American Water Works Q1 2025 Earnings Call Transcript

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Operator

Good morning, and welcome to American Water's First Quarter twenty twenty five Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with the company's 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.

Operator

Musgrave, you may begin.

Aaron Musgrave
Aaron Musgrave
Vice President of Investor Relations at American Water Works Company

Thank you, Danielle. Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. 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.

Aaron Musgrave
Aaron Musgrave
Vice President of Investor Relations at American Water Works Company

These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the first quarter earnings release and Form 10 Q, each filed yesterday with the SEC. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted earnings and diluted earnings per share. John Griffith, our President, will share year to date highlights, our affirmation of 2025 EPS guidance and long term targets and our dividend increase.

Aaron Musgrave
Aaron Musgrave
Vice President of Investor Relations at American Water Works Company

David Bohler, our Executive Vice President and CFO, will discuss our first quarter financial results, provide rate case and legislative updates and will review our affirmation of growth drivers and financing plans. Cheryl Norton, our Executive Vice President and COO, will then discuss our capital investment program, our acquisition outlook and we'll conclude with comments on the state of infrastructure in The U. S. After our prepared remarks, we'll then close by answering your questions. Our CEO, Susan Hardwick, is also with us and will be available for Q and A.

Aaron Musgrave
Aaron Musgrave
Vice President of Investor Relations at American Water Works Company

With that, I'll turn the call over to American Water's President, John Griffith.

John Griffith
John Griffith
President at American Water Works Company

Thank you, Aaron, and good morning, everyone. As we announced yesterday, we started 2025 with solid financial results. As shown on Slide five, earnings were $1.05 per share for the quarter, a nearly 11% increase compared to $0.95 last year. The increased results are on track to achieve our full year earnings guidance, which we are pleased to affirm, representing our expectation of 8% EPS growth in 2025 compared to our weather normalized 2024 EPS. First quarter twenty twenty five results included $03 per share of additional interest income from the February 2024 amendment of the seller note related to the sale of homeowner services.

John Griffith
John Griffith
President at American Water Works Company

Here, you can also see a recap of some of our other key accomplishments so far in 2025, and David and Cheryl will add to these in their remarks. We continued our track record of regulatory and capital plan execution in the first quarter with new rates effective in several states and investments in infrastructure progressing well. I'm proud of our team's efforts supporting two key priorities in Missouri this year. We achieved a constructive settlement in the general rate case in Missouri and are awaiting a final order. And through a collaborative effort with many stakeholders, future test year legislation was signed into law in the state.

John Griffith
John Griffith
President at American Water Works Company

Both outcomes are supportive of important utility infrastructure investments and aligned with our focus on providing safe, clean, reliable and affordable service to our customers. In addition, we were pleased to see S and P and Moody's again recognize our strong balance sheet and cash flows and our low risk profile as they both affirmed our strong investment grade credit ratings and stable outlook. Turning to Slide six. This quarter, we are again affirming our long term targets for both earnings and dividend growth at 7% to 9% driven by 8% to 9% rate base growth. This affirmation is based on our clear top tier capital growth plan and our strong regulatory and operational execution that I believe as a positive differentiator from our peers.

John Griffith
John Griffith
President at American Water Works Company

We expect to consistently grow earnings and dividends at an industry leading pace over the next five years and beyond, leading to a very competitive value proposition for our shareholders. Moving on to Slide seven. As we announced yesterday, our Board of Directors approved an increase in the company's quarterly cash dividend from $0.07 $65 per share to $0.08 $2.03 $5 per share, an 8.2% increase. We have grown our dividend consistently over the last decade, significantly outpacing virtually all of our utility peers. Looking ahead, we continue to expect to grow our dividend at 7% to 9% per year, in line with our compelling 7% to 9% EPS growth target.

John Griffith
John Griffith
President at American Water Works Company

Our Board and management team understand and appreciate how important the dividend component of our total shareholder return is to our investors. Finally, I would like to note that today is our last earnings call with Susan at the helm. As you recall, we announced in February with the Q4 release that Susan will be retiring upon our Annual Shareholders Meeting on the fourteenth of this month. Susan, we will miss your presence, your leadership and your wisdom and are grateful for everything that you've done for American Water. You've had a long and very distinguished career in the utility sector and we wish you much happiness and a lot of relaxation in your retirement.

John Griffith
John Griffith
President at American Water Works Company

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

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Thanks, Sean, and

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

good morning, everyone. Turning to Slide nine, I'll provide some further insights into our financial results for the quarter. Consolidated reported earnings were $1.5 per share, up $0.10 per share versus the same period in 2024. Revenues were higher by $0.44 per share, primarily due to authorized rate increases to recover investment across our states. Revenues were also higher from closed water and wastewater acquisitions and organic customer growth.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

And looking at operating costs, O and M was higher by $0.15 per share, driven primarily by employee related costs and other increases to support growth in the business and costs related to acquisitions completed in 2024 as we expected. Depreciation increased $0.11 per share and financing costs increased $10 per share, both as expected in support of our investment growth. And finally, we have $01 per share of additional interest income from the February 2024 note amendment related to the sale of HOS, which is included in the other net column. Turning to Slide 10, I'll cover the latest regulatory activity in our states. The two key developments this quarter were rate cases in Missouri and Virginia.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

In Missouri, we entered into a settlement agreement with several parties, including commission staff and the Office of Public Counsel. We agreed to an annualized revenue increase of $63,000,000 as compared to our most recent revised request of $107,000,000 New rates are expected to go into effect on 05/31/2025. And once a final order is received from the commission, we will give our view on ROE and capital structure. In Virginia, the commission issued an order approving our settlement of the general rate case. The order approved a $15,000,000 annualized increase in water and wastewater revenues compared to the original filing that had requested a $20,000,000 increase.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

The order also approved a return on equity of 9.7% and a higher equity component of the capital structure than in our previous case at nearly 46%. Since interim rates were implemented in May of twenty twenty four, results in 2025 won't be meaningfully impacted by this case. Turning to active cases, the proceeding in Iowa is progressing as expected and we expect to receive a final order this month. In Hawaii, we filed a partial settlement agreement subject to regulatory approval that results in a $1,500,000 increase based on a 9.75 ROE. We expect to receive a final order midyear twenty twenty five.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

And finally, later today, we'll be making an initial submission related to our next general rate case in California, which is in keeping with the state's three year cycle. The California case will seek to recover nearly $750,000,000 in planned investment in pipe replacement, resiliency and other important system needs. Slide 11 outlines three important pieces of priority legislation for us that were signed into law already in 2025. First, Missouri passed Senate Bill four. As a result, beginning 07/01/2026, water and wastewater utilities may request the use of a future test year in a general rate case for rate base and certain expenses.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

As you know, our current Missouri general rate case was filed on 07/01/2024. So we expect that our next general rate case in Missouri will request this future test year treatment. This is a positive step for the regulatory and business environment in Missouri. Turning to Indiana, legislators there passed Senate Bill four twenty six in March, which modifies the existing distribution system improvement charge to allow for the deferral, depreciation and post in service carrying costs from the in service state of eligible investments until they are included for recovery in rates. The language also provides important protections from lawsuits when utilities are meeting applicable water quality standards.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Then in Virginia, Senate Bill eight fifty was passed and will permit a water or wastewater utility to petition the Virginia Commission for the recovery of an expanded list of eligible infrastructure costs outside of a base rate case. Collectively, these three laws represent progress towards achieving allowed returns in each state and are supportive of further investments. I'd like to congratulate our government and external affairs teams who worked alongside many others to help achieve these constructive policies in 2025. And finally, on Slide 12, as John mentioned, we've affirmed our 2025 EPS guidance, which again represents 8% annual growth. Our outlook and plans for 2025 remain unchanged from our February call.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

As Cheryl will speak to, we don't expect any of the recent tariff related announcements to have a material impact on our 2025 plan or financial results. I'm confident in our team's ability to execute on our financial and operating plans and cost management strategies. This includes delivering cost effective financing while maintaining our balance sheet strength and credit profile. As we announced in late February, we completed a successful long term debt issuance of $800,000,000 at a 5.25 coupon that attracted strong demand. Our treasury team did a great job of timely executing part of our financing objectives for the year amidst a challenging market environment.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Our total debt to capital ratio as of the end of the quarter, net of $114,000,000 of cash on hand was 58%, which was within our target of less than 60%. Also, as John mentioned, S and P affirmed our A rating in April, which followed Moody's affirmation of our Baa1 investment credit rating in January, with a stable outlook from both. Both agencies note advantages of our scale, our low risk business profile, our strong regulatory and operational diversity across 14 states and our steady financial performance in their analysis. They also noted our expected sustained FFO to debt ratios well within the current ratings thresholds. We are confident our business and financial profile including FFO to debt will continue to support either our current or higher investment grade credit ratings.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

With that, I'll turn it over to Cheryl to talk more about our capital program, our recent acquisition activity and a look at the state of infrastructure in The U. S. Cheryl?

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

Thanks, David, and good morning, everyone. On Slide 14, our capital program is off to a good start this year, investing $518,000,000 in the first quarter. Our state and corporate leaders and their teams did a great job working through a particularly harsh winter across many of our states. This result keeps us on pace to hit our goal of approximately $3,300,000,000 of capital investment in 2025. We continue to expect these capital investments in infrastructure and in acquisitions will grow regulated rate base at a long term rate of 8% to nine percent.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

As our capital investments related to PFAS remediation and lead service line replacement begin to ramp up, we've been asked by investors if the amount or timing of our investments will change. Our answer is still the same. We haven't changed our plans. EPA's rules around PFAS and lead and copper are final regulations. Some of our states also have existing regulations for PFAS and lead and copper.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

So while we'll continue to monitor for any potential changes in this realm, for now, we're moving forward. As I'll note a bit later in my comments, if the capital spend needed to address PFAS and or lead and copper goes down, we would redeploy it to other important system needs such as pipe replacement. This quarter, we also thought it would be helpful to share a few comments about the potential impact of tariffs on our capital and operating expenses. Our teams analyze the potential cost increases that could come from tariffs on various raw materials or finished goods that we purchase to serve our customers. The good news, as David alluded to, is that our supply chain is predominantly sourced domestically, and therefore our exposure is very limited on things like fleet purchases, pumps and some construction related materials.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

Of course, we'll work to mitigate even that small exposure through our supply chain team and our purchasing power. Related to operating costs, we don't expect any significant tariff related impacts as most of our key expenses such as labor, power and chemicals are primarily sourced domestically. So again, even with the uncertainty around tariffs amidst other uncertainties, I believe the high degree the market is seeing how resilient American Water is. I'll say it again. I believe the high degree of visibility to our capital investment plan, combined with the low risk nature of the plan, uniquely positions American Water in the utility sector and is fundamental to our investment thesis.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

Turning to Slide 15. We continue to be well positioned for growth through acquisitions across many states with about 37,000 customer connections under agreement. I want to highlight three states in particular today as we think about our acquisition outlook. First, in Pennsylvania, already this year, we've received multiple unanimous approvals from the commission to acquire water and wastewater systems. We remain confident in our Pennsylvania acquisition pipeline, and we are continuing to invest in regulated acquisition opportunities in Pennsylvania, driven by the need for system consolidation and upgrading.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

A great example of this is the East Dunkirk water system, which we just closed this week. That system was out of EPA compliance since 2014 and the residents in that community could not trust that the water coming out of their taps was safe to drink. The system was placed into a receivership under Pennsylvania American Water last year and our team has done a phenomenal job in rectifying approximately 75 violations from the state DEP. In Pennsylvania, as in all our states, American Water will continue to be the solution provider to communities who deserve high quality water and wastewater service. Next, you can see that West Virginia has nearly 15,000 customer connections under agreement.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

Our business development team there is doing an excellent job in identifying consolidation opportunities and converting them to signed asset purchase agreements. And finally, in New Jersey, we have a signed purchase agreement for the South Orange Water system, which passed a voted referendum last fall. That system is in need of significant follow-up follow on capital over the next decade, which in particular includes a great deal of lead service line replacements. To close on Slide 16, the American Society of Civil Engineers latest report card for America's infrastructure issued every four years since 02/2001 recently gave the nation's drinking water systems a C- grade and wastewater systems a D plus grade, both of which are unchanged from the 2021 report card. EPA estimates that our country's water infrastructure needs total $625,000,000,000 of investments over the next twenty years, and that estimate keeps going up, not down, each time they update their estimates.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

We believe even that estimate is way too low by a factor of two or three. Aging infrastructure, extreme weather events and costs associated with regulatory and environmental compliance continue to place increased strain on the nation's water systems. And this strain is generally felt most acutely by small to medium sized municipal systems that don't always have the capital or the expertise to address the issues at hand. The need for consolidation of the fragmented U. S.

Cheryl Norton
Cheryl Norton
Executive VP & COO at American Water Works Company

Water industry to help solve these problems is dire. Within the communities we already serve, we need to invest 36,000,000,000 to $37,000,000,000 over the next ten years to help ensure safe, clean, reliable and affordable water and wastewater service. The solutions needed across the country will require the public and private sectors to work together. Together, we can safeguard public health, incentivize economic investment and ultimately create American jobs. With that, I'll turn it back over to our operator to begin Q and A and take any questions you may have.

Operator

Thank you. We will now begin the question and answer session. The first question comes from Richard Sunderland from JPMorgan. Please go ahead.

Richard Sunderland
Richard Sunderland
Analyst at JPMorgan Chase

Hi, good morning.

John Griffith
John Griffith
President at American Water Works Company

Good morning, Rich.

Richard Sunderland
Richard Sunderland
Analyst at JPMorgan Chase

Well, first congrats again to John, Susan and the whole team. Susan, I hope you enjoy your retirement.

M. Susan Hardwick
M. Susan Hardwick
CEO at American Water Works Company

Thanks, Rich. I certainly appreciate it. I plan to.

Richard Sunderland
Richard Sunderland
Analyst at JPMorgan Chase

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

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Hi, Rich. Thanks for the question. We'll continue to evaluate the market and opportunities, but at this point, no plans to pull that forward. We're going to issue equity when we need the financing and we'll leave it at that.

Richard Sunderland
Richard Sunderland
Analyst at JPMorgan Chase

Understood. Very clear. And then circling back to some of the earlier M and A acquisition outlook commentary, how do you see the landscape standing under a scenario where recession puts pressure on muni finances? Do you think this could bolster some of the medium term opportunities for you?

John Griffith
John Griffith
President at American Water Works Company

Rich, it's John here. I'd say our prior narrative that we expect to see continuous flow of acquisition opportunities is still in place. It's possible that whether it's recession or just less federal funding could drive some sellers or potential sellers to want to transact is an opportunity and we think about that as part of a broader list of reasons why sellers could sell, whether it's environmental remediation, deferred capital investment spend, retiring operators, things like that, all point to continued activity.

Richard Sunderland
Richard Sunderland
Analyst at JPMorgan Chase

Great. Thanks for the time today.

John Griffith
John Griffith
President at American Water Works Company

Thanks, Rich.

Operator

The next question comes from Anthony Crowdell from Mizuho. Please go ahead.

Anthony Crowdell
Anthony Crowdell
Managing Director at Mizuho Financial Group

Hey, good morning. And I echo Rich's comments. Congrats to all. Just if I could just quickly just hit on one state on California. I think you mentioned you're going to file, I guess, a notice that you're planning to file a rate case.

Anthony Crowdell
Anthony Crowdell
Managing Director at Mizuho Financial Group

Curious if you could just talk about maybe percentage increase that you think you'll be asking in that case? And then also I just apologize, I forgot. Is the timing of when you guys would file the I think you do it separately, so a cost of capital proceeding in California?

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Hey, Anthony. This is David. So the California case that we're filing, there's a requirement to file a case every three years. We haven't disclosed the percentage increase and won't disclose that at this time. As far as the cost of capital proceeding, that's correct.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

There's a separate proceeding. We requested that that be delayed until 2026. That was approved earlier this year. So the 10.2% we have in place will stay in place until through 2025.

Anthony Crowdell
Anthony Crowdell
Managing Director at Mizuho Financial Group

So through 2025, do you have to file it this year then to have a new cost of capital in 2026 or you begin the filing in 2026 for a new cost of capital in 2027?

John Griffith
John Griffith
President at American Water Works Company

Filing in 2026 for a new cost of capital in January 2027, Anthony.

Anthony Crowdell
Anthony Crowdell
Managing Director at Mizuho Financial Group

Great. Thank you so much. That's all I have. Thanks.

Operator

The next question comes from Greg Orrill from UBS. Please go ahead.

Gregg Orrill
Gregg Orrill
Analyst at UBS Group

Yes. Thanks for taking my question. Thank you, Susan. Appreciate all your help.

M. Susan Hardwick
M. Susan Hardwick
CEO at American Water Works Company

Thanks, Greg.

Gregg Orrill
Gregg Orrill
Analyst at UBS Group

Just

Gregg Orrill
Gregg Orrill
Analyst at UBS Group

maybe a little different topic. Just could you provide an update on the California desalination project and how that's going to help you there?

John Griffith
John Griffith
President at American Water Works Company

Sure. Greg, I think on desal, as you recall, we got our last major permit approval back in November of twenty twenty two, which was the California Coastal Commission. We've got CPCN, from the California PUC. We'll need to provide updates to the PUC. But as we had noted in our 10 ks, we expect to break ground this year on desal.

Gregg Orrill
Gregg Orrill
Analyst at UBS Group

That's not a part of the rate case?

John Griffith
John Griffith
President at American Water Works Company

Correct. That's a separate docket.

Gregg Orrill
Gregg Orrill
Analyst at UBS Group

Got it. Thank you.

John Griffith
John Griffith
President at American Water Works Company

Thanks, Greg.

Operator

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

Paul Zimbardo
Paul Zimbardo
Managing Director at Jefferies

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

M. Susan Hardwick
M. Susan Hardwick
CEO at American Water Works Company

Thanks, Paul.

Paul Zimbardo
Paul Zimbardo
Managing Director at Jefferies

Just one from of course, of course, just one for me on the legislative progress that you talked about the three states. I think you mentioned potential for stronger earned returns and incremental capital.

Paul Zimbardo
Paul Zimbardo
Managing Director at Jefferies

Is there any way that you could frame the opportunities there? I know some states are larger in your mix versus some others. Just any quantification would be helpful if you can.

David Bowler
David Bowler
Executive VP & CFO at American Water Works Company

Paul, this is David. We haven't really framed up how much of an opportunity the future test year in Missouri will provide to us, nor have we for the other states. I mean, obviously, will incrementally help our earned returns in each state.

Paul Zimbardo
Paul Zimbardo
Managing Director at Jefferies

Okay. Okay. I'll leave it there. Thank you very much.

Operator

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

Executives
    • Aaron Musgrave
      Aaron Musgrave
      Vice President of Investor Relations
    • John Griffith
      John Griffith
      President
    • David Bowler
      David Bowler
      Executive VP & CFO
    • Cheryl Norton
      Cheryl Norton
      Executive VP & COO
    • M. Susan Hardwick
      M. Susan Hardwick
      CEO
Analysts
Earnings Conference Call
American Water Works Q1 2025
00:00 / 00:00

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