element in ingredient.

Julien Dumoulin-Smith:

Got it. And just going back to lastly on that FMV piece, you guys commented extensible here, but just the time line on getting that clarity there. And you talked about being a little bit more protracted. Just how does this sort of at least from a process perspective, finally get to some resolution as far as you guys are concerned? And then prospects on expanding it even from there, given where we stand.

Julien Dumoulin-Smith:

Well, just on the fair market value just in terms of potentially taking a little bit longer yes, indeed.

Operator:

Next question Comes from Anthony Crowdell with Mizuho. Please go ahead.

Susan Hardwick:

Yes. I think you hit on it, Anthony, there at the end. It's not terribly material. We think this is a great benefit from a cash flow perspective. The additional interest is nice to have. We think the certainty associated with that contingent payment we had on the New York contract extension is quite helpful now to have that secured. So we think there's just a variety of things about the restructuring that made a lot of sense for us that don't necessarily translate into any material impact to our overall plan. So long answer to your question, we would not expect there to be a need for finding additional capital to sort of fill in that very minor hole that this $0.10 will create.

Susan Hardwick:

Yes. I think this is an area we've tried to signal, I think, for the last several discussions we've been having, and I think really probably what prompted that even was PFAS as an example. We see that as just another area that may be difficult for some of these smaller systems to be able to manage, both from an investment standpoint as well as an expertise standpoint. Cyber is another great example. Interest rates is another great example. I mean, the list just gets longer, not shorter for these communities to sort of have to deal with. And from our perspective, we have always been very focused on trying to define what the need is for a community and helping satisfy those needs. And again, from an M&A perspective or an acquisition perspective, as that list gets longer, it creates more opportunity for us to have that dialogue and work with communities to solve those kinds of problems. So yes, we think it does have upside to our acquisition strategy. It’s probably not a Tsunami though to use a water term. It's probably a much sort of longer-term impact I think it takes a bit of time for communities to sort of wrestle with these issues and determine impacts to them before the ready to make a move. So again, we use these kinds of issues in our discussions. I think it will take some time before we see any measurable impact directly related to these issues.

Steven Fleishman:

Not an M&A question, so the -- a couple of things on the HOS changes. So -- just the -- thinking about the shift in the interest rate on the note 7%, 10%, which is great; I mean that's a pretty high rate to pay for the seller and I guess, I guess soon to get rid of the prepayment. And so I guess I'm just wondering how do I think about just making sure that, that seller in terms of getting paid back, getting paid.

John Griffith:

Sure. From a credit perspective, we stay very close to the HOS business. We're, in fact, a partner. And as lender, we're constantly in touch with the business. The company has evolved, the credit has improved. Extending the New York contract is a significantly positive credit move and as I mentioned in my comments, the company is currently making an acquisition with new equity funding from their owners as well as cash on their balance sheet. So we do have covenants. They've remained in compliance with the covenants. And in fact, we've taken the opportunity to tighten covenants as well. But when you look at the underlying business, it's frankly doing better than it ever has. So we feel very, very good about the underlying credit here.

John Griffith:

Yes. No, the owner backs it up, and that's what I was trying to say. So when there's fresh equity coming into the business to make this acquisition, that's coming from APAC who owns the business.

Susan Hardwick:

Yes. Steve, I don't know if we had that disclosed. Is it separate in the 10-K? Yes. Steve, we can point you to it. I'll have Aaron follow back up with you to point you to it. But I think it is in the 10-K, which obviously, we filed last night. And this is the revenue-sharing mechanism you're referring to, where we collect the share of the revenue that's generated from the warranty work that they're doing in our various state jurisdictions where we have contracts. Yes. So Aaron will redirect you to that.

Susan Hardwick:

Yes, I would say it's probably not necessarily customary, but again, we think that this case is proceeding as it should. We don't really see, again, any issues here. It's a big case. I mean it's $1 billion worth of investment and we were in just a little under two years ago on this case. So it's certainly material. And again, solely driven by investment in the jurisdictions that we -- or the communities that we serve there.

Jonathan Reeder:

Hey, good morning, team. I just wanted to come back to EA and the fair market value stuff, do you anticipate that all the changes to the fair market value will come via the commission process? Or do you think some of the bills in the legislature will make it across the finish line?

Jonathan Reeder:

Yes. So I mean you're saying PA is, in your opinion, very much fully behind continued promotion of consolidation.

Jonathan Reeder:

Okay. what sort of impact do you think it will have on the deal activity? And would you say the proposed RRR will make it tougher for AWK to deliver on the M&A CapEx placeholders?

Jonathan Reeder:

Okay. And then last question for me. I saw that in at least the PA and New Jersey rate case filings that revenue decoupling requests were made, possibly, it's in the Illinois case, too. Do you typically make those decoupling requests and just don't get them? Or is that something new that you're pursuing?

Jonathan Reeder:

Okay. But for PA in New Jersey, are these new proposals? Or have they been there and, say, your most recent case, too?

Operator:

The next question comes from Gregg Orrill with UBS. Please go ahead.

Susan Hardwick:

Yes. On the first question, Greg, around just settlement expected outcomes. Obviously, that process is proceeding. And we had one settlement approved and the other one fairness hearing has occurred, and we would expect it to ultimately get approved. And then the process begins of claim submittals and really going through the settlement allocation process. So obviously, it's too early for us to be able to give you any indication of what we think the outcomes will be financially. But as we've said all along, these will be cents on the dollar in terms of recovery. We don't expect, obviously, for it to cover the full cost of exposure here. But the amounts to be recovered through the settlement, we think is quite important and the best avenue, as Cheryl said in her remarks, to to collect dollars on behalf of the customer to reduce the overall obligation the customer has. So it's a good process. We've been happy to be involved in it. Our team, I think, in a lot of ways, is leading much of the effort around getting this work through the courts and getting outcomes here that are quite favorable. To your second question on how do we view sort of legacy exposure here. I don't think our view changes. As we said earlier, this will be an environment like all where there will be plaintiff's attorneys that are looking for an opportunity here and how that ultimately gets worked through the larger process around the MDL, the multi-district litigation is yet to be seen. But in terms of our exposure, we don't have any different view than we've had from a legacy perspective. Again, as Cheryl said, on a go-forward basis, we are treating and we're preparing to treat, and we're confident in our ability to do that on a go-forward basis.

Operator:

Good day, and welcome to American Water's Third Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast within an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for one year on American Water's Investor Relations website. I'd now like to introduce you to your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick:

Thanks, Aaron, and good morning, everyone. Let's turn to Slide five, and I'll start by covering some highlights from the third quarter and year-to-date periods. As we announced yesterday, we delivered strong financial results in the third quarter of 2023, and we're pleased to again reaffirm our 2023 guidance on a weather-normalized basis. Earnings were $1.66 per share for the quarter compared to $1.63 for the same period last year. In the first nine months of 2023, earnings were $4.03 per share compared to $3.70 per share in the same period of '22. The estimated net favorable weather impact year-to-date in '23 is about $0.11 per share compared to $0.06 per share favorable in '22. These weather-normalized results so far in 2023 continue to reflect our strong execution in line with our growth expectations for the year. John will elaborate further on results later. Moving on to some of our other key accomplishments to date in 2023, we have invested $1.8 billion in capital projects year-to-date, reflecting great work by our teams responsible for planning and completing these investments. As you will recall, the total capital investment planned for 2023 includes approximately $400 million of acquisitions, including one sizable transaction in Pennsylvania we expect to close in December and another in Illinois around the end of the year. As you know, we completed an equity issuance of $1.7 billion in March and a $1 billion convertible debt issuance in June. These were the two key priorities of our 2023 financing plan. We were focused on completing these issuances in the first half of the year to reduce market-related pricing risk and overall execution risk, which has served our investors, customers -- and our customers well, considering the current market conditions. Turning to Slide six, as we roll out our new five-year plan today, we are affirming our long-term targets, including 7% to 9% EPS and dividend compounded annual growth rates. We are also initiating our 2024 earnings guidance of $5.10 per share to $5.20 per share, which John will discuss further later in the discussion. This represents our expectation of 8% EPS growth in 2024 compared to our weather normalized 2023 EPS guidance. One thing to note on this slide is that we have revised the look of our earnings growth outlook. Recall that we'd historically referred to it as our growth triangle. We believe this new version better highlights our compelling 7% to 9% earnings growth expectation and better represents the key drivers of growth. As a nearly 100% regulated water and wastewater utility, rate-based growth and regulatory execution are the key drivers of growth for our company. Rate-based growth continues to be driven by the accelerated CapEx plan we put forth two years ago and now with this updated plan. Combined with our robust regulated acquisition strategy on which we've proven we can execute, we continue to expect 8% to 9% rate-based growth over the next decade. Later, Cheryl will review the amount of capital we expect to spend over the next five years, including related to acquisitions. On this slide, you can see we are highlighting our acquisition growth strategy measured by a compounded annual growth rate in customer connections of 2%. The timing of closing on acquisitions is often difficult to control within a calendar year, which can cause volatility in acquisition investment on a year-to-year basis. This 2% customer additions CAGR target should be an easier way for investors to monitor and measure our growth through acquisitions. And as I said, rate-based growth, which includes acquisition investment is the key driver to earnings growth. Our growth outlook also includes the organic revenue growth opportunities we expect from our military services group from the 18 installations we currently serve with an added upside for any new bases secured. One of our company's competitive advantages is its diverse regulated operations across 14 states that provides us with flexibility in the timing of rate cases and capital deployment. We also have a very predictable and controllable set of capital projects annually, almost half of which are recoverable through infrastructure mechanisms. Along with our other regulatory approaches, we are confident we can deliver consistent earnings growth and dividend growth over the next five years and beyond. While utility stocks, including ours, have seen the impact on the short term of higher interest rates, history has shown that over medium and longer term horizons, the utility sector and certainly American Water has delivered compelling value to investors. We believe the combination of our EPS and dividend growth supported by our significant yet low risk capital investment plan and our focus on customer affordability and ESG leadership will continue to be rewarded by investors. Based on this long-term plan and our history of executing on our strategies, we intend to continue to deliver a very competitive, sustainable shareholder return for many years to come. With that, let me turn it over to Cheryl to talk more about our capital investment plan and our focus on customer affordability and regulatory execution. Cheryl?

John Griffith:

Thank you, Cheryl, and good morning, everyone. Turning to Slide 13, let me provide a few more details on year-to-date results. The appendix also has details of third quarter EPS, which has many of the same drivers as year-to-date results. Consolidated earnings were $4.03 per share year-to-date, up $0.33 per share compared to the same period in 2022, and up $0.28 per share on a weather normalized basis. Increased revenues were driven by general rate cases we completed in late 2022 and early 2023 in our larger states. These additional revenues are driven by the significant investments we have made and continue to make in our systems. As noted, earnings were higher year-to-date by an estimated net $0.11 per share as a result of weather in the second and third quarters due to warm and dry conditions, primarily in Missouri, New Jersey and Pennsylvania. This compares to net favorable weather in the third quarter of 2022 of $0.06 per share, which related mostly to warm and dry conditions in New Jersey. In looking at operating costs, higher pension expense of about $0.10 per share and increased chemical costs of about $0.09 per share, including inflationary pressures, are being recovered in large part through higher revenues we proactively sought through the use of forward test years and traditional updates to base cost of service and general rate cases we completed in the last 12 months to 18 months. This strategy has limited the bottom line impact of those higher costs in 2023 and is a strategy we are continuing to use in our recently filed and upcoming cases. Supporting our investment growth, depreciation expense increased $0.17 per share, and the cost of additional long-term financing increased $0.28 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 14, this graph illustrates that our continued execution on capital investments, both infrastructure projects and acquisitions, are succeeding in growing regulated rate base at a long-term rate of 8% to 9%. Rate-based growth, of course, will drive earnings growth. We believe the high degree of visibility to our capital investment plan, combined with the low-risk nature of the plan, uniquely positions American Water in the utility sector and is fundamental to our investment thesis. Turning to Slide 15, you'll see that we continue to be set up for strong growth through acquisitions. We closed on 14 acquisitions, totalling $36 million across six states in the first nine months of 2023, which demonstrates our continued ability to close deals in many states. We also had 32 transactions under agreement across 10 states through the end of September, totalling $611 million, two of which we closed in early October, including one in West Virginia for $27 million. This total also includes both the Butler Area Sewer Authority wastewater system in Pennsylvania and the Granite City wastewater treatment plant in Illinois we previously announced. We expect the Butler acquisition to close later this year in Granite City around year end, pending regulatory approvals for each, and we look forward to serving those customers. Also included in our acquisitions under agreement is the Towamencin Township Wastewater System in Pennsylvania we expect to purchase for $104 million, as announced back in March. We expect to close this acquisition in late 2024 or early 2025, pending final regulatory approval, and we look forward to serving those customers as well. Our outlook for future acquisitions remains very strong, as we expect to have over $250 million of acquisitions under agreement at the end of 2023 after the expected closings of Butler and Granite City. Of course, as we close on transactions, the work to build and refill the acquisition pipeline is continuous. Our pipeline of 1.3 million customer connections is a strong leading indicator that supports this piece of our rate-based growth outlook. On Slide 16, we provide some considerations regarding our outlook for 2024 results in our newly established EPS guidance range of $5.10 to $5.20 per share. First, as you would expect, our growth will be driven by capital investment to serve our customers and earning a return on that investment. As we've talked about previously, 2023 is year two of our accelerated CapEx plan following the HOS sale. So we see that ramp up reflected in earnings in 2024, both from base rate increases and infrastructure mechanisms. As a reminder, approximately 45% of our CapEx is recoverable by infrastructure mechanisms, so it's a very meaningful driver of consistent earnings growth for us. Recent regulated acquisitions that are being incorporated into active or just completed rate cases will also drive growth next year. I'd like to note that our military services group does add incrementally to our earnings growth expectation, as we have continued to show in our growth outlook. MSG's great work on the 18 military installations it serves has built trust and resulted in the U.S. government allocating additional funds for improvement projects, driving increased revenues. Just as critical to our growth strategy is our ability to prudently manage the operating costs it takes to run the business, which goes to my final point on this slide. Because of our strong culture of operating efficiency and cost management, we expect only modest increases in O&M in 2024. These efforts go to the heart of the customer affordability construct we want to protect, which is closely aligned with the interests of regulators and ultimately investors in managing affordability of customer bills. Finally, related to pension, I'd simply remind you that our pension obligation remeasurement will be done at yearend 2023, and that will drive the determination of our 2024 pension expense. Turning to Slide 17, I'll provide a financing plan update before closing with a look at our balance sheet and liquidity profile. In our prior five-year plan through 2027, we expected a total of $2 billion of equity financing need. We successfully issued $1.7 billion of the $2 billion earlier this year, leaving $300 million of equity financing needed toward the end of that prior plan. Based on our new capital plan, our financing plan now includes an estimated $1 billion of equity issuances from 2024 through 2028. The $1 billion of equity in our new plan is expected to be issued near the middle of the 2024 to 2028 period, subject to market conditions. The $700 million increase in the anticipated external equity need is driven by the incremental $2 billion of CapEx in the new plan. As we've said many times now, we expect incremental CapEx to be funded roughly 50-50 debt and equity, which includes both external equity and cash flow from operations. Our financing plan design also takes into account the goal of maintaining a strong balance sheet and continuing to meet our long-term debt-to-capital target of less than 60%. Another assumption inherent in our new plan is that we will continue to be a cash taxpayer, especially as we will likely become subject to the new corporate alternative minimum tax in the coming years. On Slide 18, we provide a summary of our continued strong financial condition. Our total debt-to-capital ratio as of September 30, net of roughly $630 million of cash on hand remains at 54%, which is comfortably within our long-term target of less than 60%. As we are all aware, the current higher interest rate environment is challenging. We are, however, in a position of strength on a number of fronts in dealing with the challenge. Our strategy of issuing debt at the holding company level allows us to take advantage of our scale and pricing debt issuances. We remain confident that we will have strong access to capital for the long term. In fact, we just extended the maturity of our revolving credit facility to October 2028, which has a capacity of $2.75 billion. Our diversified banking relationships with some of the largest and strongest banks in the world, coupled with our fully regulated business model and strong credit ratings, gives us great confidence around liquidity. Our laddered approach to long-term debt financings over the years is very important in environments like the current one to manage cash flows and minimize interest rate risk, which contributes to managing customer affordability. And our short duration between general rate cases allows us to minimize any lag we may experience related to recovery of debt costs. With that, I'll turn it back over to Susan for some closing thoughts. Susan?

Operator:

[Operator instructions] Today's first question comes from Richard Sunderland with JP Morgan. Please proceed.

Susan Hardwick:

You are, Rich. Good morning.

Susan Hardwick:

Okay, Rich, yeah, there's a lot in there. Let me start and then Cheryl and John can add to it. I would say our focus has sharpened over the last number of years related to customer affordability. And that sharpened focus, I think, has really been around this sort of wallet share concept that Cheryl talked about. I think it's important for us to understand the communities that we operate in and the demographics of those communities and what are the challenges of customers in those communities and we've been able to do a lot of analysis at a very detailed level around affordability, around household income, around just economic impacts in the various communities that we serve and our focus has been, I think, very clearly defined around our wallet share as a percentage of that household income and we've been developing this concept here now for a number of years and I think that our ability to confidently say this plan as we've continued to grow it, we'll continue to maintain our position of roughly 1% or less of a customer's bill in the communities that we serve specifically and I think that focus has allowed us to really think about how to build this plan, how to continue to grow it, how to continue to grow rate base while not overburdening customers with our growth expectations. I think this plan fits very nicely in that concept. Cheryl, you want to add anything?

Susan Hardwick:

And Cheryl, I might just add one additional comment. From a regulatory perspective, this is also a concept that we've been sharing very transparently with regulators. This affordability analysis that we've done, and as we lay out in every jurisdiction, the plan and the investments that we have made, we're right alongside it talking about impacts to customers and how we've thought about the plan and how it affects affordability for the customers in the service territory. So again, it's a concept and a view that we've taken that we think is differentiating here and I think regulators, just as one party, are certainly recognizing that.

Richard Sunderland:

Great. That was very helpful, color there. Thanks for laying all of that out. And then separately, turning to the financing plan here, you were clear on the drivers around the equity relative to the CapEx. I'm curious on the operating cash flow side. It looks like a significant step up, '24 to '20 versus '23 to '27, is that just normal course kind of rate recovery, any discrete items in there, just how to think about prior versus new?

Richard Sunderland:

Got it. Well, thank you for the time today.

Paul Zimbardo:

Hi, good morning, team. Just to clarify on that last line, confirm my understanding, so there's effectively no change in the growth triangle, as you call it, it's just kind of a representation.

Paul Zimbardo:

Okay. Understood. That's what I thought. And then shifting to the financing plan, so if I understand it right and correct me if I'm wrong, it doesn't assume any litigation proceeds, state funding, federal funding for PFAS. Is there any sense of what that kind of offset could be to help out on customer bills?

Paul Zimbardo:

Okay. To make sure, it does have an assumption around getting external funding or it does not?

Paul Zimbardo:

Okay, that is what I thought. Okay, great. Thank you very much.

UnidentifiedAnalyst:

Thanks for taking my question. Just wanted to ask, on the PFAS billion dollars that you have outlined today, how should we be thinking about the makeup of that over your service territories? Is it pretty radical? Yeah, if you could unpack the underlying assumptions there, that would be helpful.

Cheryl Norton:

Yeah, as we have looked at this, as I mentioned in my comments earlier, we expect the bulk of the spend to be in our states where we have a larger footprint of customers, New Jersey, for example and the reason for that driver of that being the largest amount of spend is that there is more contamination there in general, but also these are large surface water plants that are very costly to add treatment to. We have Pennsylvania as a larger state, numerous locations there, but we really haven't outlined everywhere that we're going to add treatment, but anywhere that it's a surface water plant as opposed to a groundwater source is going to be a lot more costly to add that treatment and so New Jersey is our biggest dollar state for sure.

John Griffith:

You've got it right, Will. It's an incremental $700 million.

John Griffith:

What we've said is we'll issue it in the middle of our new 2024 to 2028 plan, subject to market conditions, obviously.

Operator:

Our next question is from Jonathan Reeder with Wells Fargo. Please proceed.

John Griffith:

No, Jonathan. We really lead this analysis by looking at our credit metrics, and so a lot of it just goes back to what we've said in the past, where incremental CapEx will fund at 50-50 debt and equity. As we think about equity there, it's internally generated funds as well as new issuance. So we think of it as lining up in that regard.

John Griffith:

Yeah, that's just a function of the capital spend as well as the maturity schedule.

Susan Hardwick:

Yeah, there is that 30-day period, and Jonathan, I am unaware of any kind of intervention or any kind of concern over that.

Jonathan Reeder:

Yeah, no, I think investor concern is more on the electric side, whether you see some intervention than the water, but we monitor both. I think the 10-year CapEx plan, you bumped up the M&A placeholder by a billion. Is there anything specific driving that, or is that just kind of passage of time more than anything?

Jonathan Reeder:

Okay. And then last, you mentioned the pension costs for '24 and figuring that out, but do you have much exposure on that, or do most of your key states now have tracking mechanisms for pension?

Jonathan Reeder:

Okay. Thanks for taking my questions this morning.

Gregg Orrill:

Good morning. I think you mentioned you're working on an acquisition in Pennsylvania of $104 million to close in late 2024-2025. How do you think about, when you go into acquisitions, sort of the reasonable timeline for getting approvals? How do you think about that?

Gregg Orrill:

Yeah. And, Greg, it varies state to state, but since you mentioned Pennsylvania, there's a process you go through to file an application. The application has to be deemed complete, and then that starts a statutory clock and so in the case of Pennsylvania, there's a six-month statutory clock that runs through and then either you're settling your approval or you're litigating your approval, but all within that six-month statutory timetable and so what's different about this situation?

Operator:

The next question comes from Aditya Gandhi with Wolfe Research. Please proceed.

Susan Hardwick:

We can. Good morning.

Cheryl Norton:

I can take those questions. This is Cheryl. As far as protections around the SOCLA, we have been really engaged in that process, and we have been pushing really hard to ensure that water and wastewater utilities are protected in that space. And so we're going to continue to fight that battle. Right now, you're right, there is a little bit of vulnerability out there, but we feel pretty confident that we're going to be able to manage through that and that we're going to be able to impact how we're treated in that space. So more to come on that, but rest assured, we're going to fight like crazy to make sure that we are protected there. And as far as the $50 million, I don't have an exact breakdown, and we haven't talked about an exact breakdown from state to state. But whether or not that would be recovered through mechanisms just depends on the type of mechanisms that a state would have. So if they have a mechanism that would allow them to recover their production costs, any kind of tracker in that space would be really helpful in those costs. In some cases, we have environmental riders that include capital improvements. Some of them include capital and operating improvements, so that would allow them to recover those costs as well. So there's going to be a portion that we're going to be able to recover right up front, but the rest of them will just recover through a general rate case with very little lag, I would anticipate, as far as those costs are concerned.

Cheryl Norton:

Yeah, Susan, I would just add that that three-year implementation period that we have to put treatment in place gives us time to do those kinds of things and make those regulatory improvements.

John Griffith:

Yeah, I would say that we're not close enough yet in terms of time to have made the decision on the exact form of equity. You're right on the timing of the HOS note proceeds, but as we approach the more immediate timing, then we'll develop our thinking closer to that point, but certainly, we'll look and do what's best for shareholders there. I'd say that you've seen us issue the straight equity as we did this year with the $1.7 billion. We issued the convert this year for $1 billion, and so we're willing to look at everything, but I'd say that's a decision we'll make as that time approaches.

John Griffith:

Yeah, and let me just clarify, Aditya, on the equity that we've talked about, to be clear, it will be equity, not another instrument to replace the equity. With regards to our cash taxpayer status, with the Inflation Reduction Act, we do expect that we'll become subject to the corporate alternative minimum tax in the coming years. Those regulations are not finalized at this point, and there are certain elements that are in play that will dictate the precise timing for when we would become subject to the AMT, but we are expecting that to be the case for us. With regards to the 7% to 9% in a base year, I'd say on that, this is a target that we think of as a long-term target. You're aware that over the last few years, we reset the capital plan with the sale of HOS and the sale of New York, and we needed time to redeploy those proceeds, which was the case in '22 and '23 and as Susan pointed out, our '24 guidance reflects an 8% EPS CAGR at the midpoint. So we really think of 7% to 9% as a long-term target driven by the long-term 8% to 9% rate-based growth CAGR.

Operator:

At this time, we are showing no further questioners in the queue, and this does conclude our question-and-answer session as well as our conference. Thank you for attending today's presentation and you may now disconnect.

Operator:

Good morning, and welcome to the American Water's Second Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast within the accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. I will now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick :

Thanks, Aaron, and good morning, everyone. Let's turn to Slide 5, 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. In the first 6 months of 2023, earnings were $2.37 per share compared to $2.07 per share in the same period of 2022. 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 '22, and in early '23 and from infrastructure mechanism filings. We continue to execute on our regulatory strategy, 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 of our states. Tempering results were higher operating costs, which John will elaborate on further. Moving on to some of our other key accomplishments so far in 2023. 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 2 sizable transactions we expect to close in the fourth quarter. Our outlook for future acquisitions remains strong as we have over $550 million of acquisitions under agreement, including those 2 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. Cheryl will share a few highlights of the report, but 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 6. 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. I 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 5 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?

Cheryl Norton :

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 continue to execute each quarter on the multitude of projects that improve our systems. Two examples of the types of projects we're working on are improvements to the lime softening system, chemical facilities and filters at the Jerseyville, Illinois water treatment plan and enhanced aeration capabilities and other digester improvements at the Coatesville water treatment plant in Pennsylvania. These 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 2022, 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. Shown on the 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 in our top 10 states. Sharing with our -- starting with our general rate cases in California and Indiana, both are progressing as expected. In 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 next year. At the end of June, we filed a general rate case in Kentucky reflecting $330 million in 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. In Missouri, we were pleased to receive a final decision from the Missouri Public Service Commission in May. The negotiated settlement reflects the increase of $95 million in annualized revenues, including $51 million for previously approved infrastructure surcharges. Though not specifically noted in the order, our view of the return on equity allowed is 9.75%, and the equity ratio is 50%. Outside of general rate cases, the California Commission issued a decision on June 29 on California American Water's 2021 cost of capital application authorizing an 8.98% ROE with an equity component of 57.04%. The decision was not retroactive and will be effective through the end of 2024. The following day, we filed an advice letter as authorized by the state's water cost of capital mechanism seeking a 52 basis point increase to our ROE in 2023, which was approved on July 25, increasing the return on equity to 9.50% 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's proposed PFOS rule in May. The key concern that we voiced is that EPA's 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, along with nearly $50 million of annual operating expenses in order to comply with the rule as currently proposed. We are still evaluating the potential impact of our 5-year capital plan, including whether PFOS will drive incremental CapEx in the plan or if some currently planned projects will be completed later beyond the 5-year horizon or both. We expect to have more to share on that in the third quarter earnings call. Related to ongoing PFOS litigation and the announcement of some settlements with manufacturers of PFOS, 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 lead 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 in 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 2021 and 2022. This report highlights our commitment to excellent water quality, customer affordability and continued investing in water and wastewater infrastructure and our sustainable 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 have 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 2 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 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.

Paul Zimbardo :

Great. The first question I had was, I know there was a good number of changes on the drivers within full year '23 guidance. If you could just unpack like where were you seeing that better revenue net O&M strength in the year-to-date or second half, wherever it lands.

John Griffith:

Yes, 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 on from an inflation perspective, we're starting to see production costs moderate as we've come through the second quarter here.

John Griffith:

Yes. Paul, no real change there as we’re thinking about it. As you know, we’re raising financing in a periodic sort of manner. So we do expect to trend up over time until we reset again with equity, but no significant change there.

Angie Storozynski :

So first, maybe -- you mentioned the rainy July in New York State. I mean it's for us 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's an offset to that $0.07 weather benefit from the second quarter thus far in the third quarter?

Angie Storozynski :

Okay. Secondly, the exchangeable bonds that you guys did, I mean they came at a low coupon likely -- I mean, probably not something that you have considered in your guidance. So should I think that it's actually a benefit to guidance? And also, how does that tie up to the financing of those 2 big acquisitions that you expect to close later this year? Were they always planned to close still in '23. Again, I'm just trying to see if there's any benefit from an interest expense perspective.

John Griffith:

Angie, I would just say on the financing piece that we set 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 our guidance and our affirmation of 2023.

Susan Hardwick:

Yes. I think, Angie, I'll say what I always say here, I think we are very good at it. I think we spend a lot of time in these communities, cultivating the relationship. 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 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 enthusiasm for deals generally. So I'd just say they're circumstantial, and our expertise, I think, continues to be a real advantage we have here.

Gregg Orrill :

Regarding the Indiana rate case proceeding on schedule, are you expecting revenue recommendations from interveners? So is that coming up?

Gregg Orrill :

Okay. Sort of traditional process like other places?

Operator:

The next question is from Shar Pourreza from Guggenheim Partners.

Susan Hardwick:

Yes, it's a good question and it's something obviously we're continuing to work on. And Cheryl alluded to this in her comments, we would expect to have quite a bit more visibility on our third quarter call, partly because our evaluation is certainly ongoing and 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 where we're doing all of our work relative to our financial plan. All the various updates throughout the business, and 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 roll out our guidance and expectations for the next year and then the next 5-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 that work. And Cheryl, anything to add there?

Susan Hardwick:

Yes. And I think that is the key. We just need to complete that risk analysis piece, and we'll see how much of this $1 billion ultimately results in incremental capital expansion of the plan versus just shifting to later periods, shifting other work to later periods.

Susan Hardwick:

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's a good set of opportunities in that space, largely driven again by just the aging infrastructure and how many of those systems were built initially and then many of them coming to sort of the end of their useful life. 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 risk perspective and a growth opportunity perspective, we'll manage all of those opportunities within our capital financing capabilities.

Operator:

Good morning, and welcome to American Water's First Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the Company's Investor Relations website. The audio webcast archive will be available for one year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick:

Thanks, Aaron, and good morning, everyone. As we announced yesterday, we're off to a good start in 2023 with strong financial results. As shown on slide 5, earnings were $0.91 per share for the quarter compared to $0.87 per share last year. The increased results were as expected and put us on track to achieve our full year earnings guidance, which we're pleased to affirm. Here you can also see a recap of some of our other key accomplishments so far in 2023, and John and Cheryl will add to these in their remarks. As we announced in March, we completed a very successful upsized equity issuance of $1.7 billion of American Water common stock. This delivered on the highest priority in our 2023 financing plan. We also invested well over $500 million of capital in infrastructure in the quarter. In addition, we secured two large acquisitions so far this year, which puts us at over $550 million acquisitions under agreement. We did all of this while keeping customer bills affordable and staying true to our high value of quality service. The other significant news in the first quarter for us and the water industry as a whole came from the US Environmental Protection Agency when they released proposed national standards for PFAS. We support the EPA's efforts to protect drinking water quality. These contaminants are among the multiple challenges the water industry faces regarding water quality, quantity and reliability. We remain steadfast in our commitment to be a leader in the US water and wastewater industry and a provider of solutions to these challenges. Providing safe, clean, reliable and affordable water and wastewater service to customers has been American Water's mission for over 130 years. 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. Cheryl will elaborate further on the PFAS proposal and our response to it. But I want to assure our customers, regulators, investors and other stakeholders that American Water has the expertise and the will to tackle this issue head on and to advocate for reasonable policies and outcomes related to this very important topic. Turning to slide 6. As I mentioned, we are affirming our 2023 EPS guidance range of $4.72 to $4.82 per share as well as our long term targets. We believe our strong regulatory and operational execution is a positive differentiator from our peers. As we've done in the past, we expect to consistently deliver on our annual and long term plans, growing earnings and dividends at a top tier pace over the next five years and beyond. Moving on to slide 7. As we announced yesterday, our Board of Directors increased the company's quarterly cash dividend from $0.6550 per share to $0.7075 per share, an 8% increase. We have grown our dividend at a compounded annual growth rate of 9.7% over the last five years, significantly outpacing most of our utility peers. Looking ahead, we continue to expect to grow our dividend at 7% to 9% per year on average, which is 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 is to many of our investors. And with that, let me turn it over to John to cover some first quarter highlights and financial results in more detail. John?

Cheryl Norton :

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 that improved our systems and drove capital investment higher by nearly $100 million in the quarter compared to the same period last year. This result keeps us on pace to hit our goal of approximately $2.9 billion of capital investment spending in 2023. 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. 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, our theme here is around timely, consistent recovery of investments and operating costs. We have consistently engaged with policymakers 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. Through capital recovery mechanisms and forward test years, we can reduce regulatory lag and lessen the reliance on general rate cases. This enables us not only to earn our allowed return, but also to mitigate the size of general rate increases for our customers. We expect about 75% of capital investment over the next five years to be recoverable through infrastructure mechanisms and through the use of forward test years, 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. 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. Let's go to slide 16 and cover the latest regulatory activity in our states. Shown 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 cases in our top ten states. At the end of March, we filed a general rate case in Indiana, reflecting $875 million in water and wastewater system and investments to be made through 2025 to continue providing safe and reliable service. The revenue request also includes an increase in the cost of chemicals and other operating costs that we continue to see. We are seeking to increase revenues over a phased three step process through May 2025 that would result in $87 million of additional annual revenue when fully implemented. 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. We're also still awaiting a ruling from the Commission on the pending cost of capital case. In Missouri, on March 3rd, 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 infrastructure surcharges. A final decision on this matter is expected in the second quarter of 2023. 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. 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. We are now allowed to standard ratemaking treatment for the construction funding of the pumps and pipes that were built to support the expansion. Together with the desalination and water reuse projects and 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. 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. This bill allows for consolidated rates in 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 several states. We are carefully reviewing the EPA's proposed drinking water regulation to assess the four parts per trillion limits for PFOA and PFOS, and the application of the hazard index approach for several other chemicals. Our review will assess impacts to our capital and operating expense plan as well as our needed financing. It's logical to assume that the significantly lower treatment level, the number of facilities that will require treatment will be larger, as will the cost. 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 30. 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. 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 keep harmful PFAS out of drinking water supplies and communities. 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. We'll ask for an exemption of water and wastewater systems from financial liability for PFAS under USCPA. 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. In addition, we'll request permanent federal funding for a water and wastewater low income customer assistance program. Providing safe, reliable and affordable water is American Water's business. 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.

Richard Sunderland:

Hi, good morning, and thank you for the time today. Appreciate all the commentary on the PFAS side, but just want 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 potential impacts to rates on a go forward basis?

Richard Sunderland:

Okay, understood. That's very helpful context. I guess sticking with the cost side, we spent a lot of time last year discussing chemicals costs, and it came up in the walk this year in terms of the rate recovery of those higher costs. Can 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?

Operator:

The next question comes from Angie Storozynski with Seaport.

Susan Hardwick:

Well, I think the waterfall that you have there probably is as good as there is. The impact from the market based business, which is now just military, is very small and on a year-over-year basis, just not much of a variation. The other segment, I think we highlighted the primary driver there, which would have been the gain, the sort of true-up gain on the HOS sale in the first quarter of last year.

Susan Hardwick:

Yes. First quarter for us is not much of a weather impact year. Cheryl, you want to just talk about seasonality or –

Angie Storozynski:

Okay. And then lastly, I noticed that you are pursuing an appeal of that denial of the acquisition adjustment related to the Shorelands acquisition. It looks like a decision will be issued sometime in 2023. So can you, again, I haven't followed it closely, but can you give us a sense of, is this still a long shot? I mean, how important is it for any future growth aspirations you might have? And I know that transaction itself is only $29 million, so that's not that big a deal as far as the goodwill impact. But again, any implications related to this pending case?

Cheryl Norton :

Yes. Angie, yes. The issue is still kind of hanging out there, but there's going to be no real impact to us from a financial perspective. And in all honesty, we found other ways of doing deals so that we're not so worried about the precedents that this decision sets for us. We still believe, like, we have a strong case, but in the grand scheme of things, it really has little to no impact.

Susan Hardwick:

Yes, I think it's a fair observation, Angie, and it's obviously one of the things that we'll address in our comments. We think that these rules should apply, obviously, to all providers and that EPA should use its authority to enforce the rules. There is a track record here, so we'll have to, again, sort of comment on that. As it relates to our views on acquisition potential. John, you want to comment on that? We think there could be some opportunity, but I think you've hit on the key issue.

Operator:

The next question comes from Paul Zimbardo with Bank of America.

Susan Hardwick:

John, you want to comment here?

Paul Zimbardo:

Okay, great, then switching topics. I noticed that Indiana legislation as well. Does that influence higher any of the prospective capital or acquisition priorities in the state?

Paul Zimbardo:

And the additional mechanism from the new legislation that was enacted, it seems like it could help reduce regulatory lag perspectively.

Operator:

The next question comes from Gregg Orrill with UBS.

Susan Hardwick:

Well, those are two big topics, Gregg. First, maybe on Florida, let me just comment there. I think and obviously we're following developments there, as we do sort of across the nation around legislative actions, regulatory actions, et cetera. But I'd say our answer is the same as it always is on potential growth into other states. We really have to see an opportunity to grow substantially in a particular state. We look at regulatory environment, legislative environment, those types of things. And we're constantly looking at opportunities. But all of the parts have to sort of come together, I think, for us to do anything significant beyond our existing footprint, which, of course, we like a lot. We think we have optimized our footprint. We like the environments that we're in. We have great opportunities for growth in our existing jurisdictions. And obviously, that's where our focus continues to be. On your second question around PFAS and litigation and impacts there, as Cheryl mentioned, there is litigation and has been for some time around this. And our goal here, I think the industry's goal, is to while we feel responsible for helping to solve the problem and we are best positioned to do the treatment, we do think it's important that those that are responsible for the production of the chemicals also be held responsible. So our states are actively involved in that litigation and will continue to be. And we do think that's an important part of this overall equation that has to be worked through. And again, customer affordability is at the heart of that. We don't think it's necessary or appropriate for customers to pay for things that they really aren't responsible for. So we'll be actively pursuing that litigation along with the rest of the industry.

Jonathan Reader:

Hey, good morning, team. I just wanted to build a little bit on Angie's earlier question just regarding kind of the segment breakdown a little bit. Can you give us some directional guidance? I don't think your full year was exactly broken out by the two segments and with kind of other being recast to include what's left of market based and the other historical parent and other segment, I think full year 2022 was $0.19 from that segment, but that included I think it was a $19 million pretax gain. So how should we be thinking about, I guess full year ‘23 kind of overall drag there?

Jonathan Reader:

Okay. But, I mean, it sounds like if we just strip out maybe that $19 million pretax true-up gain or whatever, that you're kind of thinking the other part of the business is kind of flattish when we look at it from ‘22 to ‘23.

Operator:

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.

Operator:

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 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, Maureen Duffy, Senior Vice President of Communications. Ms. Duffy, you may begin.

Susan Hardwick:

Thanks, Maureen, and good morning, everyone. Thanks for join us today. As we announced yesterday, we finished 2022 with strong financial results that were just ahead of our plan. As shown on Slide 5, earnings were $4.51 per share for the year, which included $0.06 per share of favorable weather we had previously discussed. Excluding weather, earnings of $4.45 per share were 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, which gave us the ability to confidently execute on the plan we shared 1.5 years ago. I'm also proud of the resilient service we consistently deliver and especially over the last few months during an active and better cold storm season across the country. I want to thank our employees for safely providing reliable service to the 14 million people we serve in their homes, businesses and communities. You can see here on Slide 5, a checklist 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, it demonstrates American Water's ability to deliver on our long-term plan. I'm very confident we can execute our plans in '23 and beyond and the great -- with the great momentum we have from 2022. Turning to Slide 6. As you can see, we have delivered an exceptional total shareholder return over the past five years, including a growing record of significant dividend increases. We're very proud of this history, which also compares favorably on a three-year look back for TSR. 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 of 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 PE 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 have been in and how it affected valuation without regard to specific performance. And as we've seen so far in 2023, this revaluing of the market has stabilized as many other macroeconomic drivers have stabilized, including interest rates. If 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 7. The comments that we'll share today are an affirmation of the financial plan, targets and guidance we laid out last November. Later, 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 in our five-year plan and beyond. This is primarily, of course, due to significant investments in infrastructure and regulated acquisitions. And we get further into the plan, 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 '23 outlook and our financing plans. John?

Cheryl Norton:

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. While 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 in American Water, and we experienced some extreme weather conditions. 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 and the 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, improve cyber and physical security, and address climate variability. This allocation has increased over where we've been historically. 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 shouldn't be lost 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 we're 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'll 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. Shown 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 in our top 10 states. As Susan alluded to in her comments earlier, for us, the ability to execute on our regulatory strategies is a critical success factor for continuing to grow our business every year. However, we know that customer affordability is especially online of 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 in several of our states that are reducing the lag of regulatory recovery. This works alongside our time frame between general rate cases of about two years in our bigger states. Turning briefly to active rate cases. Our 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 a 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 filing has also been updated with more timely customer demand estimates and to reflect present rates approved by the commission, effective January 1, 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. Staying 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 AFUDC 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. Just last month, several communities in Monterey were impacted by evacuations due to flooding that occurred there. Because of our amazing employees and reliable assets, California American Water maintained 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 PFAS 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 PFAS 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 in compliance with state level guidance and have been acknowledged for that work, which will help inform our action plans when the EPA issues its standards. For example, our Short Hill Station project in New Jersey was completed 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 PFAS 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 PFAS communications and other projects. Our research scientists are frequently invited by the EPA, Maybrook, AWWA, 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. To show the magnitude of our regulatory execution efforts, you can see on Slide 20 that we have $416 million in annualized new revenues and rates since January of 2022. 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. Throughout the remainder of the year, we expect to file additional general rate cases to cover infrastructure investments and acquisitions since the last cases. As always, execution on 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, 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 continue 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 earns the SAFETY Act Designation from the Department of Homeland Security in 2022, 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.

Richard Sunderland:

Maybe starting with the equity update. I know you reiterated a similar language to 3Q, but just -- now that we're getting into 2023, I just wanted to see if there was anything else you could share on kind of timing your message as we're into the calendar year now.

John Griffith:

Rich, no update in terms of timing. We'll issue the bulk of the $2 billion in 2023. And then whatever we don't issue in '23, we'll issue in the back end of our 2023 to 2027 plan period.

Susan Hardwick:

Yes. Rich, I'd say no change from what we've previously discussed, both in terms of our results in '22 and expectations for '23. As we talked last quarter, pretty successful in the regulatory arena to really mitigate most of that exposure going into '23. And now that we finished our pension re-measurement, as John commented on, certainly anticipate no change to our guidance relative to that issue.

Gregg Orrill:

To follow-up on the equity, just how does that position you for incremental acquisitions? Is there sort of any element of prefunding 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 -- if it's different, how does that impact your guidance going forward?

John Griffith:

Sure. Greg, I would just say that the amount of equity that we're raising and the cadence of the equity does capture the various scenarios that we've run around regulated acquisitions.

Operator:

Good morning, and welcome to American Water's Third Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick:

Thanks, Aaron, and good morning, everyone. As Aaron said, we have a lot to discuss this morning in addition to third quarter results. And specifically, we also want to cover today our outlook for 2023 and our longer-term targets. As you know, last year, at this time, we shared some significant news when we sold our homeowner services business to transition to a pure-play regulated water and wastewater utility. In that update, we announced a new 5-year plan and acceleration of capital investments and some adjustments to our financial targets. The updates that we'll share today are largely an affirmation of last year's plan and targets with adjustments primarily reflecting the shift out to 2027 in our 5-year outlook. We will also share additional thoughts and plans around our continuing ESG journey. So let's dive in and turn to Slide #5, where I'll start by covering some highlights of 2022 to date. In the first 9 months of 2022, earnings were $3.70 per share compared to $3.40 per share in the same period of 2021. Strong organic growth and increased earnings from infrastructure investments continue to be our year-over-year drivers for the quarter and year-to-date periods. Favorable weather also added to results in the third quarter. Though we generally, like others, are experiencing a higher cost environment, our team continues to deliver on our financial and operating plans. This includes staying on track to achieve our total capital investment goal of $2.5 billion in 2022 and executing on significant regulatory activities, including constructive settlements in 2 of our outstanding general rate cases. Further, we continue to effectively manage and mitigate cost increases and have been successful in recent regulatory efforts to further lessen the impact of inflationary pressures into the future. These regulatory solutions are very important to our ability to manage inflationary headwinds as we move into 2023. So I'm pleased that we've successfully executed our plan so far this year in a challenging and very active period. John and Cheryl will provide additional details on financial, operating and regulatory results later in today's call. But before I move on, let me comment about how excited we were to sign an agreement a few weeks ago to serve the nearly 15,000 customers of the Butler Area Sewer Authority in Western Pennsylvania. This is another great example of how partnerships with municipalities can lead to positive outcomes for customers, employees and the community at large. Our team worked very hard to understand the community's objectives and created an opportunity that we believe benefits all stakeholders. Turning to Slide 6. As announced yesterday, we affirmed our 2022 earnings guidance. We continue on track to meet our expectations for the year as we've indicated throughout the year. And in addition, we have had the incremental contribution from weather this quarter. Also yesterday, we initiated our 2023 earnings guidance of $4.72 to $4.82 per share. This near-term plan as well as our longer-term plan remains very strong, and with our record of execution we are confident in our ability to achieve our earnings expectations for 2023. Later, John will talk more about the drivers of our growth in 2023, but our expected growth builds on the accelerated CapEx plan we put forth last year. As we've said many times, the full effect on earnings growth from the increasing capital spending will ramp up over time. John will talk further about our updated financing plan, but this plan reflects our prior discussion that the growing investment plan will result in regular access to equity capital. As we've illustrated on this slide, we expect our investments in infrastructure and regulated acquisitions to drive significant earnings growth through 2017 and beyond. Finally, on Slide 7, I want to make a few comments about our purpose here at American Water and how that drives our growth strategy, our operating plans and our company's targets and goals. Our mission is to provide safe, clean, affordable and reliable water and wastewater services to the communities across the country. Our services are vital to sustaining life. So while much has said in the news about the clean energy transition that's happening, what drives us every day is an equally important need in our country. We believe that everyone should have access to safe, clean, affordable and reliable drinking water and wastewater services, and that communities are stronger because American Water has the privilege to serve them. It's true that we have many similarities to the utilities, and we embrace the knowledge sharing and best practices that can come with those similarities. In fact, we joined EEI as a strategic partner a few years ago because of common values around customer service, safety and cybersecurity, to name just a few. And as many of you know, I've spent most of my career in the gas and the electric industry. So I have a deep appreciation for the utility industry as a whole. However, the water industry and American Water also have some important differences from other utilities. Our capital projects, for example, are much smaller on average than those in the electric and natural gas industries. Even though they add up to a similar and very significant investment need. Another difference is our greenhouse gas emissions footprint, which is very small compared to most other publicly traded electric and gas utilities. That said, we are seeing the impacts that climate variability can have through more extreme droughts or more severe floods. We strongly believe we must do our part to reduce overall greenhouse gas emissions. We have now set ambitious greenhouse gas reduction goals, including achieving net 0 by 2050. Along with our goals for system resiliency, and water use and efficiency, we see our greenhouse gas reduction goals as part of our commitment to provide superior and affordable service to our customers. We believe American Water is the leader in a clean water and wastewater transition in the United States. 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 immense. It's up to us to find ways to balance those CapEx needs with the affordability of services for our customers. That's why we've added a customer affordability target to our list of key drivers you see here. As a company, we also continue to raise the bar on our efforts to create a fair and equitable place to work in addition to making sure our operations align with the spirit of environmental justice. Two recent examples of our broad focus were the recognition through the 2022 WaterSense Excellence Award from the Environmental Protection Agency and the 2022 Leading Disability Employer by the National Organization on Disability. Cheryl will provide some examples later of the good things we are doing internally in these areas. Finally, on this slide, you can see we are affirming our long-term earnings growth targets, and most of our other long-term financial targets remain unchanged. During our planning process this fall, we decided to narrow our long-term dividend growth target to 7% to 9%, which maintains our position in the top tier of dividend growth and payout ratio in the industry. Our long-term dividend growth target now fully aligns with our compelling EPS growth target of 7% to 9% and the significance of our capital investment plan and related financing. This minor adjustment rounds out our strong long-term plan and will help us achieve our other important financial targets over time. In summary, we believe the combination of our EPS and dividend growth supported by significant and yet low-risk capital investment plan as well as our ESG leadership premium and constructive position on affordability will continue to be rewarded by investors. Based on the long-term plan and our history of executing on our strategies, we expect to continue to deliver a very competitive, sustainable shareholder return for many years to come. And with that, I'll turn it over to John to cover more detail on our 2022 financial results, our 2023 and longer-term outlook and our financing plans. John?

Cheryl Norton:

Thanks, John, and good morning, everyone. On Slide 18, I'll start by talking about our updated capital plan. I want to first acknowledge that our teams have done a great job executing on our accelerated capital investment plan in 2022. We're on pace to meet our overall capital plan of $2.5 billion this year, which includes acquisition investments. Looking ahead to 2023, we plan to again step up our investment level this time to roughly $2.9 billion, which will generally be our new annual threshold for the next several years. As John just mentioned, over the next 5 years, we expect to invest approximately $14 billion to $15 billion, an increase of about $1 billion over our previous plan. This increase is mostly driven by including the increased investment for 2027 in the 5-year window as well as about $250 million of inflationary impacts expected in the near term. We expect this pace of spend to drive our current pipe replacement cycle plan lower and much better than the industry average. On the longer horizon, you can see that we plan to spend approximately $30 billion to $34 billion in our regulated business over the next 10 years. We see this capital plan to be largely in line with last year's plan, reflecting the higher annual run rate as well as modestly higher costs for pipe and other capital goods. Turning to Slide 19. This graph illustrates that our continued execution on capital investments, both infrastructure projects and acquisitions are succeeding and growing the regulated business at a long-term rate of 8% to 9%. Rate base growth, of course, will drive earnings growth as long as we continue to prudently invest in our systems and successfully execute the regulatory process. Moving on to our regulatory recovery strategy on Slide 20, our theme here is around timely, consistent recovery of investments and operating costs. When we achieve timely and consistent recovery, it levels out build increases to our customers, which helps promote affordability. It's beneficial to our customers that we operate in states that have constructive regulatory mechanisms. We've engaged with policymakers and regulators for well over a decade to find the best ways to invest in water and wastewater infrastructure, while putting the customer first. In the states where we operate, 27 new mechanisms have been added over the past 12 years. As water and wastewater industry challenges grow, we'll continue to focus on constructive regulatory and legislative outcomes. I'd also like to discuss timely recovery of our investments across our footprint with the pie chart on the right side of the page. Through capital recovery mechanisms and forward test years, we are able to reduce regulatory lag and lessen the reliance on general rate cases. This enables us not only to earn our return, but also to mitigate the size of the general rate increases for our customers. We expect about 45% of capital investments over the next 5 years to be recoverable through infrastructure mechanisms, which is the key to unlocking a more consistent annual earnings growth pattern for the long term. Turning to Slide 21. Our focus on operating efficiency has been a part of our company's DNA for many years. As you know, we've historically used O&M efficiency as one of our benchmark metrics to measure our success at managing costs as we grow the business. This focus positioned us well to manage through much of the pressure over the last couple of years on the supply chain and even cost increases brought about by the effects of the pandemic. As we look ahead, we've been asked if we can go below the 30% efficiency threshold. While we're continuing to evaluate that question, we've continued to emphasize that revenue growth has been just as important to our success with O&M efficiency as managing costs. So with that realization in mind, there may very well be additional opportunity to go below the 30% threshold. However, we're analyzing whether this is the best metric by which to judge our effectiveness at managing costs and running an efficient business. Moving to Slide 22. One of the most difficult challenges we face in the water and wastewater industry is balancing customer affordability with the magnitude of the system investments that are needed. Thankfully, as we sit here today, our industry and our company are in very good relative positions in terms of affordability or wallet share. In fact, as investors and analysts study the sustainability of American Water's long-term earnings growth potential, we believe our affordability proposition is an important consideration. We realize, though, that we must continue to evolve our strategies around rate design and programs to assist our customers who are challenged with affordability. We must also consider our focus on technology, efficiencies of scale and a sharp focus on cost management in order to deliver on values around customer affordability. Moving on to Slide 23, and as Susan mentioned earlier, we are excited to announce our new science-based greenhouse gas emission reduction goals and our first disclosure of estimated Scope 3 emissions. Before we dive in, I'll walk you through our greenhouse gas emissions profile in a bit more detail. As an essential service provider, American Water is often compared to the broader utility sector emissions included, which can be misleading. As Susan noted earlier, it's an important distinction that our emissions footprint as a water utility is much smaller than most publicly traded gas and electric companies on both an absolute and per customer basis. To help put it into context, American Water represents just 0.1% of the total Scope 1 and Scope 2 emissions produced by the top 20 largest U. S. utilities measured by market cap. As we show on the slide, our total emissions footprint is made up of 7% direct Scope 1 emissions, such as heating, cooling and fleet; 44% indirect Scope 2 emissions or our purchase power; and 49% estimated Scope 3 emissions, which for us largely includes purchased goods and services, capital goods and fuel and energy-related activities. Framing it in a different way, more than 90% of our overall emissions footprint is generated from external sources, which is another key differentiator from most other utilities. Turning to Slide 24, there's a lot to unpack here. Let me say first, at a high level, we believe it is prudent for our company to focus our efforts on environmental initiatives that are in the purview of a water utility and aligned with our core mission. Our view is that greenhouse gas emission reductions fit as part of our sustainability strategy that, over time, will help protect customers against service disruptions from more severe weather patterns such as droughts and floods. We believe we've set forth new compelling goals to support this strategy. First, we expect to reduce our absolute Scope 1 and Scope 2 emissions 50% by 2035 from a 2020 baseline. Second, we expect to achieve net 0 Scope 1 and Scope 2 emissions by 2050. We believe these new medium- and long-term emissions goals are rooted in science and aligned with the Paris Agreement. We also believe our approach is a responsible path that considers all of our stakeholders' interest including doing our part by setting ambitious reduction goals. Our approach here will allow us to stay on course with our customer affordability metrics, as we continue to deliver clean, safe, affordable and reliable water to our customers. This was a foundational component of our analysis and recent discussion with our Board level SETO Committee, which oversees our safety, environmental, technology and operations efforts. It's also important to note that as we deliver water and wastewater solutions to more customers over time through acquisitions and organic growth, our energy usage is going to increase. We will rebaseline each year to account for our growth through acquisitions of systems, which is an acceptable practice under the standards of the science-based targets initiative, or SBTi. We did consider making a commitment to SBTi as part of our analysis this year. However, we concluded that some of SBTi's expectations around Scope 3 commission commitments mostly around timing, we're not in the best interest of our stakeholders. We do expect, though, to continue to work with our suppliers and vendors to consider what can be done to reduce Scope 3 emissions over time. And as I stated, we are confident that our new medium- and long-term Scope 1 and Scope 2 goals are science-based and aligned with the Paris Agreement. As you can see at the bottom of the slide, these are more than just goals. We have plans in place and capital ready to deploy to achieve these goals, obviously, with greater visibility to the path to 2035. Since our footprint is heavily weighted by Scope 2 emissions, the continued greening of the electric grid is a significant component of our reduction plan. We hope to see that transition continue by our fellow utilities and other providers. For us though, we know that it is cost prohibitive and outside of our core competencies to self-generate all or even a significant portion of our power needs. We will, though, continue to look to enter into clean purchase power agreements or partner on renewable investments, where appropriate, similar to our engagement with New Jersey Resources on the floating solar array at one of our treatment plants in New Jersey. Lastly, we will continue to focus on emissions reduction activities that we can control within our operations. This includes water efficiency and operational efficiency gains in order to reduce the energy and emissions associated with the pumping of water, which we disclosed previously is by far the largest driver of our purchase power needs. Capital projects will include the deployment of additional leak detection technologies and more efficient water pumps across our systems as well as converting some of our fleet vehicles and other assets to more efficient options. These are small, but important pieces of our plan. And in large part, these capital investments will align perfectly with some of our existing reliability and resiliency goals. Next, let's turn to Slide 25 and discuss some new disclosures related to our continued ESG journey. First, soon, we will release summary results of our most recent pay equity study on our ID&E website, [email protected]. This is our third such pay equity study. And each time we have engaged a third-party consultant to conduct an objective pay equity analysis. I'm pleased to share that you will see that we're very close to achieving pay parity across employee groups, including gender. Our performance is a testament to American Water's commitment to fair and equal pay and how our teams have leveraged findings from these regular assessments to correct any qualities and update processes around compensation. We will also share some initial summary findings of our internal labor market analysis that began in 2021. This analysis was also led by a third-party firm and was commissioned because we believe the factual and statistical analysis of our workforce was needed to support a holistic evidence-based inclusion, diversity and equity strategy. Lastly, I'd like to touch on 2 of our new goals that were established earlier this year in our annual performance plan. The first is to increase representation of female employees at American Water and the second is to increase ethnic and racial diversity among American Water employees. Both of these goals complement existing safety and environmental sustainability goals that are tied to annual performance plan compensation for all employees. As mentioned earlier, these goals reflect our company's focus on social benefits that we believe will help us operate as a stronger company, ultimately for the benefit of our employees and to help us better reflect the customers and communities we serve. Whether it's our ESG leadership or our consistent execution on our earnings growth goals or our leading safety culture, our team at American Water has consistently raised the bar for success in the water and wastewater industry. We have full confidence in our ability to achieve the goal we talked about today for 2023 and beyond. So with that, I'll stop and turn it back over to our operator to begin Q&A and take any questions you may have.

Angie Storozynski:

So first on '23 guidance, I mean, I guess it's a relief for all of us to see that you're messaging to get to consensus expectations even with the increased basically equity needs that you're addressing in 2023. So I mean, is it basically that you are front-end loading equity to finance CapEx that will materialize in the latter part of that 5-year plan? And as such, it's not only that CapEx is back-end loaded, but it's also that there is some incremental dilution that sort of weighs on those '23 results?

John Griffith :

I would just add that as we think about how we're delineating the equity, as we said in our prepared remarks, we'll issue or we expect to issue a significant portion of the equity in 2023. As we think about the consequences of that, based on how we trade, I would characterize that the dilution associated with that is relatively modest. And then as also we pointed out in our remarks, whatever we don't issue in 2023, we would expect to issue in the back end of our plan.

Susan Hardwick :

Yes, I think it's a good question, Angie. But I think Cheryl hit on it and you did even in your remark there, we just don't view it as our core competency. There are folks that are sort of in that business, and we believe we have the opportunity to work closely with them to develop solutions and take advantage of those renewable sources that are out there without owning them. We've got enough to do. And you even acknowledge, it's not really a growth driver. We've got plenty to do on just our investment side to continue the growth. So we don't need it from that standpoint. Your observation around tax, I think, is also a good one. But I would tell you, we think we have the right strategy here to finance this plan and manage all the elements of the requirements in that plan with what we've laid out here. So while we're always interested in and spend quite a bit of time on tax planning and tax strategy, it just does not -- it just doesn't fit our profile.

Susan Hardwick :

Yes, Angie, let me just turn it to John and have him sort of weigh in on that question.

Susan Hardwick :

Yes. And I just would add to that simply that we work very hard in cultivating these opportunities to make sure we're developing the right solution for these communities, and I think that's a big advantage for us.

Shar Pourreza:

A couple of quick ones here. If I recall correctly, the HOS sale ate up a lot of your, I think, NOL carry-forwards and you've been a cash taxpayer this year. Is it your expectation that you’ll be subject to the minimum tax going forward? Does this latest financing plan kind of embed an ongoing assumption for that?

Shar Pourreza:

Got it. Okay. Perfect. And then I think John may have touched on this a little bit, but it looks like the amount of CapEx dollars allocated to regulated acquisitions is the same as the prior plans. So a slightly smaller overall proportion. Anything to sort of read into here? Is the opportunity set fairly fixed? Are you getting more selective? Just maybe a little bit of an elaboration on John's comments, please?

John Griffith :

Sure, Shar. I'd say the smaller proportionality is really just a function of the increase in the regulated -- our organic CapEx, I'd say the -- which has more visibility attached to it, as you know, than regulated acquisitions. So in no way are we kind of decreasing our thoughts around putting dollars to work on regulated acquisitions and we continue to feel very good about that.

Shar Pourreza:

Got it. And then just a last one for me is just the shape of that 7% to 9%, I mean, obviously, you guys, you're executing on the regulatory front. You've got a good footprint there, some dilution. But I guess what else should we assume -- or I guess as we're thinking about modeling and the extension, where are you sort of within that range as we're thinking about like the near term versus the longer term as we're just thinking about the profile of that shape.

Shar Pourreza:

Terrific. We'll see you in a couple of weeks. Appreciate it.

Operator:

Our next question comes from Insoo Kim with Goldman Sachs.

Susan Hardwick :

Yes. I think market conditions certainly play into our decisions here around timing and ultimate size and the tool that we use. So that's obviously still in all of our discussions internally. John, anything you want to add to that?

Insoo Kim:

Got it. And then that 7% to 9% EPS growth rate, should we assume that it's now kind of basing off of the '23 guidance? Or should we still use '21 or '22.

Insoo Kim:

Got it. I thought I'd try. Then just 1 more apologies. Maybe for Cheryl, I think the EPA maybe still -- late this year may be on track to put out some mandates related to PFOS and other water contaminant kind of at the maximum levels. Just based on your operations and your jurisdictions, how would that -- given what could come out, how could that impact your CapEx or O&M strategy a bit?

Operator:

Our next question comes from Julien Dumoulin Smith with Bank of America.

Susan Hardwick :

Well, Julien, as I said to into, we don't really look at it that way. Our view is a long-term growth rate of 7% to 9% is the answer. So our view is you can start within a year you want, and you're going to get the same result.

Susan Hardwick :

Yes. I think John's comment about the impact of dilution is really the right one. Our view is that the dilution is pretty minimal from the issue that we're anticipating in '23. I think the real driver is the ramp-up of the CapEx. I mean we're just putting these dollars all to work. We've got the proceeds coming in again from HOS in '26. I think as we continue to see that ramp up work its way through the plan, you'll start to see towards the back end of the plan, more consistent growth rates.

Susan Hardwick :

Well, I mean, obviously, we're a full cash taxpayer now. So this 5-year plan reflects that. The comment earlier around what does IRA mean to us in terms of the alternative minimum tax, I mean, again, there's still many rules and definition still to be done around that, that I don't think any of us know exactly how it will work. But I would just reiterate what I said a minute ago, we've modeled a variety of scenarios, all of which fit in this plan that we've laid out here.

Operator:

Our next question comes from Richard Sunderland with JPMorgan.

Susan Hardwick :

Yes, it's a good question. And as John said in the prepared remarks, obviously, we'll measure at the end of the year and determine what our actual '23 expense is once we get to the end of the year. But how we've handled this from a regulatory perspective is for the most part, what we have gotten accomplished here is whatever the '23 expense ends up being, that's what will get reflected in rates. So we've left it a little bit open-ended in that regulatory arena, where we'll actually set it at the number once we know what the number is. And in other situations, we've estimated what we think the impact will be based on year-to-date performance and expected performance for the balance of the year.

Susan Hardwick :

Yes. I think what we have accomplished so far in the regulatory arena, obviously, will be in rates until we adjust rates again. And I think we'll have continued opportunity in the regulatory arena to address these cost impacts in other jurisdictions. And again, in some cases, the ability to adjust for what the actual costs are in existing cases, or in existing jurisdictions. It just depends on how we address it in each specific state. I think, again, the overall conclusion here is we've got the vast majority of these costs covered and should not really be a drag on our expectations going forward.

Susan Hardwick :

Yes, I think it's -- that's probably the right way to think about it. We're continuing in the jurisdictions of our states that don't have those agreements in place. We're continuing to evaluate those opportunities and working very closely with now the HOS ownership or leadership to see if opportunities exist. So it's a very active part of our business plan.

Durgesh Chopra :

Just -- congrats by the way, on the regulatory execution here year-to-date. You guys have done a phenomenal job and great outcomes. Just on the acquisition side of things, can you update us on where you stand year-to-date versus your targets? I think this year, you're planning on hitting $500 million in acquisitions. So could you just update us there? And then I have a follow-up.

John Griffith :

Durgesh, we're on track. I think we've closed about 65,000 customers to date with another kind of 5,000 or so customers to come. I would say that on a dollars basis, as we disclosed in our slides, our expected closings for the year will be in the neighborhood of $350 million, which -- and as you know, we target about $300 million to $400 million a year. We've said over 5 years, we're $1.5 billion to $2 billion on a run rate basis.

John Griffith :

No, Durgesh, I wouldn't say we think of in terms of specific price ranges. Obviously, we'll be very cognizant of market conditions. But I'd say we just -- we think of it more in terms of what we've messaged in the past, which is the equity from a mid-plan perspective. And as we approach 2023 here, that is mid plan relative to our historical messaging.

Steve Fleishman:

So just on the -- a couple of questions related to the equity and balance sheet. So the -- in the 2023 guidance, are you kind of assuming that it's kind of averaged roughly over the year or beginning of the year or just kind of how are you incorporating that into the '23 guidance?

John Griffith :

Sure. Yes, I think, Steve, that's a fair way to characterize '23 for modeling purposes. I'd say, I think the words we used, a significant portion of our equity, I think you can think of that as is north of $1 billion of issuance in '23. And as you know, we'll have to kind of find the right windows. But I think midyear is a reasonable way to think about it.

Steve Fleishman:

Okay. Makes sense. And then could you -- maybe just on the balance sheet, could you give more color on the comment about getting -- adding some of this for balance sheet, cushion or flexibility? And what's the thinking there today versus in the past? Is it just the volatility of markets? Is it what you see in terms of kind of acquisition pipeline or regulated investment pipeline? Or is it tax related? Just why now for the additional balance sheet capacity not a year ago or 2 years ago?

John Griffith :

Sure. Yes, I'd say, Steve, just as we've thought about our metrics over time, we're in a very strong credit position, but we do look at our ramping up of capital spend, both on the organic side as well as on the acquisition side. And so we just think it's healthy for us to have some cushion there. I would say just also, as we're thinking about the cadence of our equity issuance, where we'll do much of it in 2023, but then waiting until the back end of our plan for another issuance as we thought about it. That's just a natural consequence of creating some cushion for ourselves.

Operator:

Next question comes from Gregg Orrill with UBS.

Susan Hardwick :

It really is the growth of the business, Gregg. Again, we just -- we feel very good about how we're -- how the investment is being rolled out, cash flows from operations and the ability to get good, solid, timely regulatory solutions.

Operator:

This concludes our question-and-answer session as well as our conference for today. Thank you for attending. You may now disconnect.

Operator:

Good morning, and welcome to American Water's Second Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for one year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick :

Thanks, Aaron, and good morning, everyone. Let me also say how happy we are to have John Griffith with us as our CFO, and you'll hear more from John shortly. Let's turn to Slide 5, and I'll start by covering some highlights of the first half of the year. In the first six months of 2022, earnings were $2.07 per share compared to $1.87 per share in the same period of 2021. Results for the Regulated Business drove the majority of the growth, accounting for $0.16 of the $0.20 increase while MSG and other results were up $0.04 as compared to the same period in 2021. The regulated growth was in line with our expectations as we knew the first half of the year would be strong due to revenue increases from several general rate case proceedings completed in 2021 and early 2022 and from infrastructure mechanism filings. These higher revenues were partially offset by higher operating costs, which I'll talk more about shortly. Our Regulated Business invested over $800 million in capital projects and acquisitions for the quarter and $1.25 billion year-to-date, reflecting great work by our teams responsible for executing these investments. As you will recall, the total capital investment plan for 2022 included the $235 million acquisition of the City of York's wastewater system that we were excited to close in May. Coupled with our strong first quarter results, our capital investments are off to a good start for the year and on pace to meet our $2.5 billion goal for the year. We continue to stay focused on the plan. And as you saw yesterday, we have now for the third time affirmed our 2022 earnings guidance. And John will cover 2022 results and guidance in more detail a little later in the call. Before I move on, let me comment again about how excited we are to welcome the customers and employees of York's wastewater system to the American Water family. As we've said, this is the largest acquisition in Pennsylvania American Water history, and it's a great example of how municipal acquisitions are executed. The importance of understanding the community's objectives can't be underestimated, and we jointly created an opportunity that benefits all stakeholders. And as we think about the competitive landscape for water and wastewater acquisitions, we continue to focus on growing in states where we can leverage our competitive advantage. As we've said many times before, we target acquisitions in the range of 5,000 to 50,000 customers, where we have constructive regulatory environments, an existing footprint and critical mass. This critical mass is important in our efforts to promote customer affordability and cost efficiencies. Also, as we grow in each state, we will have a greater voice to help solve industry challenges through legislative and regulatory policies. So while we won't be awarded every opportunity we pursue, we know that there are plenty of communities in need, and we believe our 135-plus year history of delivering safe, clean, reliable and affordable water and wastewater services will enable us to continue to achieve a high success rate in our pursuits. The final highlight I'll cover here is that the Military Services Group had another great win at the end of the second quarter. And I'll let Cheryl give you the details, but the award of our first Navy contract at Mayport adds to the 17 other military installations that we're very proud to serve. Turning to Slide 6. I'll take a few minutes here to provide a review of the macroeconomic environment and how we are managing the impacts to the company. Our focus on operating efficiency is not new, as you know. In the chart at the bottom of Slide 6, you can see the result of our disciplined focus on managing costs as we grow the business. This focus has positioned us well to have managed through much of the pressure so far on supply and even cost increases brought about with the effects of the pandemic. Now as we are in what may be an extended period of inflationary pressure, we continue to exercise our disciplined approach to cost management by leveraging our scale. And through midyear, while we are experiencing cost increases in certain supplies and energy, the impacts to date have been fairly modest. In terms of our most significant costs, labor is our biggest operating expense by far. We work regularly with our union leadership to secure contract renewals. And so far, we have been able to achieve very fair outcomes. For our non-union workforce, we're focused on filling key roles and maintaining our practice of competitive compensation. Chemical costs and purchase power are usually the next biggest operating cost. While our supply chain strategies and purchasing power have helped mitigate chemical cost increases, especially as compared to our peers, we do expect higher O&M costs this year due to higher chemical prices. For many years now, the supply chain team has been successful in partnering with operations to secure reliable, cost-effective power and fleet fuel contracts across our footprint. And because of these efforts, we expect only modest power and fuel cost increases in 2022. Overall, we estimate an impact of about $0.06 to $0.08 per share of these types of cost increases year-to-date, which we've been able to generally offset through other results. Later, John will talk more about the possible impacts on the year. But as I said, we are confident in our ability to hit our earnings expectations for the year. And perhaps one final comment before I talk about how we're pursuing regulatory solutions for this rising production cost environment. Certainly, a lot has been written over the last few weeks about pension accounting and expense levels going forward. I'd simply mention that our pension plans were funded at just under 90% as of year-end 2021 with a roughly 50-50 target allocation for equity and fixed income. Though there has been much volatility in the equity markets through midyear, I'd remind you that the pension obligation remeasurement will be done at the end of 2022, and that will drive the determination of our 2023 expense. The accounting method we use includes using the fair market value of planned assets at year-end to establish the expected return on plan assets. And we also used the quarter approach for amortizing gains and losses. These methods were selected many years ago and have resulted in moderate variability in pension expense, both favorable and unfavorable over the years, which we've always managed as part of our overall cost management approach. This includes regulatory solutions such as the pension trackers we have in place in Missouri and California, and updates to pension expense in active general rate cases. As an example of how we are addressing these costs in current cases in the Illinois case currently on file, we requested and received approval last week to update the requested revenue requirement for increased costs including an estimated increase in pension costs. That request will be considered in this case. And that goes to my final point on this slide around regulatory solutions. Our teams throughout the company know that regulatory execution is vital to meeting our earnings objectives and our financial plan generally. The regulatory solutions we are pursuing such as cost deferrals and expense recovery mechanisms in all of the current active cases are closely aligned with the interest of regulators and customers in managing affordability and limiting variability of customer bills. There’s no doubt a challenging environment we all find ourselves in, but we remain confident in our ability to manage through it using our disciplined approach to cost management and our ability to execute effectively in the regulatory environment. And with that, let me turn it over to John to cover more detail on our operating results and financing plans. John?

Cheryl Norton:

Thanks, John, and good morning, everyone. While I usually start by reviewing the regulated segment's operating results, I want to start today on Slide 14 by covering the announcement coming from our Military Services Group just a few weeks ago. I'm so proud of MSG's latest award our first ever Navy contract. This contract continues the team's streak of utility privatization wins at military installations in recent years. With the addition of the wastewater contract with Naval Station Mayport, we are currently serving 18 installations with between 30 and 50 years remaining on these contracts. We also have two other bids outstanding, one of which is expected to be awarded in 2023. And as you can see, we have a potential of about 70 additional opportunities in the years ahead. MSG's business model centers around adding new military installations to our portfolio and then optimizing revenues through new infrastructure construction projects on the bases we serve. A military installation's mission can change or expand or new technologies or system improvements may be identified that improve efficiency or sustainability. We work with our military partners to identify and lead these needed infrastructure projects. Again, we're extremely proud to provide vital services for the military personnel, their families and the civilians that support these missions. As we turn to Slide 15, let's cover our regulatory activity in our states. Shown here is our summary of completed rate cases in 2022 and key facts for each of the rate case filings so far this year. In the appendix, we also share some details of changes in our infrastructure charges year-to-date. These key efforts reflect Susan's comment on our team's ability to execute our regulatory strategies. As you can see on the slide, our New Jersey case is the furthest along with constructive discussions happening over the last few months. We're really pleased to report that on July 25, the parties to the New Jersey base rate case filed a stipulation of settlement with the Office of Administrative Law resolving all pending issues in the proceeding. The parties are waiting for an initial decision from the administrative law judge. And once it's issued, the matter will be returned to the Board of Public Utilities for a final determination. In Illinois, it's been about six years since our last general rate case, and progress has been steady since our February filing. Evidentiary hearings will start next month, and we expect an order in the case by January. Importantly, Illinois utilizes a forward test year for ratemaking purposes, which is helpful during this period of rising costs faced by the business. In Pennsylvania, we filed a general rate case in late April and are seeking recovery of over $1 billion of investments. The case is proceeding as planned, including evidentiary hearings that will occur in September and with an order in this case also expected early next year. Pennsylvania also uses a forward test year for ratemaking purposes. Our cases in California and Missouri were just filed earlier this month and are progressing as expected so far. And finally, as you know, we have another case active in Virginia from 2021 that we expect to bring to conclusion in 2023. The common thread in all these cases is the focus on recovery of extensive infrastructure investments totaling over $4 billion and in some cases, the roll-in of acquisitions. As we continue to ramp up capital investments over the next few years, it will take time to see recovery of these investments in rates. We expect to continue to file general rate cases every two to three years in our larger states with the ability to go in sooner if we see lingering inflationary impacts or excessive lag from investment, limiting our ability to earn our allowed return. Clearly, regulatory execution is critical to the success of our plans, and we are very confident in our teams that lead our regulatory efforts. As always, we remain very focused on customer affordability. Our emphasis on cost and capital efficiencies coupled with our customer growth efforts have continued to design and customer assistance programs to help our customer affordability. On the legislative front, there were three additional pieces of legislation passed since our first quarter call, one in Illinois, one in Tennessee and one in Missouri. The Illinois bill is an important one to help address the affordability of our bills with certain customers. The Tennessee bill requires all utilities in the state to implement a cybersecurity plan, and we are well positioned to comply. And lastly, the Missouri bill requires a utility to defer any difference in what was actually paid in state or local property taxes compared to what was used to set the revenue requirement. We believe our legislative efforts benefit our customers and give communities more options as they seek solutions to water and wastewater challenges. On Slide 16, we summarize rate filings completed so far in 2022 as well as total annualized revenue increases being requested in currently active cases. The total of $598 million in pending cases, which includes 3 infrastructure surcharge proceedings, reflects the requested amounts in the various cases. Generally speaking, we would expect the final revenue increase granted in each case to go into effect in 2023 or 2024 in the case of California. Turning to Slide 7. Our Regulated Business leaders and their teams did a great job again in the second quarter executing on our increased capital plan. It took a significant effort to safely and efficiently complete the several hundred projects that improved our systems and drove capital investment higher by nearly $300 million in the first half of the year compared to the same period last year. This result keeps us on pace to hit our goal of approximately $2 billion of regulated capital investment spending in 2022, the foundation of our earnings growth triangle. Moving to Slide 18. I want to just highlight that our continued execution on capital investments, both infrastructure projects and acquisitions are succeeding in growing our regulated rate base. This, of course, drives earnings growth while we remain focused on operating our systems safely and efficiently to the benefit of our customers. Like we have been doing the last several quarters, I'll close on Slide 19 with another story of ESG impact at American Water. This one comes from a collaborative project between New Jersey American Water and NJR Clean Energy Ventures. The partnership is constructing the largest floating solar array in the U.S. on a lake next to our Canoe Brook Water Treatment Plant. Upon completion later this year, this 8.9 megawatt installation will provide 95% of the plant's annual power needs and will help reduce our annual greenhouse gas emissions. This is another example of a project that creates a financial, operational and ESG win for us and our customers. So with that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Richard Sunderland :

Maybe starting inflation and your guidance reaffirmation, could you frame a little bit of the 2H inflation risk relative to the 6% to 8% impact year-to-date? I guess, in particular, is there any reason the headwind could be ratable? And then given you had the HOS benefit in 1H that offset, how do you think about offsets over the balance of the year?

Richard Sunderland:

Got it. I appreciate the color there. I guess just turning to this topic, but on a macro level with the commentary around CapEx. I'm curious what you're seeing on that front, is there potential for either the dollar spend to go up given inflationary factors? Or I guess, on the other hand, less pipe replacement to occur under the current budgeted CapEx. Just curious how you're thinking about that into the budget update.

Cheryl Norton:

Yes, I would just say that we've always got hundreds of projects pretty much ready to go that we know need to be done across our systems. And so we have some flexibility in how quickly we move those projects forward. But at this point, we've been able to manage through any supply chain delays and any cost increases and still get the work that's been prioritized done and continue to do that, we think, through the years coming. So no real concerns there, just being flexible in how we approach those projects.

Susan Hardwick :

No, not at this time. Obviously, as we said in our prepared remarks, we do need to get to the end of the year, we'll do the remeasurement there, and we'll see where we are. But again, our focus would be to use all of the tools at our disposal to manage those types of increases I mentioned in my remarks around regulatory approaches. We've got trackers in two states already, so that will mitigate it there in two of our largest states, by the way. And we're continuing to focus on regulatory solutions in all the cases we have currently on file to address that specific cost. So we're optimistic we'll be able to manage through whatever increases we may or may not see there.

Insoo Kim :

My first question going back to, I guess, thinking about the '22 guidance a little bit, given the year-to-date results. I think on Slide 10, you said that second half of '22 EPS will be lower compared to 2H 2021. If I just -- if I take the last four quarters worth of EPS, it gets to kind of, I guess, the midpoint of where '22 guidance would be. So then if the 2H 2022 is going to be lower, is that implying that at least in the range you're trending towards the bottom half of the range?

Insoo Kim:

Okay. Got it. So I should take that in addition to the other commentary on demand, rates and the inflation, too, I guess, I’ll secure it more in isolation.

Insoo Kim:

Okay. That makes a lot of sense. The second question, last month, the EPA put out new advisories for PFAS and other chemicals. I know it's -- a lot of this is more state-based. Some of the states have mandates, some had their own recommendations and it is okay, you guys have had your targets as well. Just based on the new advisories, any thoughts on your operations on the PFAS and other chemical levels, whether that translates into CapEx opportunities or other expenses?

Cheryl Norton:

Yes. Thanks, Susan. What EPA put out recently were health advisories. And there's no regulatory requirement for us to test or to meet any certain levels with those health advisories. Those advisories were extremely low, in our opinion, below the detection limit of the methods to test for PFAS compounds. And so we're anxiously waiting to see what EPA comes back out with as far as a real regulatory limit. But we have tested all across our footprint. We know where we stand and we have already started looking at what capital projects would be necessary going forward. And any regulations in states other than where we're at today will mean future capital investments.

Angie Storozynski:

Just one comment on 2022. So I remember in the past you used to say that weather can have about a $0.07 positive or negative swing for the year. So I'm just wondering if it's still the case. And I see that you're calling for water conservation in at least parts of New Jersey. And I'm just wondering if that could potentially cap this earnings benefit.

Cheryl Norton:

Yes. We've got two areas in New Jersey where we've seen peak usage rise to the level that we feel it's important that we start to encourage or specifically ask our customers to conserve, to water only on alternating days, put steps like that in place so that we can kind of shave off those peaks and that we can serve our customers continuously without any kind of dips and pressure or anything like that. So we have seen usage spiking, and that's why you're seeing those conservation messages come through.

Susan Hardwick :

Yes. It's a good -- yes, sure. It's a good question. And obviously, we need to kind of dust off our analysis that has been done around this topic again. And as you said, it's sort of back new in the news. And I think as we've talked about this in the past, it really is probably an impact on cash flow primarily. Ultimately, any impacts to effective tax rates gets worked through the customer bills. So I would say it's probably cash flow -- and I think -- well, again, just need to look at our analysis that we did at the time. I don't recall it being terribly material, but we'll just need to dust it off and see if there's anything there to report.

Susan Hardwick :

Well, yes, sure. I'm obviously not going to comment on any details here. I would simply say it's never that simple. I think it's important to go back to the comments that John made in his prepared remarks that we've got a pipeline at 1.3. We just closed New York. We talked about the acquisition in West Virginia we just announced yesterday. We have plenty to do in this space. There is plenty to do, and we are doing a lot. So we take every opportunity seriously, and we approach every one with the same rigor, the same metrics, the same approach to benefits that can be provided to communities, and we put our best foot forward and then we move on. And that's probably all I have to say about that. Again, we've got lots of great opportunities here.

Michael Gaugler:

On Slide 15, Cheryl, you mentioned in Illinois, the low-income assistance plans now in place. Just wondering, do you have them in most or all of the states you operate in?

Michael Gaugler:

So Illinois then was the -- just to be clear, Illinois was the last one in terms of adopting this type of legislation in your system?

Operator:

Our next question comes from Ryan Greenwald with Bank of America.

John Griffith:

Thanks very much, Ryan.

Susan Hardwick :

I don't know, Ryan. I mean I don't think it's something we have got at our fingertips. I don't know what you can divine from the Q on that. Yes, we don't have anything out there, Ryan, to answer that specifically.

Susan Hardwick :

No.

Susan Hardwick :

Well, I think that's a difficult approach. Those are estimated costs as of a set of analyses we did for the rate case. I think the answer really to the question is you really just have to wait until we get to the end of the year, and we see really what the impact is going to be going forward. And I would just reiterate what we said in our prepared remarks that we are working diligently in many of these open cases to address these costs. As Cheryl highlighted several of these jurisdictions have forward-looking test years. And we have worked hard to either include these costs or estimates of these costs in those rate cases or we have proposals on the docket to be able to address go-forward exposures. And to the extent we don't cover those costs timely enough in rate cases, we will continue to focus on ways to mitigate those impacts through other cost management efforts, other things. So I don't think you can really draw any broad conclusions based on what you've seen to date, either in terms of market performance or even in our own filings. I think you really just got to wait until we have more insight into expectations at the end of the year, and then we'll certainly tell you how we think about it. But I'd also tell you, again, remind you that John commented in his remarks, we've affirmed our long-term guidance here. So as we think about this going forward, we're certainly confident in our ability to manage the cost, both from just a straight cost management standpoint and regulatory solutions.

Susan Hardwick :

I don't really have anything to say about that at the moment. Again, we'd be considering those types of impacts in this current case. So nothing really to comment on there.

Gregg Orrill:

Another one on pension. You talked about the quarter method. What's the size of the quarter that you use?

Gregg Orrill:

And that's across -- that's generally across the company? Okay.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to American Water's First Quarter 2022 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for one year on American's Investor Relations website. I'd now like to introduce your host for today's call, Mr. Aaron Musgrave, Senior Director of Investor Relations. Mr. Musgrave, you may now begin.

Susan Hardwick:

Thanks Aaron, and good morning, everyone. As Aaron said, I'll comment further in just a few minutes about recent announced additions to our executive team. But I want to start by saying what a privilege it has been to serve as the company's CFO these past three years. But I also must say I'm thrilled that this will be my last call as the CFO. Let's turn to slide five and six and I'll start by covering our first quarter financial results and then share some business highlights to start the year. In the first quarter of 2022, earnings were $0.87 per share, compared to $0.73 per share in the same period of 2021. Results for the regulated business drove all of the increase of $0.14 per share while market based business and other results were essentially flat as compared to the same period in 2021. Regulator results for the quarter reflect revenue increases from several general rate proceedings completed in 2021 and early 2022, as well as from infrastructure mechanism filings. These higher revenues were partially offset by higher depreciation and increased production costs due to some inflationary pressures on chemicals and energy prices. Market based businesses and other results were similar in the first quarter of 2022 and 2021, with a loss of $2 million, or $0.01 per share in both of those periods. But in those results, the $0.07 per share of earnings from HOS in 2021, was mostly offset in 2022 by the interest income and earnings from the revenue sharing agreements in place as a result of the sale of HOS late last year. While we're currently reflecting the interest income and revenue share contributions in other, they really do represent results driven by the regulated business. And will even more so once the proceeds of the note receivable from the sale are received and redeployed into regulated capital investment. We will continue to report these pieces separately so that it's easy to track. Finally, our military services group had similar results in both quarters and our MSG team continues to expect an announcement on the Naval Station Mayport, Florida bid this summer. In addition to the strong quarter of earnings growth, our regulated business invested $437 million in capital projects and acquisitions in the quarter. This is a great start to the year and puts us on pace to meet our $2.5 billion capital investment goal in 2022. I may sound like a broken record here. But as we've said last year, when we announced our stepped up capital spending plan, the increasing levels of investment will continue to ramp up during this year and over the next few years. And it will take time to see recovery of those investments in rates. We're now in the regulatory cycle that we've talked about before with general rate cases being filed every two to three years in our larger states. We've already announced rates case filings in New Jersey and Illinois earlier this year, which are proceeding as expected. We'll be filing a general rate case in Pennsylvania tomorrow and our next case in California next week which follows the statutory cycle there. In aggregate, we expect to file five to six general cases in 2022, seeking to earn a return on over $4 billion of investment. Clearly, regulatory execution is critical to the success of our plans. Let me make one more comment on our investment progress before I move on. As you will recall, the $2.5 billion total capital investment plan for 2022 includes the $235 million anticipated acquisition of the city of York's wastewater system that we're very excited about. We're also excited though about the 30 other acquisitions across several states we have under agreement as of March 31. They demonstrate that the acquisition pipeline is quite strong. Turning to slide 7, after a strong start to the year, we are affirming our 2022 guidance range of $4.39 per share to $4.49 per share. As we shared in February, our expected regulated earnings growth range in 2022 of $0.24 to $0.30 reflects new authorized rate levels in several jurisdictions. As expected, we saw much of that revenue increase related to new rates in the first quarter of 2022, including in Pennsylvania, which recorded a full quarter of the base rate increase from last year, as well as the step increase effective January 1 of this year. We also experienced about $0.03 per share of timing favorability for operating costs in the first quarter of ‘22 that we expect to reverse in later quarters. As I've mentioned previously, we will not see any material earnings in 2022 from the redeployment of the sale proceeds from HOS and New York. But the expected earnings from interest on the seller note and revenue from the utility share agreements will nearly offset the loss of the prior annual earnings contribution from HOS. Finally, on slide 7, I'll just reiterate that we are confident in the long-term financial targets we set forth in November, including 7% to 9% EPS growth for 2026. Moving on to slide 8, as we announced yesterday, our Board of Directors increased the company's quarterly cash dividend payment from $0.6025 per share to $0.6550 per share, and nearly 9% increase, including this year's expected increase, we have grown our dividend at a compound annual growth rate of 9.6% over the last several years, significantly outpacing most of our utility peers. We plan to grow the dividend at the high end of the 7% to 10% range as we know that is important to many of our shareholders. Before I turn the call over to Cheryl, I want to cover a few important points related to our industry leadership in ESG. Coming in May, we plan to issue our Second Annual Inclusion, Diversity and Equity report. This report will highlight the efforts we have undertaken and the strides we have made advancing our commitment to building an inclusive workplace. Within the report, you will find our first disclosure of consolidated EEO 1 data for American Water. Based on feedback from shareholders and ESG best practices, we made a commitment in our recently filed proxy statement to begin disclosing this data annually in 2022 and thereafter. This action will deliver on that commitment. We are also pleased to be publishing in May the second annual installment of our ESG data summary which will be found on the sustainability page of our Investor Relations website. The data summary will share numerous metrics for calendar year 2021, including scope, one and scope two emissions and progress toward our greenhouse gas emissions reduction target. As many of American Water has achieved significant greenhouse gas emission reductions over the last decade. Due to the nature of our business and our emission reductions over the years, we are in a great position relative to a large majority of our utility peers. For example, we're able to talk about our emissions footprint and hundreds of 1000s of metric tons, whereas most other utilities talk in terms of millions of metric tons. Last year, we came closer to achieving our current goal, we began the process of evaluating new greenhouse gas emission targets. This evaluation is well underway by a large cross functional team and is running in parallel with our annual planning process. They are focused on diligent study and analysis including the potential addition of a scope three emissions and potential alignment with the Paris Agreement. The team expects to present its findings and recommendations to management and the board later this year. I wanted to share this update with you today to demonstrate our commitment to transparency as one of the top ESG leaders in the industry. And with that let me turn the call over to Cheryl to cover in more detail our operating results and strategies for ’22. Cheryl?

Susan Hardwick:

Thanks Cheryl. Turning to our final slide, slide 16. And before we begin Q&A, I want to comment further on our announcement of the hiring of a CFO. As I'm sure you saw yesterday, we announced that John Griffith will be joining American Water as our Executive Vice President and Chief Financial Officer effective May 16. John comes to us from Bank of America and brings more than 25 years of industry knowledge and financial and transactional expertise. I personally know John and his capabilities, he is very talented and will bring the right skills at the right time to help American Water continue its journey of strategic execution, and delivery of superior results. As John joins us, our senior executive team is now fully in place. If you recall, Jim Gallegos, our Executive Vice President and General Counsel joined us on April 1 of this year, Jim brings nearly 20 years of regulated general counsel expertise and is already integrating nicely into the organization. We are thrilled to have both John and Jim on board now. As I've said before, I'm confident in the plan that we have in place to grow this business. And I'm confident we have the right teams in place throughout our states at the basis we serve, and here in our corporate office to achieve our goals in 2022 and beyond. And with that, I'll turn it back over to our operator to begin Q&A and we'll be happy to take your questions.

Rebecca Yuan:

Hi, thanks. Good morning. So first question, are there any changes to your equity issuance plans, both in terms of the $1.1 billion magnitude and timing in the middle of the five year range?

Rebecca Yuan:

Okay, great. And then my second question, given the current inflationary environment, are Munis more willing to sell their utilities? Are you seeing any of that or potential opportunities to accelerate some tuck-ins?

Cheryl Norton:

No, not really, Susan. As you said, we haven't seen anybody specifically come forward related to that. But we do know those pressures are very real and we're able to manage them because of our size and scope where a lot of the Municipals are going to struggle with that.

Ryan Greenwald:

Hey, good morning, everyone. Congratulations on new hiring. So appreciate the color around the O&M timing. Can you guys just talk a bit more about how the quarter shook out relative your expectations? Any other particular considerations that are making you guy’s kind of hold guidance in place after what appears to be a pretty strong quarter to start the year here?

Ryan Greenwald:

Excellent. And then can you guy just provide an update on Chester from your vantage point where things are in the process, timeline resolution, overall conviction levels to close the transaction?

Cheryl Norton:

Yes, so obviously, kind of held up in the courts, if you will. I think we're, I don't anticipate seeing anything probably it's possible this year, but it's going to be months out for sure.

Unidentified Analyst:

Hey, guys, it's actually a Chen for Shar. Good morning. So I guess just wanted to build off the prior question. It looks like the customer connections for the year is a little ahead of target. Just more broadly, are you seeing increasing competition for some of these muni acquisitions?

Unidentified Analyst:

Excellent. And like it's just building on the prior one as well, just on the supply chain side, as we think about O&M for the rest of the year. Anything that you've seen in the first quarter that gives you caution one way or the other or anything that we should think about as we look at the rest of year?

Unidentified Analyst:

Excellent, thanks. So I'll just echo Ryan and say congrats on the new hires.

Gregg Orrill:

Yes, thank you. I was wondering if you could put into context, sort of the backlog of rate cases that you have right now relative to your sort of 7% to 9% earnings growth target, is it-- when you think about Pennsylvania and California, and what's already outstanding, do you think that could take you above trend? Or is that kind of what we're expecting? Or is there even sort of momentum that's continuing to build there?

Operator:

It concludes the question-and-answer session, and also concludes the conference. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning, and welcome to American Water's Fourth Quarter and Year-End 2021 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. Following the earnings conference call, an audio archive of the call will be available through February 24, 2022. U.S. callers may access the audio archive toll-free by dialing (877) 344-7529. International callers may listen by dialing 1 (412) 317-0088 and the access code for the replay is 8387509. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. And I would now like to introduce your host for today's call, Aaron Musgrave, Senior Director of Investor Relations. Mr. Musgrave, you may begin.

Susan Hardwick:

Thanks, Aaron, and good morning, everyone. Before we get started, I want to take just a moment to say thank you for all of the thoughtful comments sent our way over the past few months to express your best wishes for Walter in his recovery. I also want to thank those who have reached out over the last few weeks with your encouragement for me in the role as CEO. It's an honor and a privilege to serve this great company. And as I begin this journey, I want to reassure you that our strategy remains unchanged from what we shared with you in November of last year. This team is energized and is in execution mode to deliver on our commitment of 7% to 9% long-term earnings growth by continuing to invest in our infrastructure, grow our regulated operations through acquisition and support our military by growing our military services footprint. We are focused on operating where we create the most value. And now as we've transitioned to a 100% regulated and regulated-like business, we believe we are positioned to deliver even higher quality earnings. There is no other water and wastewater service provider in the United States with our scale and capability. And for our investors that rely on our dividend, we are committed to grow our dividend at the high end of the 7% to 10% range. We know that the best way to secure your confidence in us is to deliver. That's exactly what we did in 2021 and what we are committed to do going forward. And with that, let's get to it. Turning to Slides 5 and 6. I'll start by covering our financial results and then share some highlights of our operational excellence in 2021. For the 12 months ended December 31, 2021, earnings were $6.95 per share compared to $3.91 per share in the same period of 2020. Full year and fourth quarter 2021 results include a gain of $2.70 per share, which reflects the completion of the sale of Homeowner Services in December reduced by the $0.19 per share contribution to the American Water Charitable Foundation from the proceeds on the sale. Full year and fourth quarter 2021 results were $4.25 per share and $0.85 per share, respectively, before the gain on the sale of HOS. This represents an 8.7% growth over 2020 earnings, a strong result that is in line with expectations and demonstrates another year of successfully meeting our annual earnings guidance. Earnings in the regulated business in 2021 increased $0.40 per share. Regulated results include the impact of increased revenues from new rates in effect as well as earnings from acquisitions offset somewhat by higher wages and other labor-related costs. Production, operating and maintenance costs and depreciation also increased in support of growth in the business. Market-Based business results, apart from the gain on the sale of HOS decreased by $0.10 per share compared to 2020, primarily because of the timing of the sale of HOS. Parent company results were $0.04 per share higher in 2021 as compared to 2020. On the people side, I'm very proud that last year marked one of our company's best years of safety performance, an excellent outcome amid the ongoing operational challenges related to the pandemic. We also witnessed the value of our resiliency investments in our New Jersey, Pennsylvania and Maryland operations. We successfully withstood widespread flooding in the aftermath of Hurricane Ida while our customers' drinking water quality was not impacted in any of our service areas. Related to capital investments. Our regulated business achieved $1.8 billion of infrastructure improvements, replacements and other system work in 2021 to better serve our customers. As we made these investments, we continue to work hard to keep customer bills affordable by focusing on operating and capital efficiencies, constructive regulatory outcomes and by leveraging the size and scale of our business, along with achieving our supply chain successes throughout the pandemic. As we discussed with you in 2021, regulated acquisitions continue to be a key component of our customer affordability and growth strategies. While we welcomed approximately 20,000 new customer connections through acquisitions in 6 states last year, we know that these results are lower than our annual targets. And of course, acquisition totals fluctuate year-to-year, but we are encouraged that we are currently -- that we currently have acquisitions under agreement covering about 77,000 customer connections to start the new year. Cheryl will talk more about our progress on acquisitions a bit later. And finally, we are pleased to have successfully executed on the sales of HOS and our New York and Michigan operations. As we outlined in November, we will redeploy the proceeds from these divestitures into our regulated business where we can best serve customers and drive efficiencies and thus create value for our customers, employees and shareholders. Turning to Slide 7. We believe the combination of our EPS growth, our dividend and an ESG premium continues to be rewarded by investors, securing our place as a top performer in the utility sector on total shareholder return for many years now. As you can see on this slide, we have delivered an exceptional total return to shareholders of 185% over the past 5 years, including our excellent dividend growth. Based on the long-term plans we've laid out in our history of executing on our strategies, we expect to continue to deliver a very competitive total shareholder return for many years to come. Moving to Slide 8. I want to emphasize just a few points here. We continue to believe that our plan, both the level of investment and how we intend to finance it, is supportive of our current credit ratings. As we've told you, both S&P and Moody's agreed with that. They both affirmed our ratings last year following our Investor Day presentation. This was due in part to the recognition of our shift to 100% regulated and regulated-like earnings, coupled with our decision to operate in constructive regulatory jurisdictions. They affirm that our solid financial metrics are a good complement to our business profile. We're proud that our A credit rating at S&P is 1 of only 2 in the industry. Our strong credit profile is something we value and we will continue to work hard at maintaining it for the benefit ultimately of our customers. The other thing I'll point out on this slide is our total debt to total capital metric. At the end of 2021, we were at 61%. After adding back to total debt, the initial HOS sales proceeds of $480 million yet to be deployed. This is about 1% better than where we ended 2020 and puts us on a good path to our goal of roughly 60% by the end of our 5-year plan. As we look ahead to 2022, let's turn to Slides 9 and 10 for a recap of some of the important strategies we laid out back in November. The map on Slide 9 clearly demonstrates our geographic diversity and how our scale and size are a key competitive advantage, especially when it comes to customer affordability. Because of our large customer base in each state, we're able to spread capital investment across that base, helping to maintain affordability for our customers. Including the 17 military installations we serve through our military services group, we provide drinking water and wastewater services to an estimated 14 million people in 24 states. On Slide 10, as we laid out in November, we plan to spend $13 billion to $14 billion over the next 5 years and approximately $28 billion to $32 billion over the next 10 years in our regulated business. These capital investments generate significant economic benefit to the local and regional economies while likely improving the environmental footprint of the systems in these communities. This is another demonstration of how the values of ESG are integrated into our everyday work. We'll balance these investments through a disciplined regulatory strategy and strategic cost management to support customer affordability. And again, while there's a ramp-up time related to the increased capital and the recovery of those investments, our earnings will be more consistent and stable in the long term. Turning to Slides 11 and 12. Let's look ahead at our outlook for earnings in 2022 as compared to 2021. As we shared in our earnings release yesterday, we are affirming our 2022 guidance range of $4.39 per share to $4.49 per share. We thought it would be helpful to share some details of the drivers year-over-year since there were several moving parts. As you can see on Slide 11, our regulated earnings growth range in '22 of $0.24 to $0.30 reflects the fact that we are filing several significant general rate cases in '22, along with labor costs and chemical cost pressures this year that may not be recoverable outside of a rate case. So we're back in that regulatory cycle that we've talked about before. And as I've mentioned previously, we will not see any material earnings in 2022 from the redeployment of sales proceeds from HOS in New York. But we will benefit from the interest income on the HOS note and the revenue share agreement in 2022, helping to offset the loss of earnings from HOS operations. Finally, on Slide 12, I'll just reiterate that we are confident in the long-term financial targets we set forth in November, including 7% to 9% EPS growth through 2026, and we believe well beyond that. Next, I want to cover a few important points about ESG -- about our ESG efforts on Slide 13. American Water has been recognized as an industry leader in ESG for many years now, and we're very proud of those accolades. Today, I want to highlight what I think is an underappreciated aspect of our ESG story, namely our decades-long runway of transformational impact in communities across the U.S. We are positioned through our regulated acquisition growth strategy to lead significant environmental and social change in the communities we serve or will serve in the future. Slide 13 highlights this ESG impact opportunity for an acquired -- for our required systems. But the reality is our entire growth triangle has impactful ESG-related initiatives integrated within each area. As you see and hear us continue to highlight this aspect of our ESG story, you'll begin to see our newly created ESG badge as shown on Slide 13. It will appear both internally and externally in our communications as we raise awareness of the integration of ESG principles and values in all that we do. And you'll see the water drop part of the badge shift from E to S to G as appropriate in order to highlight the key impact for the topic at hand. Let me close on Slide 14 with just 1 example of a story of ESG impact because of American Water's investment. This story comes from Indiana American Water, which serves over 1 million customers in that state. As some of you know, I'm originally from a small town in Indiana, that happens to be just a few hours from another small town in Indiana called Sheridan. A number of years ago, Sheridan was facing significant environmental compliance issues with the U.S. EPA related to its wastewater system. As we so often see the issue became bigger than just an environmental one. The town was facing business development restrictions because of its noncompliance issues. And if you fast forward to today, you can see -- and as you can see listed there on that slide, the many positive changes that have occurred as we partnered with the community to solve those issues. In the future, when you hear us talk about our acquisition pipeline of 1.3 million customer connections, I hope you'll see it in a different light. Sure, it means financial growth opportunity, which is very important to us, but it also means a long runway of opportunities to make a positive impact environmentally and socially. And with that, let me turn it over to Cheryl to cover our operating strategies for '22 in greater detail. Cheryl?

Susan Hardwick:

Thanks, Cheryl. Turning to our final slide, Slide 27. And before we begin Q&A, I want to reiterate what I said at the beginning of the call today. I am confident in the plan that we have in place to grow this business, and I'm confident we have the right teams in place throughout our states at the bases we serve and here in our corporate office to achieve our goals in 2022 and beyond. Our team has consistently delivered on our earnings and dividend growth goals year-over-year. Nothing has changed regarding our team's ability and determination to continue that record of execution. We have, without question, consistently raised the bar in the water and wastewater industry for standards of operating excellence, ESG leadership and financial performance as evidenced in part by our exceptional 5-year total shareholder return of 185%. That's why we're reaffirming the long-term targets we initiated last November. And with that, I'll turn it back over to our operator to begin Q&A and take any questions you may have for us.

Insoo Kim:

And first of all, I do definitely wish Walter the best of luck and Susan definitely good luck in this new role and I think an important 1 at that.

Insoo Kim:

First question I think just the -- on the financial side, I just wanted to verify that on your 5-year plan, I think at the Analyst Day, you had talked about, I think, $1.1 billion of equity needs. Just want to confirm that, that is still the right number that we should be thinking of? And if that's the case, and related to that, any thoughts around types of equity issuances, whether it's trade or potential for equity in unit converts?

Insoo Kim:

Got it. That makes sense. And then just on the CFO process of finding the permanent CFO, are you looking both internally or is it mostly external? And any type of profile that you're looking for, whether it's someone with the experience in the utilities industry or whatnot. just any thoughts you have there so far?

Operator:

The next question comes from Durgesh Chopra with Evercore ISI.

Susan Hardwick :

Thank you. Appreciate it.

Susan Hardwick :

It is anchored off of our normalized '21. And our practice here typically has been to anchor it off of the most recent actual results. So as we are affirming guidance here and talking about long-term plans, we are anchoring off of '21.

Susan Hardwick :

No. We think the strategy is quite strong. We obviously made some changes when we came out in November with the plan we laid out in November, and we are absolutely committed to that plan. We think it is the right plan. And as I said at the outset, and I think Cheryl demonstrated in her remarks, we're very confident in our ability to execute on this plan.

Susan Hardwick :

Yes. I'll let Cheryl comment in a second. But certainly, it's a large case for us. We've got a lot of investments since the last case, believe it or not, in that case, I think it was just 2 years ago. So it's a very important case, large jurisdiction for us. We think we can be and have been very effective in the New Jersey jurisdiction. So we would expect sort of typical issues in this case, but we're very optimistic about the case we have filed and our ability to work through it effectively. Cheryl, anything you want to add to that?

Operator:

The next question comes from Angie Storozynski with Seaport.

Susan Hardwick :

Thank you, Angie.

Susan Hardwick :

Yes. It's a good question, Angie. And I didn't specifically mention this in response to Insoo's question, but certainly, equity forward is on the list of options for us. We have executed some strategic transactions. We covered that in our remarks here today with the exit of HOS in New York and Michigan. Those are all aimed at creating – essentially creating equity, creating proceeds for us to be able to invest that lowers the amount of equity we have to do in the marketplace. And obviously, those things were considered in the plan that we laid out in November and are contemplated in the $1.1 billion. We'll continue to do those evaluations to see if there are other things we should be doing. At our current position, though, we think this is the right set of assets for us to be invested in, in the right jurisdictions. I think the plan, as we have laid out, again, supports the need for that equity in the middle of the plan. And as you've heard me say many times, while I know there's an anticipation for us to issue in the overhang that goes with that, I don't want to prematurely issue it and sort of carry that – the dilution associated with it unless we've got investments to match it. So we absolutely have it timed in the plan that we think is appropriate. We'll continue to look at options on how best to do it. And any adjustments we would make to that plan, we'll certainly make sure we communicate that. But I don't anticipate any dramatic changes at this point.

Susan Hardwick :

Yes, I'll let Cheryl weigh in here on the impact potentially to municipals. Largely, though, on the inflation side, we are active in the regulatory process. So we'll be hopefully current in reflecting cost impacts to the business through the regulatory process. Obviously, it impacts our customers. So we do our best to maintain or hold those cost impacts down. We've been very successful on the supply chain side over the course of the year and certainly going into the future to be able to hold those cost increases down. And we think, again, we've done so pretty successfully. So any real impacts ultimately to us or the customer should be mitigated. On the municipal side and is it a driver for them to potentially push them over the edge to want to privatize, I think it's a good question. I think we'll see some reaction to that. We'll see some -- we'll certainly have conversations with some of these municipals on those additional pressures. I don't know that we've seen any real direct impacts yet or any sort of change in the dialogue yet. But I’ll ask Cheryl to comment on if -- what are her thoughts are around that topic.

Angie Storozynski:

Okay. And if I may, Susan, I know you said that you're sticking with the strategy that you've announced, well, back in -- that you announced back in October or November. Now -- but taking a step back, given the recent pullback in valuations of other water utilities as well, unfortunately, do you actually think that there is -- you could create some value through any larger strategic transactions involving public water utilities?

Operator:

The next question comes from Julien Dumoulin-Smith with Bank of America.

Susan Hardwick :

Yes. It's a great question, Julien. Obviously, lots continuing to go on, on that particular system. And I'm going to ask Cheryl actually to comment on what our current thinking there is, which, by the way, has not changed much. But Cheryl?

Julien Dumoulin-Smith:

Fair enough. Excellent. And Susan, maybe if I can, strategically, I mean, I know the last 2 questions kind of put it out there. But -- any new fingerprint that you're looking at in terms of revised strategy thought process? I know you covered the top of the remarks here, and in Q&A on M&A, but really what I was thinking about is different states, geographies you're looking to enter to. I know that there's a variety of different legislative efforts that you highlighted in your prepared remarks earlier, but as you think about putting your fingerprints on the company here, any revised thinking on state entry, et cetera, or exit for that matter?

Operator:

This concludes our question-and-answer session, which also concludes today's conference call. Thank you very much for attending. You may now disconnect.

Operator:

Good morning and welcome to American Water's second quarter 2021 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. Following the earnings conference call, an audio archive of the call will be available through August 10, 2021. U.S. callers may access the audio archive toll-free by dialing 1-877-344-7529. International callers may listen by dialing 1-412-317-0088. The access code for replay is 10158766. The audio webcast archive will be available for one year on American Water's investor relations website at ir.amwater.com/events.

Walter Lynch:

Thanks Ed and good morning everyone and thanks for joining us. Once again, the employees of American Water delivered solid results as we continue to execute on our low-risk profile and predictable growth story. Let's move to slide five to cover the highlights of our second quarter and six month results. Our second quarter 2021 earnings per share increased 17.5% compared to the second quarter of 2020. Included in the results is a $0.03 per share benefit from weather, primarily in the Northeast where we saw a moderate impact from warmer and drier than normal conditions. In the first six months of 2021, we invested $782 million with the majority dedicated to needed infrastructure improvements to better serve our customers. We continue to work hard to minimize the bill impacts of these investments by focusing on capital and operating efficiencies, constructive regulatory outcomes and by leveraging the size and scale of our business. As a reminder, we previously announced an O&M efficiency target of 30.4% by 2025. We also continue our disciplined approach to regulated acquisitions. We have added approximately 11,200 customer connections to-date through closed acquisitions and organic growth and look forward to welcoming an additional 86,900 customer connections through pending acquisitions. I will provide more detail on growth in a moment.

Walter Lynch:

Yes. Thanks Susan. Before we move on your questions, I want to take a few minutes to talk about our ESG highlights of the last six months. We have been hearing from stakeholders that they would like to receive more ESG data on an annual basis. We have publish two new documents on our website. First, we made our environmental policy more visible by posting it on our ESG page. We also posted an ESG data summary, which we will update annually. We also continue to implement best practices and respond to surveys and reports. For example, just last week we submitted our annual CDP climate change response which highlights American Water's efforts to address greenhouse gas emissions and risks associated with climate variability. As we have discussed previously since 2007 through year-end 2020, we have reduced our greenhouse gas emissions by approximately 36%. This means we are close to our goal of a 40% reduction by 2025. I also want to mention our recent recognition as a top score in the Disability Equality Index for third year in a row. We firmly believe we are more successful when our workforce reflects the communities that we serve. We are proud to be recognized by DEI and to be an ally to those with different abilities. Finally, as a reminder, we will be publishing and posting our 2019 to 2020 sustainability report this fall. With that, we are happy to take your questions.

Shar Pourreza:

Hi. Good morning guys.

Susan Hardwick:

Hi Shar.

Walter Lynch:

Well, we continue to work with Liberty cooperatively to get to the endpoint of selling the systems and we do believe that this sale will happen. We are working with the commission staff, with the commission, with the Governor's office to advance this sale. There's just a lot there as far as the North Shore Water Authority, the South Shore Water Authority, there was legislation passed waiting Governor's approval. That's just all part, I think, of how they are looking at this on Long Island to get this deal done. So again, we continue to work in a cooperative way with everybody to get to the endpoint. We are confident that this will happen.

Walter Lynch:

Yes. Thanks for that Shar. And we welcome the attention to the water and wastewater industry. Significant investment is needed over the next 20 years. And we have talked many times about $1 trillion needed. So while this is good money to be put to good causes, there is still a lot to go. And again, we are just happy to be in discussion with the administration as far as in the infrastructure plan. We do think the money set aside for the lead service line replacement and also the PFAS treatment is good and it will help many communities out there. But again, it's a drop in the bucket compared to the overall spending that's necessary. And we don't see it impacting in any way our investment or our growth in the water and wastewater sector through acquisitions.

Walter Lynch:

Well, as we know, this is a multiyear process. And right now, they are working through getting approval from the Local Agency Formation Commission and once they get that approval, they have got to go through a series of different trials, the right to take trial and then evaluation trial. And so again, it will take years to work through that. But the first step is getting through what's called LAFCO, getting their approval before they can move forward with the condemnation.

Walter Lynch:

Thanks Shar.

Operator:

Our next question will come from Ryan Greenwald with Bank of America. Please go ahead.

Walter Lynch:

Hi Ryan.

Walter Lynch:

Yes. Ryan, there is really nothing more we can say. It's ongoing. Our disclosure is everything that we can say about it at this point.

Walter Lynch:

Well, in Pennsylvania, there is a Senate Bill that's right in line with the Water Accountability Act, Water Quality Accountability Act. So we are tracking that. That's working its way through in the Senate and then it will be introduced into the House over there. So we are expecting that to progress this year in 2021. So keep an eye out for that. That will be the fourth state. As you know, we are working with Missouri and Indiana to get theirs and also started here in New Jersey. So we are thrilled that Pennsylvania is moving forward with that.

Walter Lynch:

Yes. We are working through that. We do expect the sale to go to Liberty in its entirety and then they would work through whatever comes after that.

Walter Lynch:

Thank you.

Durgesh Chopra:

Hi. Good morning team. Thanks for taking my question.

Durgesh Chopra:

Hi Walter. Just a quick clarification on the New York American. Just, Susan, I think you mentioned in last call that the sale doesn't impact whether New York ends up being sold or not, it doesn't impact, A, the amount of equity and timing of the equity? Is that still the case?

Durgesh Chopra:

Okay. Perfect. And then maybe just got two quick things on 2021. Susan, just market-based earnings continue to be down. This is the second consecutive quarter. And you mentioned in claims expense. Can you maybe just elaborate on that a little bit? Is this still sort of the Texas event from Q1 dragging on to Q2? Or are there claims in certain parts of other service territory that are more adverse than others?

Durgesh Chopra:

Got it. That's super helpful. And then just one last for me. Can you just share the July weather experience across your service territories?

Durgesh Chopra:

So it sounds more like neutral. Okay. Thanks guys. Much appreciate the time.

Insoo Kim:

Thank you. My first question is on the pace of M&A, tuck-in acquisitions. It seems like you still have a pretty healthy run rate going there. What's a good annualized customer additions rate that we should be embedding maybe in the five-year plan and that might be in your plan as well?

Insoo Kim:

Understood. And then just a little bit more broadly, as we see, you just continue to increase focus on whether it's at the federal level or state level on the water infrastructure, water quality, whatnot. And you guys always provide a breakdown of the different investments you make on an annual basis, whether it's pipes, sourcing, IT, others. Where do you think the most upside opportunities exist as we go through time? And if there is, just to address on some of these increased focus on these items, is it more of technological advancements that we might not be baking in? Just curious on your broader thoughts

Operator:

Our next question will come from Jonathan Reeder with Wells Fargo. Please go ahead.

Walter Lynch:

We will continue to evaluate that, Jonathan. We are just really thrilled that we were able to expand the program outside of St. Louis County. And our team has worked hard to provide the input to the commission to see how important that is that we invest across our footprint in Missouri. So we are excited about that. And also increasing the cap so we can make more investment before we have to go into a rate case. So it may contribute in some way to the time in between rate cases.

Walter Lynch:

No. None here. Well, Pennsylvania Commission has always been great to work with and reasonable in their treatment towards us and we expect that going forward.

Walter Lynch:

Yes. We are assuming, at this point, the first half of 2022. We submitted our application on July 1. The Commission is looking at it. Once they deem it complete, then they will start processing. And again, we think first half of 2022.

Walter Lynch:

Yes. Let me say, we are confident in the $1.9 billion number and that's from obviously, the investment in our systems and the acquisitions that we are making.

Susan Hardwick:

Yes, I think that's a fair way to look at it. Again, we have just seen a much higher claims experience than we have in the prior periods. And we really think, again, much of it is related to more at-home activities. The business continues to grow. We continue to execute on our partnership arrangements. We continue to look for new products and roll out new products in that business. So I think the business is just fundamentally doing what we have set out for it to do. This claims experience issue is one that I think, again, is directly related to just activity. And we will hopefully see that mitigate some as we head into the latter part of this year and into next as we hopefully, although it's difficult to sort of imagine that on a day-to-day basis these days, we would return to some sort of a normal environment where people are sort of out of the homes and back in work environments. But that really is the primary driver. I would say the rest of the business is operating as we would expect it to.

Susan Hardwick:

Yes. I think that's right. That's the way to look at it.

Walter Lynch:

Thanks Jonathan.

Operator:

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Walter Lynch for any closing remarks.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good morning and welcome to American Water's first quarter 2021 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. Following the earnings conference call, an audio archive of the call will be available through May 11, 2021. U.S. callers may access the audio archive toll free by dialing 1-877-344-7529. International callers may listen by dialing 1-412-317-0088. The access code for the replay is 10155150. The audio webcast archive will be available for one year on American Water's Investor Relations website at ir.amwater.com/events.

Walter Lynch:

Thanks Ed. Good morning everyone and thanks for joining us. Before we move to quarter results, let me speak for a moment about our recent growth news. As you know, a key part of our strategy is to operate in states where we can best serve customers, drive efficiencies and continue to grow our regulated business. Recall that earlier in the year, we announced the sale of our Michigan operation and as you know in late 2019, we announced the sale of our New York operation. This slide shows what our new regulated service territory will look like after the announced transactions are completed. Moving to slide six. We recently announced what will be the largest municipal acquisition in Pennsylvania American Water's history. On April 6, we signed an agreement to acquire the wastewater treatment and collection system for the City of York, Pennsylvania. This agreement will add an equivalent customer connection total of more than 45,000. As part of the agreement, Pennsylvania American Water will also continue to provide contracted wholesale waste water treatment and disposal for seven surrounding communities of York. We look forward to developing strong relationships that meet the needs of all customers, including those outside the city.

Walter Lynch:

Thanks Susan. Before we move on to your questions, in April, we were very proud to issue our first annual Inclusion & Diversity Report. This report highlights the efforts we have undertaken and the strides we made advancing our commitment to inclusion and diversity. ESG is a journey and our I&D Report is another way that shows how we are constantly striving thanks for the contributions of every employee to build and inclusive and mutual respect in the workplace. To launch this report internally, we were honored to have Mr. Earvin "Magic" Johnson join us virtually for conversation on inclusion, diversity and on allyship. Additionally, we had an incredible community healing discussion with our employees to provide a chance for even more open and honest dialogue on inclusion. We believe that a company's strength is it's people and the diversity of our workforce makes us even stronger. With that, we are happy to take your questions.

Durgesh Chopra:

Hi. Good morning, Walter and Susan.

Walter Lynch:

Good morning Durgesh.

Walter Lynch:

Yes. That's right, Durgesh. We are still working through with, as I said in prepared remarks, still working through with staff and others. And we are hoping to be expecting this year.

Walter Lynch:

Yes. It's specific to our New York City Metropolitan operations in HOS. That's exactly right, Durgesh.

Walter Lynch:

No, not at this point. Again, we continue to work in cooperating the investigation.

Walter Lynch:

Yes. Durgesh, let me start with, we are really happy that the administration is focusing on water and wastewater as part of the infrastructure plan. So we like the attention that the industry is getting. And we think that the plan will benefit our customers, primarily by having access to low interest financing that's part of the plan. And so we access it right now on the water side. We want to get access on the wastewater side. That's a growing segment of our business and we want our customers to benefit like others from the low interest loans. So overall, we are very excited about the program and we want to participate like the municipalities do on the wastewater side.

Walter Lynch:

Well, as we have said and I have said in my remarks, there is significant need out there in the water and wastewater side. For us, it's not going to change our plan. Our pipeline continues to grow. We are going to continue to provide meaningful solutions for communities and we are committed to our plan. We don't see any change to our plan going forward.

Walter Lynch:

Thanks Durgesh.