The operator introduces the American Water's Third Quarter 2023 Earnings Conference Call and reminds listeners that the call is being recorded and webcasted. Aaron Musgrave, Vice President of Investor Relations, will be hosting the call and will be joined by Susan Hardwick, President and CEO. Safe harbor language is provided, and it is stated that forward-looking statements will be made. These statements are subject to risks and uncertainties. Third quarter and year-to-date results will be discussed, as well as 2024 EPS guidance and longer-term targets.

American Water's President and CEO, Susan Hardwick, began the third quarter earnings call by highlighting the company's strong financial results and reaffirming their 2023 guidance. She mentioned that earnings were $1.66 per share for the quarter and $4.03 per share for the first nine months of 2023. The estimated net favorable weather impact for the year is $0.11 per share. Hardwick also acknowledged the company's investments of $1.8 billion in capital projects so far in 2023.

In the third paragraph, the speaker discusses the company's planned capital investment for 2023, which includes acquisitions in Pennsylvania and Illinois. They also mention completing equity and debt issuances in the first half of the year. The company affirms their long-term targets and initiates their 2024 earnings guidance. They have revised their earnings growth outlook to better highlight their expected 7-9% growth and the key drivers of growth for the company. These include rate-based growth and regulatory execution, driven by their accelerated CapEx plan and regulated acquisition strategy. They expect 8-9% rate-based growth over the next decade.

The company's acquisition growth strategy is measured by a 2% customer additions CAGR target, which will be easier for investors to monitor and measure. The company also expects organic revenue growth from its military services group and has a diverse regulated operations across 14 states, providing flexibility in rate cases and capital deployment. The company is confident in its ability to deliver consistent earnings and dividend growth over the next five years and beyond. While short-term impact of higher interest rates may be seen, the company believes that the utility sector, including American Water, has a history of delivering value to investors. The company's focus on customer affordability and ESG leadership will continue to be rewarded by investors.

The company has a long-term plan in place and a history of successful execution, which they believe will continue to yield competitive returns for shareholders. They have consistently met their capital deployment goal and plan to invest $16-17 billion over the next five years, with a modest increase in investment spending expected in 2024. They are also advocating for federal funding for PFAS clean-up and low-income customer assistance programs, and anticipate increased capital expenditures for renewal projects and future acquisitions.

The company has experienced a higher level of investment need due to recent acquisitions, leading to a higher estimated capital need of $600 million. They have deferred $500 million of lower risk projects to later years in their 10-year capital plan. In terms of regulatory activity, the company's general rate cases in California, Indiana, West Virginia, and Kentucky are progressing well and are expected to be resolved in early 2024. They have also filed for a request to increase their return on equity in California.

The company has filed a request for a 70 basis point increase in ROE, which would bring it to 10.2%. There is a potential for an eminent domain lawsuit regarding the Monterey system assets, but the company believes it will be able to successfully defend against it. The company's research shows that rising median household income and conservative assumptions about increasing customer base will allow them to stay within their target for residential water bills. The company recognizes the challenge of balancing customer affordability with the necessary system investments and is focused on strategies and programs to assist customers with affordability. They also prioritize technology, efficiencies, and cost management to deliver on customer affordability.

The company has always focused on operating efficiency and customer affordability, using O&M efficiency as a benchmark metric to measure their success. However, in recent years, they have also emphasized the importance of revenue growth in this metric. They are currently evaluating whether this is the best way to judge their effectiveness at managing costs and running an efficient business. In terms of financial results, consolidated earnings were up compared to the same period last year, driven by general rate cases and investments in their systems. However, weather conditions in certain states had a negative impact on earnings in the second and third quarters of this year, compared to favorable weather conditions in the same period last year.

The company has been able to offset higher operating costs through proactive measures such as increasing revenues and limiting the bottom line impact of those costs. Depreciation expense and the cost of long-term financing have also increased, but the impact is expected to be neutral to EPS for the full year. The company's capital investments and acquisitions are driving regulated rate base growth and the company is set up for strong growth through acquisitions, having closed on 14 deals totaling $36 million in the first nine months of 2023.

The company had 32 transactions under agreement across 10 states, totaling $611 million, with two closed in early October. This includes the previously announced acquisitions of Butler Area Sewer Authority and Granite City wastewater treatment plant. The company expects to close on these acquisitions later this year and at the end of the year, respectively. They also expect to close on the Towamencin Township Wastewater System in late 2024 or early 2025. The company's outlook for future acquisitions is strong, with over $250 million expected by the end of 2023. The company's EPS guidance for 2024 is $5.10 to $5.20 per share, driven by capital investment and infrastructure mechanisms.

The company's CapEx is a significant driver of consistent earnings growth, with approximately 45% being recoverable through infrastructure mechanisms. Recent regulated acquisitions and the military services group are also expected to contribute to growth. Operating costs are expected to only modestly increase in 2024, as the company prioritizes customer affordability. The company's pension obligation will be remeasured at the end of 2023, which will determine pension expense for 2024. The company's financing plan has been updated to include an estimated $1 billion of equity issuances from 2024 to 2028.

In the new plan, the company expects to issue $1 billion of equity in the 2024-2028 period, with $700 million of this increase in external equity being driven by the $2 billion increase in CapEx. The company aims to maintain a strong balance sheet and meet their debt-to-capital target of less than 60%. They also anticipate being a cash taxpayer and are confident in their access to capital, as evidenced by their recent extension of their revolving credit facility and strong relationships with banks.

The company's laddered approach to long-term debt financing and short duration between general rate cases helps manage cash flows and minimize interest rate risk, contributing to customer affordability. The company's focus on execution, affordability, and ESG leadership, along with its low-risk capital investment plan and strong balance sheet, sets it apart from other utilities. The company's high operating standards, including safety and water quality, have led to a history of delivering competitive shareholder returns. The company is confident in its ability to achieve its goals and continue delivering superior shareholder value.

During the Q&A session, Chris turns the call back over to him and invites questions. The first question comes from Richard Sunderland of JP Morgan, who asks about the revised CapEx and bill outlook. He notes that in 2021, when the Accelerated Investment Plan was first announced, there was a focus on customer affordability, but he wonders if anything has changed in that regard. He also asks if the 2% customer addition target and M&A plans have affected the new capital plan. Susan Hardwick responds, saying that their focus on customer affordability has sharpened in recent years, particularly in terms of wallet share. Cheryl and John may also add to her answer.

The company values understanding the communities it operates in and their demographics, as well as the challenges faced by customers. They have analyzed affordability and household income, and their focus is on maintaining a wallet share of 1% or less of a customer's bill in the communities they serve. This allows them to continue growing and building their plan without overburdening customers. The capital investments are similar across all communities, and new regulations like PFAS and the lead and copper rule are driving significant investment.

The speaker discusses the affordability calculations and risk priority model used to determine infrastructure investments in all communities served. They stress the importance of treating all customers fairly and ensuring clean, safe drinking water for all. The concept has been shared transparently with regulators and is seen as differentiating. The 2% long-term metric for earnings growth is driven by 8-9% rate-based growth and spreading it over a larger customer base. The financing plan is driven by equity and operating cash flow.

The company's operating cash flow is expected to increase significantly due to a large step up in its capital plan and increased cash flow in the interim years. This is driven by rate-based growth and acquisitions, with no change in the company's growth triangle. The company is providing a new metric, customer additions, to measure its progress in acquisitions.

The speaker is discussing the financing plan for addressing PFAS contamination and clarifies that it does not assume any litigation or external funding. They state that their estimates are based on current costs and do not factor in potential external funding. The speaker also mentions their involvement in ongoing litigation related to the issue. When asked about the breakdown of costs over their service territories, the speaker defers to Cheryl for further comment.

During a conference call, Cheryl Norton and John Griffith discussed the expected spending for their company's states, with New Jersey being the largest due to contamination and costly treatment for surface water plants. They also mentioned an incremental equity of $700 million to be issued in the middle of their new 2024 to 2028 plan, subject to market conditions. An analyst asked about the timing of this issuance and the team confirmed it would come in the back half of the plan. Despite higher operating cash flows, the external capital needs increased more than the $2 billion CapEx increase.

During a recent discussion, John Griffith and Cheryl Norton of a water company discussed their credit metrics and the breakdown of their $700 million equity and $1.7 billion debt. They also mentioned that there has been no opposition to their request for an increase in allowed ROE in California. The company has also increased their M&A placeholder by a billion, which is mainly due to the passage of time and investments in their system's capabilities.

The company is confident in their ability to make successful acquisitions and continue to improve their operations. They have been investing in this capability and expect it to contribute significantly in the future. They also have trackers and deferral accounts in certain states to manage pension costs. The timeline for getting approvals for acquisitions varies state to state, but there is a process to file an application. The upcoming Towamencin acquisition in Pennsylvania is more complicated due to the circumstances surrounding it.

The speaker discusses the company's efforts to protect water systems from potential financial liability related to PFAS under CERCLA. They express confidence in their ability to influence the final rule and ensure protection for utilities.

The speaker discusses the $50 million cost and how it will be recovered through mechanisms, such as state mechanisms or environmental riders. They also mention creating new solutions for recovery and the three-year implementation period to make regulatory improvements. The equity needs are expected to be addressed in the middle of the new '24 through '28 plans, around '26.

The speaker discusses the timing and form of equity from the HOS note, stating that a decision has not been made yet but they will do what is best for shareholders. They clarify that the equity will not be replaced with another instrument. The speaker also mentions their expected cash taxpayer status and the 7-9% EPS CAGR target as a long-term goal.

The speaker discusses the company's recent capital plan and the sale of HOS and New York. They explain that the proceeds from these sales needed time to be redeployed, which will be reflected in their 2022 and 2023 guidance. The speaker also mentions that their 2024 guidance reflects an 8% EPS CAGR at the midpoint and their long-term target is 7% to 9%, driven by an 8% to 9% rate-based growth CAGR. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.