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

Explicit Guidance:

• FY2026 Adjusted EPS: NARROWED range to $6.07–$6.12 per share; company expects to achieve the top half of this range based on Q3 results and Q4 outlook.
• FY2027 Adjusted EPS (Standalone): Initiated guidance of $6.53–$6.63 per share, reflecting ~8% year-over-year growth over 2026.
• FY2027 Capital Plan: Expected investment level of $4.1 billion (inclusive of acquisitions), with noted increased investment in PFAS remediation compared to 2026.
• FY2029 Debt Financing: Financing plan includes $2–$3 billion of long-term debt financing scheduled for calendar year 2027.
• FY2029 Equity Needs: $1.5 billion of external equity anticipated for 2029 within the 2026–2030 five-year financing plan.
• FY2035 Capital Investment: Upwardly revised long-term plan expects total investment of >$48 billion through 2035 (previously >$20B through 2030).

Business-Segment Outlook:

• Military Services Group (MSG): Plans to submit a bid in the coming months to serve another U.S. Army base seeking utility privatization; 19 current installations remain a focus for organic growth.
• Customer Growth: Exceeded 2% annual customer growth target by mid-year; added 81,000 connections across 10 states year-to-date.
• Acquisition Pipeline: 36,000 customer connections under agreement (valued at $182 million) across five states as of September 30; pipeline confidence remains high for 2027 execution.
• Specific Asset: Neosho, Missouri system closed last month; plans to invest $35 million over the next five years to improve water/wastewater quality there.
• PFAS & Lead/Copper: Continued investment mandated by EPA rules remains embedded in capital plans at previous levels; specific increased focus noted for 2027.

Market and Competitive Outlook:

• Regulatory Environment: Anticipates rate cases in Illinois (final order by Dec 18, 2026), Missouri (testimony Nov, rebuttal Jan), and Pennsylvania (LTIP decision by end of 2027) to drive growth.
• Rate Implementation: New rates in Illinois expected Jan 1, 2027; PA LTIP filing seeks inclusion of additional eligible property categories for recovery.
• California Desalination: Updated cost estimate for Monterey facilities to $825 million + AFUDC; project included in 5- and 10-year forecasts pending commission approval.
• Industry Dynamics: Anticipates continued upward pressure on infrastructure investment needs, particularly regarding aging underground pipe replacement, driven by affordability constraints and reliability requirements.

Macro / Industry Outlook:

• Merger Timeline: Aims to close merger with Essential Utilities by the end of Q1 2027, following expiration of Hart-Scott-Rodino waiting period and state approvals (PA, TX, NC, NJ settlements ongoing; IL order expected).
• Interest Rates: Adopting a neutral stance on refinancing rates (neither overly aggressive on declines nor conservative on increases) for the $1.4 billion debt maturing in 2029.
• Debt-to-Capital: Projected to improve to <58% by year-end 2026 as equity-forward shares settle; expected to improve further post-merger due to all-stock transaction structure.
• Valuation Review: Essential Utilities' gas business ("People's") will undergo strategic review post-closing; maintaining 7–9% EPS growth target regardless of final inclusion of gas assets.

Strategic Initiatives:

• Merger Rationale: Projected to capitalize on combined scale and value creation post-closing; full pro forma guidance for 2027 to be provided after merger close in Q1 2027.
• Infrastructure Modernization: Accelerating replacement of aging underground pipe to ensure reliability and safety; risk-based planning drives capital allocation.
• Capital Plan Extension: Combined company 10-year investment plan (2027–2036) to be released post-merger; standalone plan extended to 2035.

Risks and Headwinds to Outlook:

• Regulatory Timing: Final orders for Illinois (Dec 18) and Pennsylvania (end of 2027) remain subject to delay or unfavorable rulings.
• Cost Escalation: Updated California desalination costs reflect "escalation of labor, construction, material, and financing costs" and legal/permitting delays.
• Merger Execution: Actual 2027 guidance and financial profile dependent on closing timing; pre-close vs. post-close earnings allocation requires analysis before consolidated guidance issuance.
• Strategic Review Uncertainty: Retention or divestiture of People's gas assets remains undetermined pending post-merger review.
• Operational Costs: O&M expenses expected to increase in 2027 to serve customers acquired through Nexus and other recent deals; remaining variance described as modest.

Management Tone on the Future:

• Confidence: High confidence in standalone execution ("strong and uniquely compelling investment thesis") and ability to deliver 7–9% EPS/dividend growth through 2031 and beyond.
• Hedges: Explicitly notes "shelf life" of standalone content will be short; guidance ranges and capital plans subject to post-merger integration and pro forma adjustments.
• Stability: Emphasizes "prudent" cost management and alignment with regulatory interests to protect customer affordability as a key growth enabler.

Miscellaneous:

• Dividend Policy: Affirms commitment to dividend growth aligned with 7–9% EPS target; debt-to-cap and payout ratio targets currently met and expected to strengthen in 2027.
• Tax/Depreciation: Increases in depreciation, long-term financing, and general taxes driven by capital investment are consistent with prior plans and expected to continue.
• Affordability Stance: Maintains belief that average residential water bills will remain affordable for most customers despite infrastructure cost increases; proactively designing customer assistance programs.