The operator welcomes participants to American Water's Fourth Quarter and Year-End 2023 Earnings Conference Call, which is being recorded and webcast. Aaron Musgrave, Vice President of Investor Relations, will lead the call and provide safe harbor language regarding forward-looking statements. The company's President and CEO, Susan Hardwick, will discuss the strong financial results for 2023.

In 2023, American Water's earnings were $4.90 per share, with $0.13 per share attributed to favorable weather. Excluding this impact, earnings were in line with the company's guidance. The company's focus on providing safe and reliable service to its 14 million customers was highlighted, and the company's strong execution and growth plan were emphasized. American Water has a strong track record of delivering value to shareholders, with a significant increase in dividends over the past five and ten years. However, in 2023, the company's stock performance was not as strong as the S&P 500.

The speaker affirms the company's strong performance and predicts continued success in producing shareholder value and returns. They also mention their long-term targets and growth plans, emphasizing their focus on affordability and regulatory outcomes. The company has received support at the state and federal level for their work in improving water and wastewater service in communities across the country.

American Water is committed to solving local infrastructure issues and remaining affordable to their customers. They applaud the Public Utility Commission's proposal in Pennsylvania to enhance the process for fair market value legislation. The company's capital investment plan is succeeding in growing regulated rate base, which will drive earnings growth. American Water has filed a general rate case in Pennsylvania to seek recovery of $1 billion of investments.

The company's rate cases in Pennsylvania, New Jersey, Illinois, California, West Virginia, Virginia, Indiana, and Kentucky are all progressing as planned. In New Jersey, the company is seeking recovery of over $1.3 billion in investments through 2024. In California, a partial settlement was reached in November and the company's request for a one-year extension on cost of capital was granted. In Indiana, a final order was received and is being evaluated. In New Jersey, new legislation supporting capital investment was recently passed and signed by the governor. The company is confident in obtaining constructive outcomes in future rate cases.

The RESIC program allows water and wastewater utilities to recover capital spending for investments in resiliency, environmental compliance, and public health, including PFAS remediation. American Water has successfully implemented this program, resulting in $390 million in new revenues since January 2023 and $670 million in pending revenue requests. The company remains committed to customer affordability and is implementing strategies to assist customers with affordability challenges. American Water is also focused on technology, efficiency, and cost management to offset the impact of regulatory demands, such as the proposed PFAS rule and improvements to the lead and copper rule.

American Water is committed to meeting water quality standards and believes in removing the risk of lead service lines for the health and safety of their customers. However, they also acknowledge that the costs associated with the proposed improvements to the lead and copper rule may be higher than estimated by the EPA. They are currently developing estimates and have allocated $500 million for lead service line replacements in their five-year capital plan. They have been proactively investing in lead service line replacements and expect to continue at least through 2030, but this may change depending on the final requirements of the lead and copper rule improvements. They are also awaiting a final rule from the EPA on PFAS.

The company expects no major changes to the proposed rule regarding PFAS compliance and is treating for PFAS in accordance with state regulations. They are also involved in a lawsuit against PFAS manufacturers and have decided to remain a party to two potential settlements. The DuPont settlement has been approved and they will begin the process of perfecting their claims. The 3M settlement is still pending. The company recognizes the challenges posed by changing regulations and their expertise sets them apart from others. The speaker then hands it over to John to discuss financial results and plans.

In 2023, the company saw an increase in consolidated earnings, driven by general rate cases and investments in their systems. However, weather conditions in certain states had a negative impact on earnings. Operating costs, such as pension expenses and chemical costs, were also higher but were mostly recovered through rate cases. Depreciation and financing costs also increased, primarily due to share count dilution. The equity issuance in March had a positive impact on interest income for the year.

The paragraph discusses the impact of post-closing acquisition adjustments in 2022 and the company's strong growth through acquisitions. They closed on 23 acquisitions totaling $77 million in 2023 and have 25 transactions under agreement totaling $589 million and 88,000 customer connections. They also mention challenges in closing pending transactions in Pennsylvania due to changes in the regulatory environment, but express confidence in the future. The company has a strong track record of closing acquisitions and continues to invest in new opportunities.

The company's pipeline of customer connections is a strong indicator of their rate-based growth outlook. They have a long-term target of 2% annual customer growth from acquisitions, and are investing in their capabilities to support this. The company recently announced an increase in their 2024 EPS guidance range due to additional interest income from an amended secured seller note. The note balance has been increased and the annual interest rate has been raised to 10%.

American Water is pleased with the growth of its HOS business under new ownership and the service contract extension with New York City. They also note the recent acquisition by HOS, which will be funded with new equity from its owners. American Water will provide forward year EPS guidance in November, including the additional interest income from the secured seller note. They also mention their strong financial condition, including their solid Baa1 investment grade credit rating and improved FFO to debt ratio. Despite the challenging higher interest rate environment, American Water remains proactive in managing risk and achieving a low cost of capital for the benefit of their customers and shareholders. The call then opens up for Q&A.

The speaker is asked about their company's interest in larger M&A opportunities, specifically in the Northeast. They mention their standards for evaluating opportunities and the need for confidence in regulatory environments and policies. They also mention that it is too early to determine the impact of the lead and copper rule on their current plan.

The speaker is discussing the potential impacts of a new rule on their plant and the need for more time to assess them. They mention that the rule will be significant but not as dramatic as previous ones, and that they are making good progress in addressing lead service lines. They also mention that the rule includes unknown service lines and customer-owned pipes, making it a larger and longer-term issue. The speaker concludes by saying that they are limited in what they can say about M&A.

Durgesh Chopra asks about how Connecticut water assets fit into the company's M&A strategy and whether they are more attractive than organic growth opportunities. Susan Hardwick responds by saying that they are focusing on their current states and will consider opportunities but will prioritize their screens of regulatory and legislative environment, business climate, and growth potential. Durgesh then asks about the Pennsylvania rate case and Susan defers to Cheryl for more details, but mentions that it is all about investment.

The speaker is asking about the regulatory outcomes in Illinois for electric and gas, which have been negative in recent years.

The speaker is inquiring about the unfavorable regulatory outcomes for electric and gas in Illinois.

The speaker is addressing concerns about a case in Illinois and how it may be affected by previous events. They state that they are proceeding as planned and are confident in their ability to handle the case. They also discuss the issue of PFAS and potential lawsuits against the company, but they are not overly concerned and are prepared to handle any legal challenges.

The company has been working hard to comply with regulations and is seeking protection from polluted waters. They are also working with the EPA on CRC designation and at the federal level to get protections for water utilities. The company is confident in their forecast period through 2026, but there have been no changes to their original guidance from November.

The speaker discusses the Illinois case and mentions strategies to mitigate rate increases, such as trackers and deferrals. They state that they are not expecting any major issues in the case. They also clarify that any potential M&A opportunities need to be in a conducive regulatory and business environment.

The company is still considering opportunities for growth in other territories and believes that the recent legislation in Pennsylvania will ultimately be beneficial for their business. They are working with the PUC to determine fair market value and are confident in the commission's approach.

The company is working on implementing new guidelines, which will help improve productivity. However, they are still figuring out the details and timing. They have some acquisitions in Pennsylvania that are currently being impacted by the process, but they expect it to clear soon. During the question and answer session, a question was asked about the impact of the HOS note on future earnings. The company clarified that it is not a significant amount and will not affect their overall plan. They do not expect to need additional capital to make up for this minor impact.

The increased needs on water systems, such as cybersecurity and compliance requirements, may lead to more frequent smaller acquisitions for the company. These issues are seen as opportunities for the company to help solve problems for communities. However, the impact may be more long-term and it will take time for communities to address these issues before making a move.

Steve Fleishman from Wolfe Research asks a question about the recent HOS changes and the impact on the company's credit. John Griffith, the operator, explains that the credit has improved and the company is currently making an acquisition with new equity funding from its owners. The owner backs up the credit and there is a sharing mechanism in place. Steve asks for more details on the income made from the sharing mechanism in 2023 or 2024.

Susan Hardwick responds to a question about fair market value in Pennsylvania and mentions that it is disclosed in the 10-K. She also discusses the ongoing case in Pennsylvania and the letter sent by two commissioners. She believes that the case is proceeding as it should and that the changes to fair market value will likely come through the commission process.

The speaker, with 40 years of experience, believes that the commission charged with interpreting legislation and implementing it is doing a good job. They are proactive in resolving issues and promoting consolidation in the state. The speaker believes that Pennsylvania is fully behind consolidation. They do not believe that the proposed RRR will have a material impact on deal activity. The speaker also discusses revenue decoupling requests in rate case filings and notes that it varies across jurisdictions.

The speaker discusses the company's responsibility to understand and educate commissions about different mechanisms and their impacts in various jurisdictions. They mention that decoupling is always on their list, but the use of specific mechanisms depends on the circumstances of each case. They also mention that they are not breaking new ground with their proposals in Pennsylvania and New Jersey. The speaker then addresses a question about PFAS settlements and states that they are proceeding and they expect them to ultimately be approved. They also mention that the process of claim submittals and settlement allocation will begin after approval.

The speaker discusses the financial outcomes of a settlement and mentions that it is too early to determine the exact amount. They anticipate it will only cover a portion of the costs and is the best way to collect money for the customer. They are pleased with their team's efforts in the process. They do not expect their view on legacy exposure to change and are confident in their ability to handle future cases. The conference then concludes.

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