American Water Works Co. Inc (AWK) — Q4 2020 Earnings Call Transcript

Good morning, everyone. I’m Ed Vallejo, Vice President of Investor Relations at American Water. And on behalf of our entire company, I'd like to welcome you to our Virtual 2021 Investor Day. Let me first go over some Safe Harbor language. Today, we will be making some forward-looking statements and those statements, those projections are made with the best estimates we have on hand. However, since these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. The reconciliation for non-GAAP financial information used in the O&M efficiency ratio can be found in our Investor Day press release and in the appendix of the accompanying slide deck, which has been posted to the Investor Relations page of our website. All statements during this presentation related to earnings and earnings per share refer to diluted earnings and earnings per share. In addition, for the purposes of the presentation, our long-term EPS CAGR range is anchored off of the 2020 earnings per share results. Let me now spend a few minutes on safety, a very important topic for us. So much so that for every meeting we have, we start with a safety message. And you'll see this message woven throughout our presentation today. It's embedded in our culture. There is nothing more important than the safety of our employees and our customers. At the heart of our safety objective is our pursuit of zero injuries at work. You've heard us say that we want to send our employees home at the end of every day in the same or even better condition than when they came to work. A safe and inclusive work environment is key to achieving this path to zero. The safety and health of our team is the reason we decided to hold a Virtual Investor Day this year. The format allows our speakers and those working behind the scenes to remain in remote locations and maintain social distancing. We've practiced these and other COVID-19 safety measures throughout the year for our field teams, as well as those colleagues that work in offices. We're also taking into account all CDC and local and state guidance as we work on plans to return to a more normal state of operations when possible, with safety as our continued primary driver. And with that, I would now like to introduce American Water’s President and CEO, Walter Lynch.

Thanks Ed and good morning, everyone. I'm Walter Lynch, President and CEO of American Water. I want to welcome and thank you for taking the time to join us today. We know you have a choice in where to invest your money. We thank you for your confidence in American Water. We're confident that throughout our presentation today, you'll continue to see that we're positioned for success for decades to come. And we continue to have a compelling long-term value profile for you, our owners. We look forward to sharing our story. Before we discuss our agenda today and move to the presentation. I want to echo Ed's message on safety. Nothing matters more to everyone at American Water than the safety of our team and the public. As a company that provides essential services to communities across the country and an employer of more than 7,000 people with families and loved ones, no injury is ever acceptable to us. Safety is embedded in everything we do and is that the foundation of the plan we'll lay out for you today. Turning to our next slide. As outlined in our press release issued yesterday, American Water continues to execute on our strategies and we're well positioned for long-term success. Today, I'll start by discussing our strategic focus and our commitment to building and maintaining reliable and resilient water and wastewater infrastructure, cultivating an inclusive high-performing culture, delivering water and wastewater solutions, where we create value for customers and communities, and continuing our commitment to being a values-led company. Bill Varley, our Chief Growth Officer will discuss our regulated growth strategy. Cheryl Norton, our Chief Environmental Officer and President of New Jersey American Water will talk about our commitment to ESG principles and our new, and we think critical environmental targets. And Susan Hardwick, our Chief Financial Officer will cover in more detail, our 2021 guidance and long-term business plan along with our strong 2020 results. We'll then look forward to answering your questions. Everything we'll discuss today starts with a clear, transparent strategy. We've been providing essential water and wastewater services dating back to 1886. Our success is rooted in our values of safety, trust, environmental leadership, teamwork, and high-performance, and the strategies we built around our safety, people, operational excellence, growth and customers. As we look to the future and our long-term success, today, I want to spend some time on how we'll continue to create value for all our stakeholders. This starts with operating where we can leverage our strengths, including areas where we have customer concentrations. Fragmentation has long been a challenge for water and wastewater providers across the United States. But for American Water, we're able to focus our resources and efforts where we have scale, where we can drive efficiencies, invest in reliable and resilient infrastructure while enhancing our customer's experience and keeping their bills affordable. The COVID-19 pandemic has highlighted the importance of clean, safe, reliable water, and wastewater services like never before, by strategically focusing our resources, we strengthen our operations and continue to provide excellent local customer service. This strategic effort also provides greater opportunities to deliver meaningful water and wastewater solutions to communities building on our proven success. Last year, we invested more capital than any previous year. We continued our disciplined focus in O&M efficiencies. We added approximately 38,000 customer connections through acquisitions in 10 states. And we were recently named one of the Top 10 World's Most Sustainable Corporations by Corporate Knights. Now we'll build upon that success by continuing to hone our strengths. There's no other water and wastewater service provider with our scale and capabilities. We're uniquely positioned to help our country address long existing water and wastewater challenges and strengthen the communities that we're privileged to serve. And that starts with the dedicated and talented people of American Water. This goes beyond investing in training. It's an intentional long-term commitment to building and hiring talent, inspiring and rewarding high-performance, creating fulsome development paths and building a strong, diverse team. A perfect example of our bench strength is last week's news that Cheryl Norton has been named American Water's Chief Operating Officer, effective March 1. We’re excited to have Cheryl take on this key leadership role for our company. Cheryl has deep utility experience, a strong commitment to safety, a passion for excellent customer care, and a collaborative approach to building high performing teams. Importantly, she fully embraces our values and the culture we continue to build at American Water. We're cultivating deeply committed and passionate teams that care about our customers, our communities, and each other. Let me take a moment to talk about our business and the continued execution of our strategies. American Water is the largest and most geographically diverse water and wastewater utility in the United States. We have more than 7,000 employees who provide drinking water, wastewater, and other related services to an estimated 15 million people in 46 states. We provide services to customers through our two business segments, our regulated business and our market-based businesses. Our regulated business is our core business, providing more than 89% of our projected EPS by 2025. We own and operate a significant amount of assets, including more than 53,000 miles of pipes, 609 water treatment plants, 150 wastewater treatment plants, 1,100 wells and 75 dams. We treat and deliver more than 1 billion gallons of water every day for our customers. Our market based businesses include homeowner services and our military services group, which I'll speak to in a moment. Before we move on to the next slide let me comment on recent transactions that illustrate the execution of our strategy. As you know, we're in the process of selling our operations in New York, and we recently signed an agreement to sell our Michigan operation. We're working on additional opportunities that will further strengthen our presence in states where we're eager to grow. We expect to have more to share on that in the very near future. These agreements and other opportunities that we're exploring are a key part of our strategy to operate in states where we can best serve customers, drive efficiencies, and continue to grow through regulated investment and acquisitions. I would also note that Pennsylvania-American Water was the successful bidder to acquire the wastewater treatment and collection system for the city of York, Pennsylvania. We're currently working through the approval process. This potential agreement would add an equivalent customer connection total of about 45,000 and would be another example of growing where we can add value.

Thanks, Walter. Hi. I'm Bill Varley, Chief Growth Officer for American Water. Prior to my current role, I've held many leadership positions at our company, including President of New Jersey American Water, Senior Vice President for the Northeast and Midwest divisions and Deputy COO. Before I review our growth strategy, let's take a look at the landscape of the utility industry in general. Our industry is highly fragmented, there are more than 50,000 community water systems and approximately 15,000 community wastewater systems in the United States. Compare that to the U.S. electric utilities, which are comprised of approximately 3,800 systems and gas utilities, which are even more consolidated with approximately 1,400 systems. The water industry's fragmentation provides ample opportunities for systems to consolidate and bring efficiencies across the entire sector. To put that in perspective on the water side, 84% of the population is served by municipal water systems. And more than 90% of those systems serve a population of 10,000 people or less. This is significant for two reasons. First, these numbers illustrate the large volume opportunities available. Second, many of these smaller communities are facing infrastructure challenges that require capital investment. Due to competing priorities, funds may or may not be readily available. And the large amount of capital investment required must be distributed across a small customer base, which can significantly impact rates and affordability. Because of our scale, we're able to spread capital investment costs over a much larger customer base, helping us maintain affordability for our customers. Opportunities on the wastewater side are also significant because many of these systems are already part of our water footprint. This gives us the opportunity to leverage our existing infrastructure and drive operational and cost efficiencies. Let's move to the next slide. Beyond our scale, other competitive advantages include a large customer base. Let me take you through an example where both scale and a large customer base played an important role prior to New Jersey American Water acquiring the water and wastewater systems of Haddonfield, New Jersey. The town faced the daunting need to invest over $20 million in capital improvements over a short timeframe. This investment was required to maintain compliance for their wastewater system and to make necessary improvements to their aging water infrastructure. These costs would have significantly increased rates for their 10,000 customer connections. When New Jersey American Water purchased Haddonfield system, we were able to spread the capital costs across a customer base of over 650,000 connections throughout New Jersey.

Thank you, Bill; and good morning, everyone. I'm Cheryl Norton, Chief Environmental Officer of American Water and President of New Jersey American Water. As Walter said earlier, I'm a great example of the value that American Water places on the development of its employees. My career began at American Water 34 years ago, when I was hired as a temporary employee at our central lab in Belleville, Illinois. And on March 1, I will become the Chief Operating Officer. The path that I've taken to get here today has given me a broad base of experience across multiple states and multiple areas of the business. My start with American Water as a microbiology research technician gave me a unique perspective on water quality, which I continued to build on throughout the years. It's been fun to reconnect with those roots in the Chief Environmental Officer role. I've worked in Illinois, Kentucky, Missouri and New Jersey, and I even spent a few months in West Virginia. My leadership roles in these States allowed me to become familiar with operational challenges across the business. I've also experienced a wide range of regulatory and legislative environments and can directly relate to the efforts that Walter and Bill mentioned, and the importance to the business and our customers. My success is a direct result of the amazing people that I've worked with over the years, who've been willing to teach me the business and allow me to bring my whole self to work. I'm honored and grateful to have the opportunity to give back by mentoring and helping others find their path here at American Water. In the future, I'll be here to talk to you about the industry leading operations across American Water, but today, I'm excited to talk to you about our ESG efforts. At American Water, ESG is core to our business and integral to our success. It's who we are, what we do and how we do it. Living by ESG principles is our commitment to operate in the most responsible manner possible. ESG is a constantly evolving journey for us. The information that we gather for various reports is used internally to guide our strategy, as well as externally for investors. We categorize our reporting topics into five key areas, which includes stakeholder engagement, workforce, customers, infrastructure and environmental stewardship. We confirm those topics with various internal and external stakeholders. We know that each stakeholder group brings a valuable perspective that helps inform our priorities. ESG is not simply environmental, social or governance; it's the sum of all three areas coming together and overlapping with our corporate values and strategy. The culture at American Water is what makes us who we are and our employees throughout our business understand that how we do things matters just as much as what we do.

Thank you, Cheryl. Good morning, it's good to be with you virtually this morning. And we certainly look forward to doing this in person, hopefully very soon. I'm Susan Hardwick, Executive Vice President and Chief Financial Officer of American Water. You have just heard from my colleagues, the various elements of our strategy. Let me now translate what that means to our financial plan. But before we get into our longer-term financial outlook, let me take you through the highlights of our strong 2020 results. In the fourth quarter of 2020, earnings were $0.80 per share, compared to $0.54 per share in the same period of 2019, an increase of $0.26 per share. Results for the regulated business increased $0.01 per share and results from the market-based business increased $0.22 per share. Parent company results improved $0.03 per share in the fourth quarter of 2020, as compared to the same period in 2019. Consolidated results reflect a two cent per share benefit from depreciation not recorded as required by assets held for sale accounting in 2020 related to the pending New York sale, and the loss of $0.19 per share on the disposal of Keystone Clearwater Solutions in the fourth quarter of 2019. For the 12 months ended December 31, 2020 earnings were $3.91 per share compared to $3.43 per share in the same period of 2019, an increase of $0.48 per share. Earnings in the regulated business increased $0.33 per share, while the market-based business results improved $0.24 per share compared to 2019. Parent company results were $0.09 per share lower in 2020 as compared to 2019, due primarily to higher interest expense. Regulated results reflect an estimated $0.10 per share, favorable impact year-over-year due to warmer and drier than normal weather across several of the company's subsidiaries in 2020 and unusually wet weather conditions in 2019. Regulated results also include the impact of increased revenues from new rates in effect, as well as earnings from acquisitions offset somewhat by higher wages and related costs and other maintenance costs. Operation and maintenance costs and depreciation also increased in support of growth in the business. And finally, regulated results reflect $0.06 per share benefit from depreciation not recorded as required by the assets held for sale accounting in 2020. Market-based business results improved compared to 2019 from the addition of installations for the Military Group and new partnerships and price increases in the Homeowner Services Group. As a reminder, results in 2019 reflect a $0.19 per share loss on the disposal of Keystone Clearwater Solutions in the fourth quarter of 2019. Additionally, results for the full year 2020 included an estimated $0.02 per share unfavorable impact from the COVID-19 pandemic, primarily in the homeowner services group from increased claims that likely have resulted from more work from home activity. For the regulated business, as we have mentioned throughout much of 2020, we have been working with regulators to secure the opportunity to defer for future recovery, many of the impacts of the pandemic. And we did see as expected that an increase in residential demand largely offset the lower demand in the commercial sector. Our solid performance in 2020 is the basis for our long-term outlook. And as Walter highlighted for you, that outlook is quite strong. Referring to Slide 31, we are establishing the EPS guidance for 2021 of $4.18 to $4.28 per share, compared to our weather normalized results of $3.84 per share for 2020. Our expectation for 2020 run reflects a year-over-year growth rate of over 10%, which is what we indicated would occur at our Analyst Day last year. In longer-term, we are maintaining our growth outlook of 7% to 10% over the next five years anchored off of 2020 results. The foundation of our growth as both Bill and Walter mentioned is our investment in rate base through acquisition and upgrades to our existing systems.

Thank you, Susan. Proven and predictable financial performance is an outcome of the successful execution of our strategies. I think you've clearly heard today that we're confident in our long-term success. This confidence is rooted in our strengths; it starts and ends with our unwavering commitment to safety. To us, safety is more than just the right thing to do. The health and safety of our team is a leading indicator of our company's health. Simply put, if we can get safety, right, we can get everything else right. To excel we must get the fundamentals right. Operational excellence helps us define better and more efficient ways to do business and it enables us to provide safe, clean and affordable water services for our customers. As the largest water and wastewater company in the United States, we assume the responsibility to go beyond minimum requirements and be an industry leader in operational and environmental excellence. This can only be achieved by collaborative high-performing teams. Maintaining an environment where our people feel valued, included, and empowered is critical to our ability to serve customers every day. We're working together to create an environment where employees can live up to their fullest potential and feel confident that they can directly contribute to our company's ability to stay strong, grow and make a difference in our customer's lives. And making a difference for our customers and for the communities we serve is centered on providing solutions to water and wastewater challenges. When we grow, we're able to leverage our scale, we can invest more, we can create stable jobs and we can improve infrastructure and make communities stronger, and for some ESG is a relatively recent development. For American Water, it's an affirmation of the values we've upheld for decades; it's much broader than just three words, it includes environmental leadership and sustainability, operational excellence, employee engagement, safety and equality, active community engagement, civic and charitable involvement and transparency and good governance. All are foundational to our corporate strategy. Turning to Slide 41. American Water has been recognized for our leadership and ongoing commitment to integrating ESG principles throughout our business. From sustainability to supplier diversity, to our commitment to an inclusive culture, we're incredibly proud of these achievements. But we know we have got much more work to do.

Thank you, Walter. At this time for members of the investment community that wish to ask a question, please dial in using the instructions we provided in a previous email. We’ll now take a five minute break.

Thank you. Susan, so my first question is about equity needs. You guys do not have an ATM plan, so talk to me please about how you see that $700 million in equity exactly – roughly which years and again, would you consider an ATM?

Hey, good morning, Angie. Thanks for the question. Yes, so a little bit of an update to this year's plan on the equity requirements as I indicated it’s about $700 million, we were at $500. And recall in our last plan, we had talked about that $500 million being sort of in the middle of the five years so roughly in the 2022, 2023 timeframe. I would say that's generally where we have this $700 million still scheduled, and my philosophy on this is we sort of line up the need or the issue with the need and the capital plan. So that's when it sort of comes into the plan in terms of expected requirements. We haven't really decided, and I know I keep saying this, but we haven't really decided on methodology yet, whether we do sort of a block issue or we do it using some other tool, we certainly are considering an ATM like program and you're right, we don't have one in place today, it may fit the profile a little better to use a program like that. We just haven't made any decisions on it. I would just tell you again, sort of generally speaking, it's in the middle of the five years and we'll continue to look at the best method to get it to market.

Angie, Walter here, how are you? I'm going to take that question. So let me start by just apologizing for the issues with the webcast, if you missed any of the 30 to 60 seconds, let me tell you in my section, it was fabulous. So I would ask you to go back and look at it again. So the 1.5% to 2.5%, that's a reflection of the growing pipeline that we have, Bill Varley working with the State teams have been hard at it to truly identify opportunities and then work them through our pipeline. And right now, we believe that we're confident that the pipeline supports that increase up to 1.5% to 2.5%, so that's really the reason for the growing part of that growth triangle.

And Angie on the proceed side, I'd just add quickly here. We have increased the expectation for proceeds, sort of after tax proceeds from the sale compared to our prior plan. We increased it about $250 million and obviously that's a source of equity if you will in this plan to help finance the growth here. And that really is just driven by – as we continue to kind of refine our estimates around tax position on the transaction, we feel like there is more proceeds coming after tax. So we did an increase at about $250 million from the prior plan.

Yes. Let me start with what's going on there and then Susan can talk about that. Yes, we still – we're working structurally with the public service commission as we work towards the sale of the system there. We still believe it's in the best interest of New York American Water customers to sell the Liberty. As you know on February 3, the governor directed a special council to complete a study on the feasibility of a public takeover, and that study is to be completed by April 1. So while we remain confident in the sale the date of that work and the outcome of that work may impact our timing to some degree.

Hey, good morning, Walter and I promise to go back and listen to the 30 to 60 seconds.

Yes, thanks Durgesh. Well, as you know we increased our pipeline and almost doubled it over the last year and it's really focusing in the States where we want to grow and focusing on both water and wastewater. We're still pursuing wastewater opportunities in areas where we serve water customers and also adjacent to where we serve water customers. And I think if you look at the city of New York wastewater, that's a perfect example of that. But it's really a combination of the States doing a tremendous job in identifying opportunities and working them through the pipeline. But also the team here led by Bill, working with the States to look at best practices and things that we can take advantage of across our scale of our business. So that's why really the increase is there, but it's really back to the pipeline, it's all about a pipeline, you have to have a pipeline to deliver on those acquisitions.

Yes, it is a long-term target, but we do plan to provide annual updates on where we're at with it. And we probably in future calls may talk about some of the technology we're using just to help you have a clearer picture around our path to get there.

Good morning, guys. The Biden Administration is reviewing a host of different environmental regulations. Is there anything in the works on the water side that might provide more stringent regulations for munis, etc., that might help facilitate further M&A for you guys?

Yes, thanks for the question, Becca. I think one of the areas, and it's been out there for some time, is really the PFAS limits. And again, there's a health advisory limit of 70 parts per trillion. Many states have enacted more stringent standards, but I think the EPA maybe monitored or coming up with a limit on that would be one area of focus for the Biden Administration. I know it's going to take some time, and the EPA likes to focus on science to make their MCLs, but I think that's going to be a key area. As they establish that, they'll continue to look at other emerging contaminants. And that will play again into our acquisition strategy as we continue to provide solutions for communities. And we think there is going to be a keen focus here by the EPA. Thank you for joining us today, and we value your participation and the work you do on behalf of your clients. We hope our open and transparent discussions give you confidence in our company and the investment in our stock. If you have any additional questions, please call the IR team and they'll be happy to answer them. Thanks again for joining us and please stay safe.