Q1 2025 Earnings Call Transcript

Good morning. And welcome to American Water’s First Quarter 2025 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast within company 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 you, your host for today’s call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

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. 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. David Bowler, 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 will 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&A. With that, I’ll turn the call over to American Waters President, John Griffith.

Thank you, Aaron, and good morning, everyone. As we announced yesterday, we started 2025 with solid financial results. As shown on Slide 5, 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 2025 results included $0.03 per share of additional interest income from the 20 -- from the February 2024 amendment of the seller note related to the sale of Homeowner Services. 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. 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&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 6, 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 based growth. This affirmation is based on our clear, top-tier capital growth plan and our strong regulatory and operational execution that I believe is a positive differentiator from our peers. 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 7, as we announced yesterday, our Board of Directors approved an increase in the company’s quarterly cash dividend from $0.765 per share to $0.8275 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. 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 14th of this month. Susan, we will miss your presence, your leadership and your wisdom, and are grateful for everything you have 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. With that, I’ll hand it over to David to cover our financial results and rate case and legislative updates in further detail.

David?

Thanks, John, and good morning, everyone. Turning to Slide 9, I’ll provide some further insights into our financial results for the quarter. Consolidated reported earnings were $1.05 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.

And looking at operating costs, O&M was higher by $0.15 per share, driven primarily by employee-related costs and other increases to support growth in the business and cost-related acquisitions completed in 2024, as we expected. Depreciation increased $0.11 per share and financing costs increased $0.10 per share, both as expected, in support of our investment growth. And finally, we have $0.01 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. In Missouri, we entered into a settlement agreement with several parties, including Commission’s staff and the Office of Public Counsel. We agreed to an annualized revenue increase of $63 million, as compared to our most recently revised request of $107 million. New rates are expected to go into effect on May 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 million annualized increase in water and wastewater revenues, compared to the original filing that had requested a $20 million increase. 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 2024, 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 $1.5 million increase based on a 9.75% ROE. We expect to receive a final order mid-year 2025. And finally, later today we will 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 million 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 4. As a result, beginning July 1, 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. As you know, our current Missouri general rate case was filed on July 1, 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 426 in March, which modifies the existing distribution system improvement charge to allow for the deferral, depreciation, and post and service carrying costs from the in-service state of eligible investments until they are included for recovery and rates.

The language also provides important protections from lawsuits when utilities are meeting applicable water quality standards. Then, in Virginia, Senate Bill 850 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 would 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. 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 million 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. Our total debt-to-capital ratio as of the end of the quarter, that of $114 million of cash on hand, was 58%, which was within our target of less than 60%. Also, as John mentioned, S&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. 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?

Thanks, David, and good morning, everyone. On Slide 14, our capital program is off to a good start this year, investing $518 million 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 $3.3 billion 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 9%.

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. 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 analyzed the potential cost increases that could come from tariffs on various raw materials or finished goods that we purchased 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. 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. 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. A great example of this is the East Dunkard 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.

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 2001, recently gave the nation’s drinking water systems a C- grade and wastewater systems a D+ grade, both of which are unchanged from the 2021 report card.

EPA estimates that our country’s water infrastructure needs total $625 billion of investment over the next 20 years, and that estimate keeps going up, not down, each time they update their estimates. 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 genuine [Audio Gap] The need for consolidation of the fragmented U.S. water industry to help solve these problems is dire. Within the communities we already serve, we need to invest $36 billion to $37 billion over the next 10 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&A and take any questions you may have.

Thank you. [Operator Instructions] The first question comes from Richard Sunderland from JPMoran, excuse me, from JPMorgan. Please go ahead.

Hi. Good morning.

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

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

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?

Hey, 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.

Understood. Very clear. And then circling back to some of the earlier M&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?

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, it 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. I’ll point to continued activity.

Great. Thanks for the time today.

Thanks, Rich.

[Operator Instructions] The next question comes from Anthony Crowdell from Mizuho. Please go ahead.

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. 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 a -- I think you do it separately, so a cost of capital proceeding in California?

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. 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.

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?

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

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

Thank you.

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

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

Thanks, Gregg.

Just 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?

Sure. Gregg, I think on desal, as you recall, we got our last major permit approval back in November of 2022, which was the California Coastal Commission. We’ve got a CPCN from the California PUC. We’ll need to provide updates to the PUC. But as we had noted in our 10-K, we expect to break ground this year on desal.

That’s not a part of the rate case?

Correct. That’s a separate docket.

Got it. Thank you.

Thanks, Gregg.

[Operator Instructions] The next question comes from Paul Zimbardo from Jefferies. Please go ahead.

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

Thanks, Paul.

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. 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 will be helpful if you can.

Yeah. 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, it will incrementally help our earned returns in each state.

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

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