Q3 2026 American Water Earnings Conference Call - AMERICAN WATER WORKS COMPANY INC

Financial Performance:

• Q3 2026 Adjusted EPS: $2.00 (vs. $1.89 in Q3 2025).
• YTD 2026 Adjusted EPS: $4.63 (vs. $4.40 in YTD 2025).
• Revised 2026 EPS Guidance: Narrowed to $6.07–$6.12 per share, expecting achievement of the top half of the initial range.
• Q3 2026 Revenue: Increased driven by new authorized rates recovering infrastructure investments; O&M costs rose modestly period-over-period.
• YTD Capital Expenditures: $2.8 billion invested in capital projects and acquisitions.
• Balance Sheet: Debt-to-capital ratio was 58% as of September 30, 2026; projected to improve at year-end with equity-forward share settlements and post-merger.
• Liquidity: Completed $500 million long-term debt issuance on September 14, 2026, at 5.55% interest.

Guidance and Future Outlook:

• 2027 Standalone EPS Guidance: Initiated at $6.53–$6.63 per share, representing 8% standalone EPS growth over 2026.
• Long-Term Targets: Affirmed 7%–9% annualized EPS and dividend growth through 2031 and beyond.
• Capital Plan: 2027 investment expected at $4.1 billion; 5-year plan (2026–2030) updated to >$20 billion; 10-year plan (2026–2035) updated to >$48 billion.
• Financing Plan: Includes $2–$3 billion in long-term debt financing for 2027; $1.5 billion in external equity anticipated for 2029.
• Combined Company Guidance: Consolidated 2027 guidance and pro forma metrics to be provided after merger closing, likely after the first quarter of 2027.
• Merger Timeline: Transaction expected to close by end of Q1 2027 following federal HSR expiration and state approvals.

Business Segments and Product Lines:

• Customer Growth: Added nearly 81,000 customer connections YTD across 10 states, exceeding the 2% organic growth target.
• Acquisitions: Closed on 8 systems including Nexus Water Group (June 2026) and Neosho, Missouri system (5,900 connections); $35 million committed over 5 years for Neosho infrastructure.
• Pending Deals: ~36,000 connections under agreement across 5 states totaling $182 million as of September 30.
• Military Services Group (MSG): High priority segment serving 19 installations; preparing to bid for a new U.S. Army base involving utility privatization.
• Infrastructure Focus: Increased investment in PFAS remediation, lead/copper compliance, and aging underground pipe replacement.

Market and Competitive Landscape:

• Regulatory Environment: Operating in diverse, supportive regulatory environments across 10 states; rate cases ongoing in Illinois, Missouri, and Pennsylvania.
• Major Regulatory Wins: New Jersey received final order for $68M annualized revenue increase (9.5% ROE); Illinois ALJ recommended 9.67% ROE (rates implement Jan 1, 2027).
• Industry Trends: Significant upward pressure on infrastructure investment needs due to aging systems and EPA compliance (PFAS, Lead/Copper); industry-wide consensus on capital necessity.
• Merger Strategy: Combining with Essential Utilities to create scale, improve operating efficiency, and enhance customer affordability through shared values and expanded footprint.
• Strategic Review: People's Gas assets will be reviewed for strategic alternatives post-merger closing; potential retention remains on the table.

Risks and Challenges:

• Project Costs: California desalination project cost estimate updated to $825 million + AFUDC due to permitting delays, legal challenges, and cost escalations.
• Regulatory Lag: Management noted no current regulatory lag issues, though updated capital plans reflect "north side" cost projections.
• Cost Management: O&M cost increases expected to absorb expenses from acquired customers (e.g., Nexus), requiring continued focus on operational efficiency.
• Merger Uncertainty: Consolidation timelines and final regulatory approvals (IL, NJ, PA) remain prerequisites for final closing.
• Affordability Pressures: National dialogue on utility bill affordability requires careful balance between necessary investments and rate increases.

Management Commentary and Tone:

• Tone: Confident and optimistic regarding standalone performance and the strategic value of the merger with Essential Utilities.
• Strategic Confidence: CEO emphasized the "uniquely compelling" investment thesis, citing strong execution of the 2026 plan and robust pipeline of rate cases.
• Merger Sentiment: Expressed appreciation for stakeholder support and progress in state-level settlements (PA, TX, NC).
• Capital Discipline: Reiterated commitment to maintaining strong balance sheet strength and financial flexibility despite increased capital needs.

Analyst Questions and Answers:

• Consolidated Guidance: Management confirmed 2027 pro forma guidance will be provided post-merger close, likely after Q1 2027 earnings, to account for earnings timing differences (e.g., People's Gas Q1 peak).
• People's Gas Retention: Confirmed People's Gas assets are under strategic review post-close; retention is a possibility being evaluated.
• Growth Baseline: Long-term 7%–9% growth target applies to both standalone and combined company scenarios; 2027 standalone guidance serves as a proxy, not a new baseline for the pro forma entity.
• Rate Case Lock-in: Management stated the vast majority of the 2027 revenue growth ($170M–$180M) is locked in via recent PA, NJ, and KY decisions, with Illinois finalization expected soon.
• Interest Rates/Refinancing: Adopted a neutral stance on refinancing rates for the $1.4B debt due in 2029; not overly aggressive or conservative.

Other Key Points:

• Merger Status: Constructive settlements reached in PA, TX, and NC; ongoing settlements in NJ; favorable ALJ recommendation in IL; HSR waiting period expired mid-August.
• Pennsylvania LTIP: Filed third long-term infrastructure improvement plan (2027–2031) for distribution system improvements; decision expected by end of 2027.
  California Desalination: Updated application filed for Monterey area facilities, including low-cost financing framework and rate-making proposal.
• Safety & Compliance: Strong emphasis on addressing PFAS and aging infrastructure as core pillars of the growth strategy and customer value proposition.