American Water Works Company, Inc 2026 Q3 Earnings Call

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 third quarter earnings release and Form 10-Q, each filed yesterday with the SEC.

This call will include a discussion of non-GAAP financial information. It can be found in the appendix of the slides for this call, which are available on our investor relations website. Finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I will turn the call over to American Water's President and CEO, John Griffith.

Thanks, Aaron, and good morning, everyone. Turning to slide 5, I wanted to start today by saying again how excited we are about our proposed merger with Essential Utilities, which we announced one year ago this week. We are combining two top-notch teams who share similar values and a deep commitment to our customers, shareholders, and communities. I also continue to believe this combination creates a value proposition that is uniquely compelling in the utility sector. We expect to capitalize on the strategic rationale and financial benefits of the merger to drive growth and value creation, which ultimately will benefit all of our stakeholders. We greatly appreciate the support we have received over the last 12 months as we have moved through the approval process. On that front, I am pleased to share that we have continued to achieve great progress in the third quarter related to the merger.

You may recall, as part of the update we provided with Q2 earnings, we achieved our first three state approvals during the first half of the year in Kentucky, Ohio, and Virginia. Since mid-year, we have also now reached constructive settlements in three states, Pennsylvania, Texas, and North Carolina. These are key milestones as they demonstrate a collaborative process in each state where many stakeholders have come together and supported the value our merger will bring to the communities we serve. It is also worth noting that settlement discussions are ongoing in New Jersey, and we expect an order in Illinois soon following the ALJ's favorable recommendation in September. Finally, the federal Hart-Scott-Rodino waiting period expired in mid-August, satisfying that closing condition of the merger. Given these positive developments, we continue to expect the merger to close by the end of the first quarter of 2027.

So with that update, as we turn to slide 6, the rest of our remarks today will pertain to our standalone results, plan, and outlook. Today's financial plan update that we will share is in largely the same format as usual for us, with minor differences around the edges. While we realize the shelf life of this standalone content likely won't be long, we want to share this update to illustrate that our standalone business plan remains strong and, as I said earlier, represents a uniquely compelling investment thesis in the industry. Moving to slide 6, I will start by covering some highlights of the third quarter and first nine months of the year. As we announced yesterday, we delivered solid financial results in the third quarter that were in line with our expectations, adding to an already successful 2026.

Adjusted earnings were $2 per share for the third quarter, compared to $1.89 per share for the same period last year. In the first nine months of 2026, adjusted earnings were $4.63 per share, compared to $4.40 per share in the same period of 2025. Our results reflect the strong execution of our plan in 2026, which David and Cheryl will discuss further in their remarks. With these results, combined with our outlook for the rest of the year, we now expect to achieve the top half of our initial EPS guidance range for 2026, which we have narrowed to $6.07-$6.12 per share. Moving on to some of our other key accomplishments so far in 2026. We have continued our track record of regulatory execution this year, with new rates reflecting investments in infrastructure for the benefit of customers.

We have also invested $2.8 billion in capital projects and acquisitions year to date, again, reflecting great work by our teams to complete work that will enable us to better serve our customers and to grow the business. As we have said, growing to scale in our states benefits our operating efficiency and long-term customer affordability. As Cheryl will review, we continued to build momentum with our business development platform with nearly 81,000 customer connections added through September across 10 states. Overall, we are well on our way to executing our capital plan for 2026 and have already achieved our target of 2% customer growth. These efforts align squarely with our mission to provide safe, clean, reliable, and affordable service to our customers. Slide 7 highlights that we are initiating our standalone adjusted earnings guidance for 2027 of $6.53-$6.63 per share, reflecting 8% standalone EPS growth over 2026.

David will cover guidance in further detail. Turning to slide 8, as we update our existing five-year plan today, we are again affirming our long-term targets, including 7%-9% EPS and dividend per share growth. I want to emphasize that we expect to achieve consistent EPS growth through 2031 and beyond. As a regulated water and wastewater utility, rate base growth, regulatory and capital execution, expense management, and operational excellence are the key drivers of growth for our company. We also continue to value very highly our Military Services Group. The work that our MSG team performs to serve the military on our 19 installations is highly rewarding and continues to bring organic revenue growth opportunities. We and our MSG leadership team are looking forward to submitting a bid in the coming months to serve another U.S. Army base that is expected to seek utility privatization proposals.

The capital investment needs in our systems and for the broader water and wastewater industry are vast. Our commitment to solving problems for our current and future customers is unwavering, including addressing PFAS, lead and copper, and aging infrastructure, among other challenges. These catalysts are embedded in the foundation of our growth strategy and strongly position us to achieve consistent earnings growth for many years to come. With that, I'll hand it over to David to cover our financial and regulatory update in further detail.

David? Thanks, John, and good morning, everyone.

Starting on slide 10, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $2 per share compared to $1.89 per share in 2025, which is on track with our plans for the year. Revenues were higher due to new authorized rates to recover investment across our states, while depreciation, financing costs, and general taxes increased as expected. Importantly, as I mentioned last quarter, O&M costs have modestly increased period over period, highlighting our continued focus on cost control while supporting operational and customer needs. Slide 11 shows our financial results for the year thus far. Consolidated earnings were $4.63 per share compared to $4.40 per share in 2025, which is also on track with our plans for the year. The various drivers here are similar to the quarterly drivers.

Year-to-date results, coupled with additional revenue we'll earn in several states in Q4, gives us confidence we'll achieve our narrowed guidance for the year. Slide 12 covers the latest regulatory activity in our states. In New Jersey, we received a final order in the case that approved a $68 million annualized increase in water and wastewater revenues with an approved return on equity of 9.5% and an equity component of 54%. We believe this was a constructive outcome, and new rates were implemented on September 15th. On active cases, you can see we have general rate cases in progress in five jurisdictions. To highlight a few of these cases, in Illinois, we received a proposed order from the administrative law judge on October 23rd, recommending a 9.67% return on equity and a 50% equity layer.

From a total equity return standpoint, the proposed level would be slightly favorable to our current authorized level, which is comprised of 9.84% ROE and a 49% equity layer. The proposed incremental revenue of $67 million compares to our updated request of $104 million. Final order in this case is expected no later than December 18th, with new rates to be implemented January 1st, 2027. In Missouri, our case is progressing as expected, and the procedural schedule calls for testimony to be filed in November, with rebuttal due in January. Outside of the general rate cases, I want to highlight two important regulatory matters not on this page. First, in Pennsylvania. On September 1st, we filed our third Water Long-Term Infrastructure Improvement Plan, covering proposed distribution system improvement charge investments for the period of January 2027 through December 2031.