American Water Works Co. Inc (AWK) — Q4 2023 Earnings Call Transcript

Thank you, Dave. 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 fourth quarter earnings release and in our 2023 Form 10-K, 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. After our prepared remarks, we'll then close by answering your questions. With that, I'll turn the call over to American Water's President and CEO, Susan Hardwick.

Thanks, Aaron. Good morning, everyone. As we announced yesterday, we finished 2023 with very strong financial results that were right on plan. As shown on slide five, earnings were $4.90 per share for the year, which included $0.13 per share of favorable weather, most of which we discussed earlier in the year. Excluding the estimated weather impact, earnings of $4.77 per share were at the midpoint of the guidance rates we shared originally back in November of 2022. I'm very proud of our company's ability to stay focused on serving our customers safely and reliably through numerous economic events this past year, which gave us the ability to confidently execute on the plan we had for 2023. I'm also proud of the resilient service we consistently deliver, especially over the past few months during a cold January and active storm season across the country. I want to thank our employees for safely providing reliable service to the 14 million people we serve in their homes, businesses, and communities. You can see here on slide five an abbreviated list of some of our key accomplishments in 2023, and John and Cheryl will add to these in their remarks. Overall, we believe the takeaway today for investors is that our strong execution in 2023 amid the challenging macro backdrop, coupled with our clear top-tier growth plan, demonstrates American Water's ability to deliver on our long-term plan. I'm very confident we will execute our plans in 2024 and beyond with the great momentum we have from 2023. Turning to slide six. As you can see, we have delivered an excellent total shareholder return over the past five and ten years, including our growing record of significant dividend increases. We're proud of this history, which compares very favorably to other utilities. I want to acknowledge, though, that our stock and utility stocks in general did not perform nearly as well as the S&P 500 in 2023, which dampened the outperformance we've had versus the S&P 500 over the last decade or so. Relative valuations of utility stocks fell without regard to specific performance, all of that while we continued our very strong performance. I'm confident our company's fundamentals and the execution of our strategies will continue to produce superior shareholder value and very competitive total shareholder returns for years to come. This, of course, is driven by significant investments in infrastructure and acquisitions, coupled with our track record of constructive regulatory outcomes, all with a keen focus on affordability. And on top of all of that, we continue to grow organically, including in our military services business that successfully serves 18 military installations across the country. One final thought I want to leave you with as we begin 2024. American Water continues to receive tremendous support at the state and federal level for the work we do across the country. The impact we are making in communities across our 14 states to improve water and wastewater service is critical to the well-being of the citizens we are proud to serve. And as we've told you many times, we are committed to solving local infrastructure issues while at the same time driving efficiencies in our business to remain very affordable to our customers. Policymakers frequently encourage our leadership to keep growing, keep investing, and keep solving problems in their states. And this includes Pennsylvania, where we applaud the Public Utility Commission's proposal on February 1 to enhance the process around the implementation of fair market value legislation. We believe the spirit of the enhancements is to increase public awareness and establish greater procedural consistency, all in support of much-needed consolidation of the commonwealth water and wastewater systems. While the business of providing these critical services can at times lead to enhancements in the way we do business, including in the regulatory construct, we have no doubt about the overwhelmingly positive support we receive from stakeholders as we pursue our company's mission. With that, I'll turn it over to Cheryl to talk more about rate-based growth, our regulatory plan, and some recent news around lead service lines. Cheryl?

Thanks, Susan, and good morning, everyone. Let me start by turning to slide 9, where these graphs illustrate that our continued successful execution of our capital investment plan is succeeding in growing regulated rate base consistent with our long-term rate of 8% to 9%. Rate-based growth, of course, will drive earnings growth. We 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 10, I'll cover the latest regulatory activity in our states, beginning with our most recently filed cases. In Pennsylvania, we filed a general rate case in November and are seeking recovery of $1 billion of investments. The case is proceeding as planned, including testimony and evidentiary hearings that are scheduled for February and March, with rates still expected to be effective in August. As a reminder, Pennsylvania uses a forward test year for rate-making purposes. In New Jersey, we filed a general rate case in January and are seeking recovery of over $1.3 billion of investments through December 2024. This case includes, for example, infrastructure improvement projects at all seven of our surface water treatment plants in the state. We expect the New Jersey case to be completed sometime later this fall. We also filed a general rate case last month in Illinois, where we have invested over $550 million since our last case. Our general rate cases in California, West Virginia, and Virginia are all progressing well and as expected. In California, we reached a partial settlement in the case in November related to the revenue request. We will prepare to implement the new rates retroactively to January 1, 2024, upon receiving the CPUC's decision on the settlement agreement and outstanding topics related to rate design and revenue stabilization mechanisms. Our request for a one-year extension on the cost of capital was also granted, pushing the next filing out to May of 2025. In Indiana, we received a final order just yesterday, and it looks very constructive. We are currently evaluating it and will share key takeaways in the next day or two, but overall, we're generally pleased. Finally, in Kentucky, we expect to receive a final order very soon. As a reminder, we expect to file general rate cases about every two years in our larger jurisdictions. Because we make prudent investments and have skilled and dedicated employees working on these cases, we're very confident in obtaining constructive outcomes again in 2024, as we did in 2023. On the legislative front, in New Jersey, new legislation supporting capital investment was passed and was signed by the governor in January. The Resiliency and Environmental System Investment Charge, or RESIC for short, establishes a new regulatory mechanism that will enable water and wastewater utilities to recover in a more timely manner capital spending related to investments in resiliency, environmental compliance, safety, and public health. This includes capital related to PFAS remediation. In fact, most of our states where PFAS is present, there are either existing environmental mechanisms that we believe PFAS investments will fit under, or we're proactively advocating for such mechanisms. To show the magnitude of our regulatory execution efforts, you can see on slide 11 that we have $390 million in annualized new revenues and rates since January of 2023. This includes $273 million from general rate cases and step increases and $117 million from infrastructure surcharges. We also have $670 million of total annualized revenue requests pending. As a reminder, American Water recovers about 75% of our overall capital spend through infrastructure mechanisms or forward test years, which greatly reduces regulatory lag. Alongside all of the investments we're making, we remain extremely focused on customer affordability and operating efficiently. We are continuing to evolve our strategies around rate design and programs to assist our customers who are challenged with affordability. We are also continuing our focus on technology, efficiencies of scale, and cost management to deliver on customer affordability, especially as the regulatory demands of the proposed PFAS rule and lead and copper rule improvements drive increases on our capital program. On slide 12, I'd like to cover our recent announcements regarding the US EPA's proposed lead and copper rule improvements. Like PFAS, we think clear rules are important and should be enforced for all providers. American Water consistently meets water quality standards related to the lead and copper rules across our footprint and believes removing the risk of lead service lines over time is the right thing to do for the health and safety of our customers. But also like PFAS, we believe all stakeholders must understand the costs associated with the proposed improvements to the lead and copper rule and that the EPA estimates are likely understated. The cost to identify the material of all unknown service lines and replace all lead service lines, including the customer-owned lines and galvanized lines, required by 2037 will require significant investment for all water systems. We are currently developing preliminary estimates based on the proposed rule. Unlike PFAS, though, the expected timeline for complying with the lead and copper rule improvements is much longer, so the impact on capital spend will be more gradual. Providing safe, reliable, and affordable water is American Water's business. We continue to work with the EPA, Congress, regulators, and policymakers to ensure that the implementation of any final standards protects customers, communities, and the general public. As I close on slide 13, you can see that our five-year capital plan, which is unchanged from November, has $1 billion for PFAS and approximately $500 million for lead service line replacements. We have been proactively investing about $100 million per year to replace lead service lines for several years now and expect to continue that level at least through 2030 or beyond. Depending on the EPA's requirements in the final lead and copper rule improvements, such as for customer-owned service lines, our annual investment level may need to be revised and likely over a longer period of time. Also, we are still awaiting a final rule from the U.S. EPA on PFAS. We continue to expect that there will be no material changes to the proposed rule, and we have not changed any of our announced plans or estimates from last November related to PFAS compliance. We continue to treat for PFAS in compliance with state regulations and we continue to prepare for full compliance with the new federal rule once released. Previously, we have disclosed that we are a party to the multi-district litigation, or MDL, lawsuit in U.S. District Court for the District of South Carolina against manufacturers of certain PFAS, like 3M and DuPont, for damages. In early December, there were deadlines to decide whether or not to remain party to the two potential settlements with manufacturers, and we did remain a party to both settlements. We believe this is the optimal path to recouping the most dollars possible from PFAS manufacturers in an expedient manner for our customers. On February 8, the MDL Court issued its final approval of the DuPont settlement. We will now begin the process of perfecting our claims under the settlement within the time period provided by the MDL. A fairness hearing on the 3M settlement was held on February 2. This matter remains pending. In closing, it's important for investors to understand that the ever-changing regulatory environment is leading to significant industry challenges, including those related to lead and PFAS, but also with issues like cybersecurity, for example. Each change on its own is significant, but the layering effect of all these changes is even more dramatic. The expertise we bring to the table to solve these challenges is well-recognized across the states where we operate and sets us apart from others. It's a privilege and a great responsibility to deliver safe, clean, reliable, and affordable services to our customers and communities. With that, I'll hand it over to John to cover our financial results and plans in further detail. John?

Thank you, Cheryl, and good morning, everyone. Turning to slide 15, let me provide a few more details on financial results for 2023. The appendix also has details of fourth quarter EPS. Consolidated earnings were $4.90 per share in 2023, up $0.39 per share compared to 2022, and up $0.32 per share on a weather-normalized basis. Increased revenues were driven by general rate cases we completed in late 2022 and early 2023 in our larger states. These additional revenues are driven by the significant investments we've made and continue to make in our systems. As noted, earnings were higher in 2023 by an estimated net $0.13 per share as a result of weather in the second, third, and fourth quarters due to warm and dry conditions primarily in Missouri, New Jersey, and Pennsylvania. This compares to net favorable weather in the third quarter of 2022 of $0.06 per share, which related mostly to warm and dry conditions in New Jersey. In looking at operating costs, higher pension expense of about $0.13 per share and increased chemical costs of about $0.11 per share, including inflationary pressures, are being recovered in large part through higher revenues we proactively sought in general rate cases we completed in the last 12 to 18 months. In the fourth quarter, we also had higher costs of about $0.10 per share related to waste disposal, equipment repairs, tank painting, and other maintenance costs across our footprint. Supporting our investment growth, depreciation expense increased $0.24 per share, and the cost of additional long-term financing increased $0.38 per share, primarily related to share count dilution. As I have mentioned all year, the EPS impact of the higher share count from our equity issuance back in early March was offset by avoided interest on the year. An additional benefit realized this year from the equity issuance is the interest income we have been earning from the cash balance held since March. Other reflects primarily post-closing acquisition adjustments in 2022 from the sales of HOS in New York, which added to EPS. Turning to slide 16, you will see we continue to be set up for strong growth through acquisitions. We closed on '23 acquisitions totaling $77 million across eight states in 2023. We also have 25 transactions under agreement across seven states at year-end, totaling $589 million and 88,000 customer connections. This total includes both the Butler Area Sewer Authority wastewater system in Pennsylvania and the Granite City wastewater treatment plant in Illinois. We are very close to completing the Granite City acquisition where we already provide wastewater collection service for approximately 12,000 customers. In Pennsylvania, as Susan briefly discussed, the regulatory environment relating to acquisitions is undergoing change, which we think is ultimately necessary and positive, but will take a period of time to sort out. We are very confident that Act 12 fair market value legislation will remain in place and continue to have strong support. As is often the case, implementation of legislation needs to be worked through in the regulatory arena, and that is what is happening now. In the meantime, closing of our current pending transactions will likely take more time than usual, but to be clear, we are confident that the previously approved Butler acquisition will close soon. We are continuing to invest in regulated acquisition opportunities in Pennsylvania, driven by the continued need for system consolidation and upgrading for the benefit of communities in Pennsylvania who deserve safe and reliable water and wastewater service. As you know, we have a strong track record of closing acquisitions. Over the past five years, we have closed over 100 acquisitions across 12 states, totaling nearly 200,000 new customer connections. Of course, as we close transactions, the work to build and refill our acquisition pipeline is continuous. Our pipeline of more than 1.3 million customer connections with meaningful contributions from across our platform continues to be a strong leading indicator that supports this piece of our rate-based growth outlook. As you recall, in November, we introduced our long-term target of 2% annual customer growth from acquisitions, as shown on slide 7. This equates to about 70,000 acquired customers per year, based on our current customer count of approximately 3.5 million customers. We are proactively investing in our capabilities across our platform to bolster our system-wide contribution to acquisitions to support this growth and are confident in meeting our 2% long-term target. Turning to slide 17, here we show the buildup from 2023 weather-normalized actual to the 2024 EPS guidance range of $5.10 to $5.20 that we introduced last November, which reflects 8% growth at the midpoint of $5.15. Working from that same buildup, yesterday, we announced an increase of $0.10 per share to our 2024 EPS guidance range, which is now $5.20 to $5.30 per share. The increase is due solely to additional interest income we will receive in 2024 and expect to receive annually through 2026 from the amended terms of the secured seller note from the sale of HOS. As we described in the 8-K we filed on February 5, the note balance has been increased to $795 million from $720 million, which satisfies payment of a contingent consideration owed to American Water of $75 million, triggered by the extension of HOS's service agreement with the New York City Water Board. In addition, reflecting current market interest rates and removal of American Water's option to require prepayment of the note at a future date, the annual interest rate on the note has been increased from 7% to 10%. American Water is pleased to see the continued growth of the HOS business under its new ownership, including the service contract extension with New York City, as well as the significant acquisition recently announced by HOS, which will be funded with new equity from HOS's owners. As it relates to future earnings guidance, it will be important for investors to be able to track the ongoing growth of American Water from its core regulated strategy before this additional interest income. Therefore, when we provide forward year EPS guidance each November, we will be sure to note the EPS associated with the additional interest income from the secured seller note in that guidance. To wrap up, slide 18 is a summary of our continued strong financial condition, which we further solidified in 2023. Just last month, Moody's affirmed our solid Baa1 investment grade credit rating and stable outlook and noted our improved FFO to debt ratio. We are confident our FFO to debt ratios will continue to support our current credit ratings. Our total debt to capital ratio as of December 31, net of our roughly $330 million of cash on hand, is 55%, which is comfortably within our long-term target of less than 60%. While having moderated somewhat, the current higher interest rate environment continues to be challenging. As I said in November, though, we are in a position of strength on a number of fronts in dealing with this challenge. Our strategy of issuing debt at the holding company level allows us to take advantage of our scale and pricing debt issuances, and we will remain proactive in managing risk and achieving a low cost of capital to the benefit of our customers and shareholders. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Hey, guys. Good morning. Yes, I don't usually lead off with sort of an M&A question, but I know John loves talking about M&A, and we saw that in the prepared remarks. And obviously, it's timely given the Eversource news yesterday where they essentially put a query on the block. Can you speak maybe to your appetite for larger inorganic opportunities and specifically any geographic aversions to the Northeast in light of the developments yesterday?

Thank you. Yes, Shar, I think it's a great question. Obviously, we saw the news as well, and John certainly can comment more. I'd say, first of all, of course, we don't comment on any activity in the M&A space of that nature. I think for us, it continues to be our standards that we've shared. We have to be confident in the ability to grow. We have to have confidence in regulatory environments, confidence in policy, support in any jurisdiction that we're currently in or other jurisdictions we may be looking at. So I think that's always the gate at which we evaluate opportunities. So I'd probably just say that. John, any additional comments from your side?

Well said.

Perfect. Just a follow-on question. I know you're still working through some details of the lead and copper rule. Is there a general CapEx upside amount you could share with us? Do you think the spending would be additional to your current plan, or would it result in shifting some expenditures, similar to what we experienced with PFAS spending in the previous update?

Yes, Shar, let me give a general answer and then Cheryl can add to it. First of all, it's too early to provide additional guidance on the overall plan's impacts. It's important to remember that this situation spans a much longer timeframe than what we're experiencing with the PFAS regulations. This will allow us more time to assess the actual impacts on the plan and to explore opportunities to rearrange other projects to accommodate any potential incremental spending. We need a bit more time to sort through this before we can offer clearer guidance. As Cheryl mentioned in her prepared remarks, we anticipate it will be significant, but I don't believe it will have the immediate dramatic impact on our plan as we saw with PFAS. Cheryl, do you have anything to add?

Yes. The only thing I would add, Shar, is just that we have been making really good progress in that space and we'll continue to be focused on removing our lead service lines and the customer lead service lines where they exist. But this is a more inclusive rule that, as Susan said, is over a longer period of time, so we'll continue to look at how we can layer that in.

Yes. I think just to sort of punchline on that one, and Cheryl again made the comment in her prepared remarks, this is about unknown service lines, unknown material, and it is about customer-owned. So as we've been working through our own program of replacing our lines, now we have the added requirement to look at unknown pipes and customer service lines. So that's why it gets bigger. And then again, the long-term time horizon to deal with it, I think, is also important to keep note of.

Good morning, team. Thank you for the time. I want to revisit the topic of M&A. I know you might have limitations on what you can share, but we have received numerous questions about it. I want to clarify something. Your peers typically view M&A as having a high hurdle rate, considering the organic growth options available to them. How would you describe the Connecticut water assets? Are these unique large assets that rarely come to market and are highly desirable? Or would you say that the M&A opportunity still presents a high hurdle rate compared to the organic capital expenditures you have? I don't want to misinterpret your thoughts; I'm just trying to understand your perspective.

Yes, Durgesh, I have to say upfront that you might not be pleased with my response as I won't go into extensive detail. Our primary focus remains on the communities and states where we currently operate, and as you know, that includes 14 different states. We believe there are numerous opportunities within those areas, and we plan to keep our focus there. Naturally, we will assess this type of opportunity as anybody would. However, I want to emphasize that our critical considerations are the regulatory environment, legislative landscape, business climate, and potential for growth. We will always evaluate opportunities from that standpoint.

Understood. Susan, I appreciate that. Maybe then switching gears. Can you just update us on the Pennsylvania rate case? The commission, I think, came out in December, I think they may have suspended the rate case schedule. Maybe just talk to that, what does that mean? What are the next steps there, please?

Yes, Cheryl provided details regarding the timing. We've shared the size of the case and from a broad perspective, this case, like all our ongoing general rate cases, focuses on investment. We are not attempting anything unusual in these cases, and there are no major policy changes from our viewpoint. This is solely about investment, which is the focus of the Pennsylvania case, and we will continue to navigate the process. So far, there are no signs of any problems with this case as we proceed. This holds true across all our jurisdictions and the cases we currently have filed. We’ve been indicating for a while that we expect to enter general rate cases on an approximately two-year cycle, a trend we've communicated for about two to three years, and this is just a continuation of that program. Our investment pace has been increasing, as we've raised our capital spending plan over several years to meet the needs of the communities we serve. Our regulatory strategy aligns with that approach, so Pennsylvania is treated similarly to other states in our efforts, and we will continue to work through the process there as we always do. We believe Pennsylvania is a very constructive state, and we're confident in our ability to manage that case effectively.

Got it. Just a quick follow-up there, Susan. Does the procedure, like the steps in the rate case in terms of testimony and intervenor testimony, proceed as planned with the suspension, or is that on pause? I might have seen something indicating it is on pause, but I'm not sure.

No, no change. Yes, no change. It's on schedule and on the normal process.

Good morning. I would like to start with Illinois. We are facing significant regulatory challenges regarding electricity and gas in the state, and we have already begun to notice some issues. I'm curious if there are any lessons learned from the events in December and if those have been integrated into the current timeline. Additionally, regarding PFAS, there are ongoing lawsuits against investor-owned utilities related to PFAS. I know you mentioned that you are compliant with regulations and exceeding requirements, but I would like to know how you are managing this risk.

Yes. Again, let me sort of start off here. On Illinois, I would take my answer to Pennsylvania and insert the word, Illinois. We are proceeding there as scheduled with no significant issues in that case. It is about investment, and we'll continue to process that case like we always would. Certainly, there is noise around the electric and gas industry cases there. We think, again, our cases are different in that they are about investment only, and we're confident in our ability to continue to work through that case as well. On PFAS, Cheryl, you might just actually want to comment on Illinois, if you like. And then on PFAS. There's obviously a lot going on here, too. I think the litigation environment around this is probably not surprising. There'll be all sorts of plaintiffs' attorneys looking for an angle here. And I think that's probably what mostly you're referring to and what we're seeing. But Cheryl, anything you want to add on either of these topics?

Yes, Susan, you were right about Illinois. We have built a solid case based on our capital investment, and we are confident in that case and the process. We will proceed with the process as we usually do. Regarding the PFAS issues, we have noticed some lawsuits, as you mentioned, Angie. However, we are working diligently to ensure compliance with all existing regulations and taking a proactive approach. We are also collaborating with the EPA on the CRC designation and advocating for protections for water utilities nationwide. We believe we should not be held accountable for contaminated water that we receive, and we are doing everything we can to treat that pollutant. Therefore, we feel we should be protected from such accountability. We will continue to pursue this direction, and being part of the MDL is a step toward recovering from those responsible for the contamination in the first place.

Hey, good morning, team. Thank you very much for the time. I appreciate it. And nicely done on the guidance here, I got to say. Maybe actually, to that point on guidance, given the bump here. Just with respect to resetting higher the CAGR going forward, I just want to recognize that this goes through '26. Implicitly, could we say this is a statement of confidence through the forecast period? Or is this more nuance to the specific 3-year forecast period, '25, '24 to '26 here, if you will?

Yes. I think we've tried to be clear, Julien, on the sort of duration of this additional interest we'll have on the note. But John, do you want to comment on this further?

Yes, I think you're correct, Julian. This should be viewed as an increase to our ongoing guidance for the period through '26. However, we haven't made changes as we've mentioned in our comments regarding our original guidance on the regulated strategy from November.

Right. Yes, understood. I just wanted to clarify that extra clear. With respect to Illinois here, obviously, you've got this case out there, there's a certain degree of attention. Can you comment a little bit about maybe some of the rate mitigation factors, what other pieces could help offset some of the rate increases to customers in Illinois? And any other mitigating factors and circumstances around that case that we can speak to here, for instance.

Yes. I'll comment on sort of overall strategy on that point. I think we treat Illinois the same as we do our other states. I mean we've been very focused on mechanisms or approaches to regulatory solutions that will help lessen and mitigate the direct impact of inflationary cost, pension and other things. We've done that via trackers, we've done that via deferrals, we've done that sort of across many of our jurisdictions, and we have a good amount of those costs actually, frankly, already sort of dealt with and embedded in rate structures across our territory. In Illinois, really no different than that. And as Cheryl said, we're just not experiencing other issues currently in that case. Now we obviously have to finish it. We have to get through the rest of the procedural schedule. And work through any issues that may come up. But we're not anticipating anything materially different there.

Yes. Excellent. And then lastly, just going back to the M&A point you were making earlier. I thought you were pretty clear about this. It needs to be accretive and/or provide robust visible growth. I just want to make sure I'm hearing you right about the growth piece there in terms of a key element in ingredient.

I don’t think I said it has to be accretive. Are you referring to the M&A aspect? I’ll reiterate that for us to consider new jurisdictions, there needs to be a productive regulatory and legislative business environment, along with growth opportunities. I was specifically talking about footprint growth, and a significant financial contribution would also be important. So we are applying the same criteria we always have and maintaining the same discussions about potential expansion into other areas. Therefore, I don't believe this situation alters our perspective on growth in other jurisdictions.

Got it. And just going back to lastly on that FMV piece, you guys commented extensible here, but just the timeline on getting that clarity there. And you talked about being a little bit more protracted. Just how does this sort of at least from a process perspective, finally get to some resolution as far as you guys are concerned? And then prospects on expanding it even from there, given where we stand.

Well, Julian, you're going to have to help me. On the first part of your question, I'm not sure what you're referring to.

Well, just on the fair market value just in terms of potentially taking a little bit longer, yes, indeed.

I got you. I just didn't hear the first part. Yes, I think that, as I said in my remarks, and John expanded on a bit, I think that what the PUC has done in Pennsylvania is actually quite helpful. And I've got a lot of experience in the regulatory world over the last 40 years or so. I've seen many pieces of legislation enacted, and I've seen many situations where commissions have to work through the implementation of that legislation. And I think that's exactly what we're doing here. And as we said, we applaud the commission for taking this approach and really being thoughtful about it and understanding the importance of this legislation to the larger strategy in the Commonwealth. So I think the steps that are being taken make good sense. Now having said that, we do have to continue to work through how those guidelines ultimately may be employed. But we think it's just helpful. And we'll give a framework for all of us to be able to work more productively in. Now having said that also, we do have to sort out what it means in terms of timing, and we've got a number of cases, acquisitions that we're working on in Pennsylvania through the regulatory and approval process, and it's obviously impacting that a bit currently, but we expect that to clear soon and be able to get back on our way here.

I have a quick question for you after Julien's comments. You mentioned the HOS note in the income, and you clarified that it's not really part of an ongoing earnings figure. You indicated that it may roll off in 2026. As we look ahead beyond 2026, should we consider that there will be additional rate base that might provide a more consistent growth rate? I recognize that $0.10 on a $5 number is quite small, but will there be something in place to maintain a relatively linear earnings trajectory?

Yes. I think you hit on it, Anthony, there at the end. It’s not terribly material. We think this is a great benefit from a cash flow perspective. The additional interest is nice to have. We think the certainty associated with that contingent payment we had on the New York contract extension is quite helpful now to have that secured. So we think there's just a variety of things about the restructuring that made a lot of sense for us that don't necessarily translate into any material impact to our overall plan. So long answer to your question, we would not expect there to be a need for finding additional capital to sort of fill in that very minor hole that this $0.10 will create.

Great. If I could ask one more question, it's regarding Cheryl's earlier comments. It seems that much of the Q&A has focused on the Eversource question, so I won't touch on that. When Cheryl mentioned the increasing demands on water systems and cybersecurity, could that be an indication that smaller bolt-on acquisitions might occur more frequently due to the compliance requirements being imposed on these smaller systems?

Yes. I think this is an area we've tried to signal, I think, for the last several discussions we've been having, and I think really probably what prompted that even was PFAS as an example. We see that as just another area that may be difficult for some of these smaller systems to be able to manage, both from an investment standpoint as well as an expertise standpoint. Cyber is another great example. Interest rates is another great example. I mean, the list just gets longer, not shorter for these communities to sort of have to deal with. And from our perspective, we have always been very focused on trying to define what the need is for a community and helping satisfy those needs. And again, from an M&A perspective or an acquisition perspective, as that list gets longer, it creates more opportunity for us to have that dialogue and work with communities to solve those kinds of problems. So yes, we think it does have upside to our acquisition strategy. It’s probably not a tsunami though to use a water term. It's probably a much sort of longer-term impact I think it takes a bit of time for communities to sort of wrestle with these issues and determine impacts to them before they're ready to make a move. So again, we use these kinds of issues in our discussions. I think it will take some time before we see any measurable impact directly related to these issues.

Hi. Good morning. Good morning, Steve.

Not an M&A question, so a couple of things on the HOS changes. Just thinking about the shift in the interest rate on the note being 7% to 10%, which is quite high for the seller. I'm curious about how to ensure that the seller gets paid back.

Great question, Steve. Yes. John, do you want to take this question?

Sure. From a credit perspective, we stay very close to the HOS business. We're, in fact, a partner. And as lender, we're constantly in touch with the business. The company has evolved, the credit has improved. Extending the New York contract is a significantly positive credit move and, as I mentioned in my comments, the company is currently making an acquisition with new equity funding from their owners as well as cash on their balance sheet. So we do have covenants. They've remained in compliance with the covenants. And in fact, we've taken the opportunity to tighten covenants as well. But when you look at the underlying business, it's frankly doing better than it ever has. So we feel very, very good about the underlying credit here.

Okay. Is the owner or the firm also supporting it, or is it solely the business that is backing up the remaining payments?

Yes. No, the owner backs it up, and that's what I was trying to say. So when there's fresh equity coming into the business to make this acquisition, that's coming from APAC who owns the business.

Got it. And I know you have that sharing mechanism for the business. Could you let us know how much income you made from the sharing mechanism in 2023?

Yes. Steve, I don't know if we had that disclosed. Is it separate in the 10-K? Yes. Steve, we can point you to it. I'll have Aaron follow back up with you to point you to it. But I think it is in the 10-K, which obviously, we filed last night. And this is the revenue-sharing mechanism you're referring to, where we collect the share of the revenue that's generated from the warranty work that they're doing in our various state jurisdictions where we have contracts. Yes. So Aaron will redirect you to that.

Regarding the Pennsylvania case, I noticed that two of the commissioners sent a letter at the start of the case to set the context. Would you consider that unusual, or is it typical for cases in Pennsylvania? How would you describe it?

I would say this situation is not necessarily typical, but we believe the case is progressing as it should. We don't see any issues here. It's a significant case, involving a $1 billion investment, and we got involved just under two years ago. So it's certainly important, driven entirely by our investment in the communities we serve.

Hey, good morning, team. I just wanted to come back to EA and the fair market value stuff, do you anticipate that all the changes to the fair market value will come via the commission process? Or do you think some of the bills in the legislature will make it across the finish line?

Our perspective is that this is the optimal route to address fair market value issues in Pennsylvania. This is a standard practice, and based on my 40 years of experience, it's common for commissions to interpret legislation and apply its provisions. I believe the commission is taking proactive measures to resolve these issues and ensure effective implementation of the legislation. While there may be a few who have concerns about the intended goals of fair market value legislation, there is a strong understanding of the need for consolidation in the state, and this is the mechanism to facilitate that. I am confident that the commission will carry out the necessary work to ensure the legislation is properly enacted and implemented.

Yes. So I mean you're saying PA is, in your opinion, very much fully behind continued promotion of consolidation.

Yes. I think as a state, as a Commonwealth, I believe that is a true statement, yes.

Okay. what sort of impact do you think it will have on the deal activity? And would you say the proposed RRR will make it tougher for AWK to deliver on the M&A CapEx placeholders?

I think we'll have to see how it plays out and how ultimately it gets worked from a procedural standpoint. But I'd say, generally speaking, no. we do not see it having a material impact on available opportunities and then ultimately, the outcomes on transactions.

Okay. And then last question for me. I saw that in at least the PA and New Jersey rate case filings that revenue decoupling requests were made, possibly, it's in the Illinois case, too. Do you typically make those decoupling requests and just don't get them? Or is that something new that you're pursuing?

Yes, it's a good question. I'd say it varies across jurisdictions. And again, part of our job here is to really understand what each commission is comfortable with and what mechanisms work or don't work in a particular jurisdiction. And it's also part of our responsibility to educate and to inform commissions and their staffs about how various mechanisms can work and what the impacts are. So we do that across our jurisdictions. And I think we have really been more proactive in that regard over the last couple of years. And so I think as we do that education and that dialogue it will inform where we propose what mechanisms. So I wouldn't necessarily say it's a broad application. The decoupling is always on our list. In every jurisdiction, I think it's all circumstantial. What mechanisms work best in what jurisdictions and we work accordingly.

Okay. But for PA in New Jersey, are these new proposals? Or have they been there and, say, your most recent case, too?

Yes. I’d have to go back and look to see if we had them specifically in those cases. I don’t actually recall. But again, I wouldn’t necessarily think this is breaking new ground on either of these proposals.

Yes. Thank you. Just a question on the PFAS settlements. Just sort of your expectation on the outcome following up on the 3M settlement there. And thanks for the additional updates. I'm just curious if anything's changed around your view of the company's sort of legacy liability to PFAS if there is one?

Yes. On the first question, Greg, around just settlement expected outcomes. Obviously, that process is proceeding. And we had one settlement approved, and the other one fairness hearing has occurred, and we would expect it to ultimately get approved. And then the process begins of claim submittals and really going through the settlement allocation process. So obviously, it's too early for us to be able to give you any indication of what we think the outcomes will be financially. But as we've said all along, these will be cents on the dollar in terms of recovery. We don't expect, obviously, for it to cover the full cost of exposure here. But the amounts to be recovered through the settlement, we think is quite important and the best avenue, as Cheryl said in her remarks, to collect dollars on behalf of the customer to reduce the overall obligation the customer has. So it's a good process. We've been happy to be involved in it. Our team, I think, in a lot of ways, is leading much of the effort around getting this work through the courts and getting outcomes here that are quite favorable. To your second question on how do we view sort of legacy exposure here. I don't think our view changes. As we said earlier, this will be an environment like all where there will be plaintiff's attorneys that are looking for an opportunity here and how that ultimately gets worked through the larger process around the MDL, the multi-district litigation is yet to be seen. But in terms of our exposure, we don't have any different view than we've had from a legacy perspective. Again, as Cheryl said, on a go-forward basis, we are treating and we're preparing to treat, and we're confident in our ability to do that on a go-forward basis.