American Water Works Company, Inc.

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 date 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, and 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 at 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 Harwick, 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've 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 on efforts where we have scale, where we can drive efficiencies, invest in reliable and resilient infrastructure, while enhancing our customers' 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 on 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 1st. We're so pleased 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, a regulated business and our market-based businesses. A 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. Let's turn to our long-term growth story on slide 9 covering our five-year plan. You'll recognize our projected growth triangle, now reflecting a larger growth expectation from regulated acquisitions. This plan also reflects our increasing capital plan. There continues to be a significant need to invest in water and wastewater infrastructure, not just within our system, but broadly across the United States. On the water side, there are 1 million miles of pipes in the United States, and there's a major main break every two minutes. The country loses about 2 trillion gallons of treated water every year through more than 240,000 main breaks. That's roughly 20% of all treated water in the United States. On the wastewater side, there are about 800,000 miles of collection pipes in the United States. Many of those pipes are in dire need of replacement and pose a risk to groundwater. Every year, nearly a trillion gallons of untreated sewage are discharged into our rivers and streams. We understand the urgent need for a well-planned and executed asset renewal and upgrade plan to drive modernization, improve efficiency, and increase reliability and resiliency. Our 2021 to 2025 capital plan includes an increase of $1.3 billion, reflecting the continued needs in our existing systems, as well as the increase in potential regulated acquisitions. Bill Varley will give more detail on our pipeline of acquisition opportunities in a moment. We expect our market-based businesses to contribute about 1% of our growth over the next five years. Compared to our prior plan, this slightly lower growth rate is not a reflection of slower growth in our market-based businesses, but rather the increasing growth potential we see from regulated acquisitions. As a reminder, our Capital Light market-based businesses generate cash as well as enhance our customer experience. And again, we're incredibly proud to provide water and wastewater services to the men and women of our military at 17 installations. These components of our triangle give us confidence that we can continue to grow our long-term EPS CAGR of seven to 10% over the next five years. Let me now talk about our capital plan in greater detail. We're committed to providing safe and reliable water and wastewater services to the hundreds of communities we serve. We achieve this level of service by incorporating established best practices in our operations and implementing an investment strategy that balances infrastructure needs with affordability for our customers. American Water is a demonstrated ability to service and maintain distribution and treatment infrastructure, including improving water quality, fixing leaks, and providing water for fire hydrants, to name just a few. These efforts help communities remain strong and attractive to residents and businesses. We plan to spend $1.9 billion in 2021 and about $10.4 billion over the next five years. Again, that's a $1.3 billion increase over the plan we shared with you last year. The largest component of this investment is infrastructure renewal, which is primarily for pipe replacement and upgrading water and wastewater treatment facilities. Over the next five years, we plan to replace about 2,200 miles of pipes and make significant upgrades to our water and wastewater facilities across our footprint. We're also making needed investments to enhance water quality, as well as taking steps to improve our water sources. Every water provider must be prepared to address a broader range of contaminants and be ready to meet more stringent regulations. Finally, we'll invest in new technologies to enhance our customer experience and enable our employees to drive efficiencies. On the longer horizon, you can see that we plan to spend approximately $22 to $25 billion in our regulated business over the next 10 years. American Water's investment thesis is unique because of the predictable and stable way we deploy our capital. Our capital deployment is made up of many small investments across our footprint, which gives us the flexibility to scale our infrastructure investment plan up and down as capital needed for regulated acquisitions may vary because of deal timing. You can see that we set aside $3 to $4 billion for regulated acquisitions. Let me also point out that our capital investment generates significant economic benefits to the local and regional economies. According to the U.S. Water Alliance, for every million dollars we invest in our infrastructure, we create 15 high-paying jobs for our communities. So our planned investment of about $10.4 billion over the next five years has the potential to create over 156,000 jobs in the communities we serve. Let's move to slide 11 and discuss how we balance investment opportunities with customer affordability. This is a holistic approach focused on operating and capital efficiencies, constructive regulatory and legislative policies, and leveraging the size and scale of our business. It comes down to driving efficiencies in areas where we've been successful, effectively leveraging technology, taking advantage of our size and scale through supply chain, not only around price, but access to critical supplies, and driving our cost management through a culture of continuous improvement. When we achieve smart O&M reductions, we can invest in our water and wastewater systems while mitigating the impact on our customers' bills. We continue to improve our O&M efficiency ratio, which I'll discuss in a moment. We reinforce our operational efficiency efforts by also focusing on capital efficiency. We understand that driving capital efficiency allows us to do more with the same amount of money. We employ a value engineering step in all our large projects to optimize cost and performance of a project. We also continue to receive timely recovery of our investments through regulatory mechanisms across our footprint. These mechanisms reduce regulatory lag and extend the time between general rate case filings, which enables us to mitigate the size of any rate increase. I would note that 64% of capital recovery comes from regulatory mechanisms. We continue to engage with policymakers in similar efforts to support critical investments in solutions to water and wastewater challenges. Finally, our large customer base plays an important part in minimizing customer bill impact for this needed investment. We're able to spread the cost of these investments over a large customer base and, again, leverage our efficiencies to minimize customer bill impact. As you know, small water systems across the country are unable to do this as they grapple with aging infrastructure and contaminants that threaten the quality of their drinking water. Let's move to slide 12 for other ways we're strategically managing costs. We take a strategic approach to managing our costs, centered on deploying enabling technology, leveraging our supply chain, and embracing our culture of continuous improvement. Our technology is three areas of focus, enabling our employees, enhancing our customer experience, and driving best-in-class operations. Technology enables us to drive efficiencies in our business and to provide an excellent customer experience, whether it's through automating manual tasks so employees can focus on higher-value work, making data available to customers so they can better manage their usage, or leveraging automatic meter reading solutions with an intelligent alert system to detect and fix leaks earlier. We continue to drive efficiencies through our supply chain. Just last year, we saved over $80 million by leveraging our buying power across our business. For example, we saved more than $50 million on pipes and vehicles, and we replicated this effort in other areas such as chemicals, valves, construction materials, and safety supplies. Our team has established strong relationships with key suppliers to ensure we have priority when items essential to operating our business are in short supply. This was especially important during the initial phases of the COVID-19 pandemic. None of this would be possible without our people. Our employees are passionate about our customers and know how savings directly benefit them by keeping their bills affordable. We enable our employees to find better, more efficient ways to work. This is our culture and it's been so instrumental to our success in driving efficiencies. Our employees understand that for every operating dollar we take out of the business, we can invest $8 in capital with no customer bill impact. Moving to slide 13, you can see that we continue to make steady progress in driving efficiencies in our business. Over the past 10 years, our O&M efficiency ratio has gone from 46.1% to below 35%, and we've challenged ourselves with a new O&M efficiency target of 30.4% by 2025. we're confident in our ability to hit that target. Just to put that into perspective, our adjusted O&M expenses are just slightly higher today than they were in 2010. Since that time, we welcomed approximately 322,000 customer connections, while expenses only increased at a compound annual growth rate of 1%. That could only be done with the great work of our employees and our commitment to controlling costs and keeping bills affordable for our customers. Our market-based businesses are complementary to our regulated business. They're capital-light businesses, and they provide positive cash flow to help us with our growth in the overall business. Homeowner Services now serves approximately 1.5 million customers. Reaching that customer milestone is a testament to our ongoing dedication and commitment to serving our customers, delivering quality protection programs, and fostering innovation in the home warranty sector. Our Military Services Group is the largest provider of water and wastewater services for the military, now proudly serving 17 installations across the country. We were also extremely honored in 2020 to be awarded Department of Defense contracts for the water and wastewater systems at Joint Base Lewis-McChord in Washington State. It's truly an honor to serve the men and women who serve our country. Let's turn to the next slide and I'll conclude my remarks before turning it over to Bill. We have a clear strategy focused on what we do best. Our future success is based on our proven success. Our long-term perspective has informed our business strategy, and it starts by operating where we can create value, leverage our critical mass, drive efficiencies, and increase opportunities to provide water and wastewater solutions. Our regulated investment remains the foundation of our growth, and we'll balance that investment through strategic cost management. We'll continue to focus on our customers and enhance their experience through technology, efficiencies, and innovation. Our market-based businesses will continue to complement our regulated business through operating results, free cash flow, and an enhanced customer experience. And finally, it's not just what we do, but how we do it. That's at the core of our ESG philosophy. It's who we are today and how we plan to challenge ourselves in the future. Let me now turn the call over to Bill to talk about our strategic growth. 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 of 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 invested required must be distributed across a small customer base. This 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 to maintain affordability for our customers. Opportunities on the wastewater side are also significant because many of these systems are already part or near our water footprints. 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 time frame. 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's system, we were able to spread the capital costs across a customer base of over 650,000 connections throughout New Jersey. Our ability to leverage scale of our footprint enabled us to accelerate the capital program. At the same time, rate impacts were far less than if the town had decided to do the work themselves. Deep utility experience and expertise was also relevant in Haddonfield, as it is in other acquisitions. We have a culture of continuous improvement, and our employees are passionate about finding solutions and serving our customers. Technology and purchasing capabilities, along with our culture of continuous improvement, also bring added benefits. As Walter mentioned, for every dollar of O&M costs we can remove from the business, we can invest $8 of capital without increasing customer bills. Another advantage is our ability to acquire wastewater systems within or near our water footprint. Our water operations make up approximately 93% of our business, while wastewater is only 7%. This presents a tremendous opportunity because we have the operational infrastructure, equipment, expertise, personnel, and relationships with communities where we already provide water services. It's a natural transition to acquire wastewater services, and it is an important piece of our growth strategy. We've executed multiple successful wastewater acquisitions adjacent to and within states with existing water operations. For example, in Scranton and Exeter, Pennsylvania, we added 31,000 and 9,000 wastewater customer connections, respectively. And in Olton, Illinois, we added 23,000 wastewater customer connections. Let's now move to the next slide and see how regulatory and legislative policy also helps drive water and wastewater solutions. We continue to engage with state legislators and regulators on policies which we believe benefit existing and future customers. Let's talk about three examples, fair market value legislation, consolidated tariffs, and legislation around water quality accountability. Fair market value legislation enables communities to receive a fair value for their systems. In turn, the water or wastewater purchaser earns on the appraised value of the system, rather than the book value, as was historically the case. The appraised value is then included in rate base as long as the Commissioners deem it reasonable. The latest states within our footprint to enact fair market value legislation include West Virginia and Iowa. 10 out of the 15 states we serve now have some form of fair market legislation. Next is consolidated tariffs. We have that legislation now in 12 states. This legislation allows us to purchase systems, integrate them into our operations, and share those costs across a bigger customer base, minimizing customer bill impact. The last example is the water quality accountability legislation, which directly benefits customers and communities as it holds all water providers to the same standards. The first state to enact this was New Jersey with the Water Quality Accountability Act. This act requires cybersecurity programs, capital asset management programs, and responding to notices of violations in the same way across all systems. Additionally, it requires all systems to establish a maximum 150-year pipe replacement program to help ensure infrastructure reliability. At American Water, our pipe replacement rate is slightly over 100 years. Because of our asset management program, We remain well-positioned in New Jersey and across our footprint to meet these requirements. We have seen other states adopt similar legislation, such as Indiana and Missouri. Let's now shift our attention to updating you on our acquisition activities. Since 2015, we've completed 106 acquisitions and have added over 211,000 customer connections. Of the 106 acquisitions, 62 were water acquisitions, totaling 52,000 connections. 44 were wastewater, adding 159,000 customers. In 2020, we completed 23 acquisitions in 10 states, totaling approximately 38,000 customer connections. Regarding our focus to increase our wastewater acquisitions, of the 38,000 customer connections added, over 24,000 were wastewater. This total does not include the over 14,500 customer connections attributed to organic growth. We're off to a good start in 2021 with a total of 27 acquisitions under agreement in six states representing approximately 30,000 customer connections. As you can see, we've increased our five-year opportunity pipeline by 50% over the past year, from 800,000 customer connections to over 1.2 million. When developing our pipeline, we first look to our optimal target range of 5,000 to 50,000 customer connections, then we conduct the evaluation. This evaluation is not just focused on financial needs, but also looking to provide solutions for potential water quality, operational, and wastewater compliance needs, challenges that are increasingly burdensome to communities. Other criteria that we use to evaluate opportunities include enhancing the quality of life for residents and local businesses, whether it be economic development for growth, social programs, or overall community services, to name a few. Once systems have been identified, we proactively engage with the communities to see where and how we can provide solutions. You can see on the right, here are some of the targets we're working on over the next five years. This list clearly shows that our growth is not contingent on any one deal, but multiple deals across our footprint. And as you can also see, the size of these potential deals is also increasing. Let's take a moment to discuss the process in the timeline of acquisition from opportunity assessment, development of agreements to the final close, and inclusion in rate base. This process can take a minimum of 18 months to several years to complete. It usually starts with a robust bid and procurement process, community approval, regulatory approval, and then the final inclusion in rate base as part of a general rate case. Our increased pipeline, our proactive approach to engaging communities, and our competitive advantages position us well to achieve our EPS growth target related to acquisitions. Regarding York, Pennsylvania, in January of this year, Pennsylvania American Water was a successful bidder to acquire the wastewater treatment collection system for the City of York. We are currently working through the process, but this potential agreement would add an equivalent of 45,000 customer connections. It also shows how American Water plays a role in providing solutions for communities and enhancing the lives of the customers we serve. Let's move to the last slide. In summary, as we have added more capital to our plan, our regulated acquisition target has been raised from 1% to 2% to 1.5% to 2.5%. We intend to achieve this by executing on fundamentals, which are a continued focus on water system acquisitions in our target range of 5,000 to 50,000 customers and consideration for larger acquisitions where appropriate, a focus on wastewater acquisitions in or near a water footprint, continued engagement on legislative and regulatory policy to benefit customers, and an increased development of our opportunity pipeline through a proactive approach. By executing on our fundamentals, we firmly believe we are well positioned to meet our increased growth targets. Now I'll turn it over to Cheryl to talk about ESG.