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American Water reported Q1 2026 adjusted EPS of $1.01, reaffirming its full-year guidance and 7% to 9% long-term growth targets. The company announced an 8.2% dividend increase, reflecting strong financial health. Progress on the Essential Utilities merger remains on track with Kentucky's approval secured and a final close expected in early 2027. Management highlighted success in infrastructure investment, particularly in PFAS remediation, supported by $185 million in manufacturer settlements. Regulatory activity remains heavy, with major rate cases pending in Pennsylvania and New Jersey; despite a lack of settlement in Pennsylvania, management remains confident in achieving a balanced outcome. CFO David Bowler noted a significant liquidity boost from new Corporate Alternative Minimum Tax guidance, which is expected to yield $100 million in annual cash benefits and may reduce future equity requirements. Operationally, the company continues to expand through acquisitions, including the Nitro wastewater system and the pending Nexus Water Group deal. With a robust pipeline of 105,000 customer connections under agreement and a successful $700 million debt issuance, American Water is well-positioned to execute its capital plan while focusing on customer affordability and long-term shareholder value.

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American Water Works: High-Tide Debt and Dilution in the Regulated Deep End

Full Earnings Call Transcript — Q1 • 2026-04-30

Operator: Good morning, and welcome to American Water's First Quarter 2026 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.
Aaron Musgrave: 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'll 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. 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. This call will include a discussion of non-GAAP financial information. A reconciliation of our historical adjusted earnings per share to GAAP earnings per share and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I'll turn the call over to American Water's President and CEO, John Griffith.
John Griffith: Thanks, Aaron, and good morning, everyone. As we announced yesterday, we started 2026 with financial results that were right on track to achieve our full year earnings guidance, which we are pleased to affirm again this quarter, along with our long-term targets. Adjusted earnings were $1.01 per share for the quarter and reflect a successful execution of our plan so far in 2026. We expect to again deliver 8% EPS growth in 2026, while continuing to provide high-quality, affordable service to our customers. We are well on our way to executing on our regulatory and capital plans for 2026 with rate cases completed in 2 states and investments in infrastructure progressing well. Our teams have also continued to advocate for our customers in various facets to start the year. For example, we've now secured approximately $185 million of net payments from PFAS manufacturers that will be passed on to customers or offset the cost of PFAS remediation. And in 2 more states, we've helped advance legislation in 2026 and that should set the foundation for expanded limited income customer bill assistance. These efforts align squarely with our mission to provide safe, clean, reliable and affordable service to our customers. In sum, for Slide 5, I am confident we'll successfully execute on our plans for 2026 and beyond. Moving on to Slide 6. As we announced yesterday, our Board of Directors approved an increase in the company's quarterly cash dividend of 8.2% to $0.8950 per share. 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. Our Board and management team highly value our dividend and its contribution to our compelling total shareholder return for investors. In closing, on Slide 7, I'm pleased to share that we've achieved another milestone on the path to closing our proposed merger with the Essential Utilities. You may recall, as a part of the update I provided in February, we filed all of the required state regulatory approvals prior to the end of 2025. Last week, we received our first state approval for the merger in Kentucky. We expect to receive the next decision in Virginia in June. In other states, including in Pennsylvania and New Jersey, the cases are proceeding as planned with procedural schedules expected to continue through the summer and early fall. Also, late this summer, we plan to file the Hart-Scott-Rodino notification application related to the proposed Essential Utilities merger. Finally, we continue to expect the merger to close by the end of the first quarter 2027. With that, I'll hand it over to David to cover our financial and regulatory update in further detail. David?
David Bowler: Thanks, John, and good morning, everyone. Starting on Slide 9, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $1.01 per share, which, as John noted, is in line with our expectations. Revenues were higher due to authorized rate increases to recover investments across our states, while O&M, depreciation and financing costs increased as expected. Our outlook for these categories for the year remains unchanged, which you can see from the full year waterfall included in the appendix. As you would expect, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect in Q3. Slide 10 provides a look at our balance sheet, and liquidity profile. Our total debt-to-capital ratio as of March 31 was 58% which has improved compared to our year-end following the repayment of the $795 million HOS note in February as we expected. On April 1, we completed a successful long-term debt issuance of $700 million at 5.2% that attracted strong demand. Our financing plan for 2026 also still contemplates settling the roughly $1 billion of proceeds from our equity forward in the middle of this year. Related to credit, we continue to have strong investment-grade credit ratings at S&P and Moody's. Both agencies note our trend of credit supportive regulatory outcomes and expect to sustain FFO-to-debt ratios that are well within the current ratings thresholds. Slide 11 covers the latest regulatory activity in our states. We received final orders in West Virginia and Maryland during the first quarter, both of which had reasonable outcomes in terms of revenues and ROEs balanced with our continued focus on affordability. West Virginia American Water now has over $1 billion of rate base and our team there continues to receive positive feedback from stakeholders in the state as a solution provider, which Cheryl will further talk about in a few minutes. On active cases, you can see we have general rate cases and progress in 5 jurisdictions. Our cases in Virginia, California and Illinois are progressing as expected and are just now entering key phases in their procedural schedules, as you can see on this slide. In New Jersey, our rate case is progressing with the next major step in the case in Rate Counsel  and intervenor testimony due June 22. As a reminder, from our last case filed in 2024, we entered into a settlement agreement in August of that year, with rates effective in September of 2024. We expect new rates for the current case to go into effect later this fall. In Pennsylvania, briefs from all parties were filed earlier this month in line with the procedural schedule and a recommended decision from the administrative law judge is expected in May. We are encouraged by the tone of the case over the last several months. Prior to filing the case and through testimony filed, we have had the chance to highlight our numerous investments in water and wastewater systems for the benefit of our customers. And throughout this case, we believe our commitment to affordable service and our willingness to help our new communities in need of water quality and wastewater solutions has been recognized. While settlement wasn't reached before the procedural deadline of April 6, we feel confident in our filed positions and the investments we've made and plan to make to serve Pennsylvania American Water customers. We expect the final order from the commission in July and new rates effective in August. Turning to Slide 12. As John mentioned, yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of 8% EPS growth in 2026 compared to 2025, consistent with what we laid out last fall. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond. With that, I'll turn it over to Cheryl to talk more about our capital program, legislative wins, and our recent acquisition activity.
Cheryl Norton: Thank you, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many important capital projects across our footprint in the first quarter of 2026. These projects are mostly focused on pipe replacement, aboveground treatment facilities, including PFAS remediation, removing lead service lines and investing in updated technologies like smart meters. These investments are crucial for us to deliver on our core mission of consistently providing safe, clean and reliable water and wastewater services, and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers, which I'll speak more about in a minute. Slide 15 outlines 4 important pieces of priority legislation for us that were passed already in 2026. In Iowa, an infrastructure recovery mechanism is expected to go into effect on July 1 of this year that will allow us to recover certain investments more timely outside our general rate cases. In Indiana, we'll be able to adjust for power and chemical costs if they change by more than 3% during a certain period. This will become effective on July 1. These bills will help to reduce our overall regulatory lag and further demonstrate the constructive regulatory and legislative environments in these states. Additionally, as John mentioned, Maryland and Virginia both passed affordability-related bills that we pursued to benefit low-income customers. American Water continues to advocate for customer affordability legislation at the state and federal level. And lastly, on Slide 16, we continue to be well positioned for growth through acquisitions across many states with 105,000 customer connections currently under agreement from deals totaling $565 million. In order to meet our 2% goal for customer additions, we know that growth needs to come from multiple states. You can clearly see that our investment in dedicated originators who are focused on targeting and initiating acquisitions across our footprint is being reflected in deals under agreement in many states. In March, we completed the acquisition of the Nitro wastewater system in West Virginia for $20 million. This system, like many of those we acquire, needs extensive capital upgrades in the near future in order to remain in environmental compliance and would cause their citizens in the absence of a transaction to absorb the full rate impact of those investments. American Water plans on investing over $40 million in the next 5 years, and we look forward to serving the 4,600 customer connections in that community. And finally, the regulatory approval process for the Nexus Water Group Systems is progressing very well. We've received approval from the regulatory commissions in 7 of the 8 required states. Based on this progress, we now expect the closing to occur by June 30. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.
Operator: [Operator Instructions] The first question is from Jeremy Tonet with JPMorgan.
Aidan Kelly: This is actually Aidan Kelly on for Jeremy today. Just wanted to touch on the 2026 guide. Clearly, you guys reaffirmed today and continue to message higher second half results from the upcoming new rates in Pennsylvania, New Jersey. I guess on that front, will be curious if you could provide any more insight on if you assume ROE increases, especially in PA, do you kind of expect that to bounce back a bit?
John Griffith: Thanks for the question. We certainly feel good about the merits of our case in Pennsylvania and expect to see a recommended decision from the ALJ in May and certainly all of the fundamentals from when we go back to the filing of our last case and the environment in Pennsylvania, I think, is well recognized in terms of the types and amount of water and wastewater investment that are required in the state, including along the lines of PFAS remediation, lead and copper, et cetera. So I'd say we feel very good about the fundamentals of the Pennsylvania case and same in New Jersey where there's a meaningful amount of PFAS investment that's required. And I think there's broad understanding across administrations and other stakeholders for the need of those investments.
Aidan Kelly: Great. And then just one separate -- simple question on the merger process. Could you just remind us like what is required to get it through? Do you need full approval across Pennsylvania, Texas, North Carolina, New Jersey, Illinois and Virginia? Or is there a scenario where it could go through if some states don't approve, I don't know, if Kentucky just had approved to get signed there, but just curious procedurally, how that's kind of going.
John Griffith: Sure. We need approvals in all of the states where approvals are required. And so there are PUC approvals required in 7 states. As you noted, we've received approval in Kentucky, statutorily will receive decisions in Virginia and Illinois this calendar year. But yes, you need all of the required approvals before we can close the transaction.
Operator: The next question is from Paul Zimbardo with Jefferies.
Paul Zimbardo: I just wanted to focus also on Pennsylvania. Just there's been a lot of kind of comments from the Governor's office and just more focus on utility bills, again, more the electric side. But just curious kind of what the engagement's been from stakeholders. I know you said going to get the settlement in Pennsylvania. But just curious kind of what the conversations and tone have been in Pennsylvania broadly?
John Griffith: Yes. I'd say, Paul, it's a good question. It's something that we're thinking about all the time and very active on with the Governor's office and with stakeholders. And we frankly see a lot of alignment in our position relative to what we think is necessary in Pennsylvania in terms of affordability and also investment, right, particularly in the era of increasing environmental investments and frankly, just the state of water and wastewater infrastructure in the state. And again, from our perspective, utilities need to remain transparent, accountable, responsive to customer needs and we strive to be all of those things. And we also see the state being very constructive on growth and the need for growth. And in order to have that good economic development and kind of growth-oriented environment in the state. That requires having good healthy infrastructure, and we think there's broad recognition of that. So we feel very good about the fundamentals of where we are and what we're doing in Pennsylvania.
Paul Zimbardo: Okay. And one other small one, more of a technical one. I saw the corporate alternative minimum tax update in New Jersey and something in the Q. Just any impact we should be thinking about earnings, cash flow or otherwise from that new corporate alternative minimum tax guidance?
David Bowler: Paul, this is David. So yes, I mean there is a cash benefit for us. We filed for a refund for the '24 returns, about $84 million that we expect to get sometime this year. And then going forward throughout our forecast period. Prior to this change, we had $100 million or thereabouts throughout the forecast period CAMT payments. So there will be a, I'd say, a meaningful cash benefit for us.
Paul Zimbardo: Okay. Great. So that $100 million, that's a multiyear number, so whatever is $20 million, $30 million a year kind of say that...
David Bowler: Sorry, it's about $100 million a year. It trails off towards the tail end, but about $100 million a year.
Operator: [Operator Instructions] our next question comes from Shar Pourreza with Wells Fargo.
Andrew Kadavy: Actually, this is Andrew Kadavy on for Shar. So with the Essential merger pending in Pennsylvania and New Jersey, both net benefit states. Can you give a sense of what kind of customer benefits from the merger that you're highlighting for the commissions?
John Griffith: Yes, Andrew, I'd say we've made our filings in the states, and we're going through public hearing processes now. And certainly, it's still early days in those processes, but we do feel like there's good broad support for what we're trying to accomplish in the States. As you're aware, Pennsylvania is an affirmative public benefit state, and we look forward to demonstrating that, which we think is very consistent with everything that we're pushing for in Pennsylvania and in all of our states, which is affordability and top-tier customer service. So I think we feel really good about our position there.
Andrew Kadavy: And then shifting gears a little bit to your financing plans. How should we think about the timing of the debt issuance for this year? Should we expect that in second quarter, third quarter? And then would it all be in one chunk or would it be spread out throughout the year?
David Bowler: Andrew, this is David. So I'm sure you saw, we just issued $700 million of long-term debt -- 10-year debt on April 1. And then for the balance of the year, we've got our equity forward that we expect to take those proceeds at this point today as around midyear is what we've assumed for modeling purposes. And then in the latter half of the year, we have another debt issuance, long-term debt issuance in the plan. So you can think about Q3, early Q4 for that.
Operator: The next question is from Aditya Gandhi with Wolfe Research.
Aditya Gandhi: I wanted to start off in -- I wanted to start off in Pennsylvania. You mentioned you weren't able to settle this time before the procedural deadline. One of your electric peers in the States settled their rate case recently. Recognize each case has its own unique circumstances. But can you maybe just speak to sort of your approach to this case, just given the fact that historically, you've been able to settle in Pennsylvania except this one and the prior one. And then also speak to your level of confidence in being able to get a balanced outcome from the commission?
John Griffith: Yes. Thanks for that, Aditya. And I'll go backwards. I think we do feel good about our prospects for getting a balanced outcome in Pennsylvania. Since our last case, we've worked very purposefully across the state to continue doing what we always try to do, which is really a prudent investment in the state to meet all of our system needs while recognizing the need for affordability across customer classes. And we do think that those efforts are recognized. And so we certainly feel good about our prospects there. In any rate case, there's always -- you go down a path and there are opportunities to settle and then you move forward from there. Rate cases are a combination of financial issues, policy issues, and it's just a process. We feel good about the process that we've gone through so far in Pennsylvania. And again, just look forward to hearing what -- from the ALJ with a recommended decision in May.
Aditya Gandhi: Got it. That's helpful color. And maybe just one more question from me. Following up on a previous question about the CAMT. So in your current plan, if I understood David's comments correctly, you're embedding about $100 million of cash tax payments annually. When you do refresh your plan this year with Q3, will you incorporate that benefit into your plan? And could we see some sort of reduction in your equity needs?
David Bowler: Well, we will incorporate the change into the plan when we refresh in Q3, and we'll evaluate the need at that time on equity.
Operator: As there are no more questions in the queue, this concludes our question-and-answer session. And this also concludes the conference. Thank you for attending today's presentation. You may now disconnect.