American Water Works Company, Inc.

Good morning everyone. I'm Aaron Musgrave, Senior Director of Investor Relations at American Water. On behalf of our entire company, I'd like to welcome you to our Investor Day. We know this is a very busy week and we appreciate you joining us for today's comprehensive update. Let me first go over some Safe Harbor language. Today we'll be making some 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 earnings release and in our September 30, 2021, Form 10-Q, each is filed with the SEC. The reconciliation for non-GAAP financial information used to calculate the O&M efficiency ratio can be found in our earnings release and in the appendix of the accompanying slide deck, which has been posted to the investor relations page on 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, our last reported actual results. As we do with every meeting in American water, let me start with a safety message, as there is nothing more important to our company. Daylight savings time comes to an end for many of us this coming Sunday, November 7th. As we turn back our clocks, it is important to recognize that it takes time to adjust to the shift, and that the adjustments can span broader than sleep patterns. As an example, studies from the National Road Safety Foundation show that auto accidents increase when daylight savings time ends due to driver fatigue and decreased visibility during rush hour traffic. With that in mind, I'll close with a few brief reminders to consider while driving over the coming weeks. First, make sure you slow down when driving in neighborhoods or near where kids, like mine, may be playing at dusk. Second, remember to turn on your headlights to increase visibility during early morning and evening hours. And third, keep your vehicle's headlights and windows clean, both inside and out, before you begin driving. And with that, I would now like to introduce American Waters President and CEO, Walter Lynch.

Thanks, Aaron, 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 on 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 well-positioned for success for decades to come and have an even more compelling long-term value profile for you, our owners. We look forward to sharing our story. Turning to the next slide, as outlined in our press release issued yesterday, American Water continues to execute on our strategies we laid out for you in February, operating where we can create the most value and now becoming a 100% regulated and regulated-like business positioned to deliver even higher quality earnings. Today we'll update you on our strategic focus and why becoming a fully regulated business allows us to accelerate on our commitment to build and maintain safe, reliable, and resilient water and wastewater infrastructure, continue to put our customers first, and deliver water and wastewater solutions where we can create the most value for customers and communities. Cheryl Norton, our Chief Operating Officer, will talk about our regulated business, focusing on our significantly increased capital investment plan, efforts to maintain affordable service, and our continued commitment to embed ESG principles throughout our operations. Susan Hardwick, our Chief Financial Officer, will cover the recently announced sale of homeowner services, our long-term financial strategy, 2022 earnings guidance, and longer-term business plan, along with our year-to-date and expected strong 2021 results. We'll then look forward to answering your questions. Let me start with our clear, transparent strategy to operate where we can leverage our strengths and create value for all stakeholders. We create value when we focus our resources and 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. There is no other water and wastewater service provider in the United States with our scale and capabilities. And that starts with the dedicated and talented people of American Water. Our company has an intentional long-term commitment to build and hire talent, inspire and reward high performance, create long-term development paths, and build a strong, diverse team. Our successful strategic execution is driven by our inclusive, high-performing culture and our continued commitment to being a values-led company. Our values of safety, trust, environmental leadership, teamwork, and high performance guide us every day. 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 our continued execution of our strategies. I'll start by reviewing our recent decision to sell our homeowner services business. Susan will cover the structure of the deal in greater detail. The strategic reason we executed this transaction was to further support our focus on the regulated business, resulting in what will be a fully regulated and regulated-like pure play water and wastewater company at close. Simply put, our core regulated business is strengthened by this transaction. We'll be able to invest more capital in our water and wastewater systems, as well as in acquisitions. I'll discuss our growth pipeline shortly, but there are many communities looking for solutions to serious water and wastewater challenges. The homeowner services business is a great business that we've grown over the past 20 years. Because of the nature of the business and its presence in the marketplace, we concluded that the opportunity to monetize that value and use the proceeds to accelerate our regulated investment strategy was in the best interest of all stakeholders. I want to say a special thanks to our employees of Homeowner Services for building this successful business. You're a tremendous team. We're thrilled with the transaction we've entered into with Apex Partners and know that the business and its employees will continue to grow under their leadership. With the sharpened focus on our regulated business, we can grow and put our resources where we have scale, leverage constructive regulatory and legislative tools, drive further efficiencies, and best serve our customers. After closing on the sale of HOS, our earnings will come exclusively from our regulated and regulated-like businesses, providing long-term stable and steady growth. We know that higher quality earnings matter to those who invest in us. The opportunity to lessen the risk of more volatile earnings growth in exchange for the steady growth of regulated earnings adds to the American water value proposition. And the sale of homeowner services is just one example of our strategic execution. It's worth noting that we've announced multiple acquisitions in 2021, including our largest acquisition in York, Pennsylvania, which will add an equivalent customer connection total of more than 45,000. To date, we've closed on 14 acquisitions in six different states, adding approximately 7,450 new customer connections. We also added 12,600 customer connections through organic growth to date. And we look forward to adding another 82,700 customer connections through 31 currently signed agreements in eight states. Additionally, we continue to make progress in the sale of New York American Water. We fully expect the transaction to close by the end of the year. So let's look at what the company will look like upon the closing of these two large sale transactions. This map clearly demonstrates our geographic diversity and how our scale and size are a key competitive advantage. American Water is the largest and most geographically diverse water and wastewater utility in the United States. Upon the closing of the sales of HOS and New York American Water, we'll provide drinking water and wastewater services, including the 17 military installations we serve, to an estimated 14 million people in 23 states. We operate in over 1700 communities in the United States with 3.4 million customer connections. In 2020, our top seven states provided over 87% of our regulated businesses' total revenue. Our military services group is the largest provider of water and wastewater services for the military, now proudly serving 17 installations across the United States. It's truly an honor to serve the men and women who serve our country. Now turning to slide 10, I want to highlight our industry-leading earnings growth outlook of 7% to 9%. As I mentioned, our regulated and regulated-like businesses will soon provide 100% of our projected EPS. Investments in the water and wastewater infrastructure and communities we currently serve and the ones we strive to serve will lead the way in our growth outlook. And as Cheryl and Susan will cover, we'll stay focused on prudent and efficient operating and financial strategies to continue to deliver on our growth targets. Turning to slide 11, as you may know, there is a bipartisan effort at the federal level related to an infrastructure package that would dedicate $55 billion over the next five years to improve water and wastewater systems across the United States. The need for significant investment in water and wastewater infrastructure is widely recognized. Just this past fall, we saw the havoc the extreme weather caused for many water systems. This is in addition to an aging infrastructure, contaminants of emerging concern, ongoing efforts to replace lead and copper lines, and ever more complex water quality regulations. American Water is executing on our well-planned asset renewal and upgrade strategy to drive modernization, improve efficiency, and increase reliability and resiliency. It's far better to address these challenges proactively than to wait until disaster strikes. Our new accelerated capital plan includes an increase of nearly $6 billion over the next 10 years, reflecting the continued needs in our existing systems as well as the increase of potential regulated acquisitions. American Water's investment thesis is unique because of the predictable and stable way we deploy our capital. We have the flexibility to scale our infrastructure investment plan up and down as capital needed for regulated acquisitions may vary because of deal timing. We've included $3 to $4 billion for regulated acquisitions in our new 10-year plan. Let's move to slide 12 and discuss how we balance investment opportunities with customer affordability. This is a disciplined and holistic approach, focusing on operating and capital efficiencies, constructive regulatory and legislative policies, and a large, increasing customer base. 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. We reinforce our operational efficiency efforts by 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 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 rate increases from base rate cases. 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 state customer base, and again, leverage our efficiencies to minimize customer bill impact. Over the past 10 years, our O&M efficiency ratio has gone from 46% to nearly 34%, and we've challenged ourselves with a new O&M efficiency target of 30% by 2026. We're confident in our ability to hit that target. 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 bills affordable. This is our culture and it's been so instrumental to our success in driving efficiencies. As you're aware, we've shown you many times before, our industry remains highly fragmented, creating ample opportunity for consolidation and efficiencies. There are approximately 51,000 community water systems and approximately 16,000 community wastewater systems in the United States, compared to approximately 3,800 electric utility systems and 1,400 gas utility systems. 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 investment required must be distributed across a small customer base. This can significantly impact rates and affordability. Turning to slide 14 and our competitive advantages. Because of our large customer base, we're able to spread capital investment costs, helping to maintain affordability for our customers. Another advantage and important piece of our growth strategy 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 service. We've executed multiple successful wastewater acquisitions adjacent to and within our existing water operations. Some of these include Scranton and Exeter, Pennsylvania, where we added 31,000 and 9,000 wastewater customer connections, respectively. And in Alton, Illinois, where we added 23,000 wastewater customer connections. And in Long Hill, New Jersey, we added 2,800 wastewater customer connections. Wastewater acquisitions are a key growth opportunity and will continue to be going forward. Turning to slide 15, foundational to our strategy is operating in constructive regulatory environments with supportive business climates. We're proud to have worked with many stakeholders on constructive regulatory and legislative outcomes at the state level, ultimately benefiting the communities we serve. this foundation gives communities more options to solve water and wastewater challenges and american water more opportunities to help those communities through acquisitions let's move on to slide 16 for an update on our pipeline of acquisition opportunities as we communicated earlier this year we've increased our regulated acquisition eps growth target to one and a half to two and a half percent and at the same time sharpened our focus on our regulated investment and acquisition strategies American Water is focused on growing in states where we can leverage our competitive advantages. As of today, we have a total of 31 acquisitions under agreement in eight states, and our five-year opportunity pipeline has increased by over 60% in the past 12 months, growing from about 800,000 customer connections to over 1.3 million today. Moving to slide 17, let's discuss our military services business. Our business model centers on adding new military installations to our portfolio and then optimizing revenues on those bases. As you can see here, we have a potential of about 70 additional opportunities in the years ahead. Additionally, we can optimize revenue through constructing new infrastructure projects on base. A military installation's mission can change or expand, or new technologies or system improvements may be identified that improve efficiency or sustainability. We work with our bases to identify and lead these needed infrastructure projects. This regulated like business has also been a key part of building talent within our organization. For example, our president of New Jersey American Water, Mark McDonough, previously served as president of our military services group. Because serving a military installation is very similar to serving a large system, the experiences our employees gain in safety, customer service, and asset management are highly applicable in our regulated operations. And again, we're extremely proud to provide essential services for the military men and women and their families. Let's turn to our long-term growth story in slide 18, covering our five-year plan. You'll recognize our projected growth triangle, with our regulated infrastructure investment serving as the foundation, reflective of an increased capital plan made possible by the proceeds from the homeowner services sale and our previously announced larger growth expectation from regulated acquisitions. You can also see that we've narrowed our long-term EPS CAGR range to 7% to 9%. This narrow target range reflects the shift to higher quality earnings as we increase our capital spend for both system improvements and acquisitions. Of course, the accelerated spend will take time to be deployed and ultimately be included for rate recovery. That ramp up will result in a bit slower earnings growth rate early on as the spend accelerates, but the result is earnings that are more consistent and predictable. We're confident that we can deliver on the components of this triangle and believe moving to a 100% regulated and regulated-like business best positions us for long-term success. We have a clear strategy focused on what we do best, 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. We're able to advance our capital plan, making critical investments in our pipes, pumps, and plants, hardening our assets against extreme weather events, and deploying technology that'll help us work smarter and more efficiently. We'll balance that investment through a disciplined regulatory strategy and strategic cost management to support customer affordability. And again, while there's a ramp-up time related to increased capital and acquisitions and the recovery of those activities, our earnings will be more consistent and stable in the long term. And finally, at American Water, ESG is core to our business and integral to our success. It's who we are, what we do and how we do it. Living by ESG principles is our commitment to operate in the most responsible manner possible. I'd like to highlight a great example of how we embed ESG into our operations on slide 19. In 2016, Pennsylvania American Water acquired the wastewater system assets of Scranton Sewer Authority, a combined sewer system that provides wastewater service to approximately 31,000 customer connections in Scranton and Dunmore. Pennsylvania American Water was already the public water service provider for these communities and brought both the technical expertise and financial resources to meet the Scranton Sewer Authority's unique challenges, provide a long-term wastewater solution, and maintain reasonable rates for the customers. Prior to significant upgrades made by Pennsylvania American Water, it was estimated that during a typical year, nearly 700 million gallons of combined sewer overflow discharged into the Lackawanna River negatively impacting the water quality of the receiving streams. After Pennsylvania American Water purchased the system, implemented numerous improvements and invested capital, the overflow volume had been reduced by 70%. We continue to work collaboratively with the state DEP on additional capital investments to further reduce the overflow volume and protect the local environment. This story demonstrates the interrelationship of our competitive advantages and how our leadership in applying ESG values complements our regulated growth strategies, all to improve the communities we serve and deliver meaningful value to shareholders. Let me now turn the call over to Cheryl to talk about our regulated business.

Thank you, Walter, and good morning, everyone. I'm Cheryl Norton, Executive Vice President and Chief Operating Officer at American Water. In this section, I'll talk about our increased capital plan, efforts to maintain affordable service, and our continued commitment to embed ESG principles throughout our operations. Let's start with the state of the water and wastewater industry. Turning to slide 21, you've seen this before, but it clearly articulates the issue. The American Society of Civil Engineers' latest report card for America's infrastructure issued every four years since 2001 recently gave the nation's drinking water systems a C-minus grade and wastewater systems a D-plus grade. They have also estimated that the needed investment over the next 25 years is $1 trillion. many drinking water pipes were laid in the early to mid-20th century with a lifespan of 75 to 100 years utilities average a pipe replacement rate of 0.5 percent per year at that rate it will take an estimated 200 years to replace the system and more than double the useful life of the pipes in contrast over the past five years american waters replacement rate has averaged around 150 years Our current five-year capital plan will drive American water's average replacement rate down to approximately 110 years. Clearly, the infrastructure need in our industry is widely recognized. We welcome the attention and support that our industry is getting at the federal level. As Walter referenced and put into context, the bipartisan effort supports $55 billion to be spent over the next five years of the $1 trillion water and wastewater infrastructure need. American Water is well positioned to help provide solutions to water service challenges for decades to come. Now let me talk about our capital plan in greater detail. As mentioned by Walter, the sale of our homeowner services business will enable cash proceeds to be redeployed into the regulated water and wastewater business in the near and medium term, allowing us to accelerate our capital spending plans, We plan to spend $2.5 billion in 2022 and $13 to $14 billion over the next five years, which is an increase of approximately $3 billion over the 2021 to 2025 business plan we shared with you earlier this year. On the longer horizon, you can see that we plan to spend approximately $28 to $32 billion in our regulated business over the next 10 years, reflecting an approximately $6 billion increase compared to the plan we shared with you in February. And let me also underscore that our capital investment generates significant economic benefit to the local and regional economies. According to the US Water Alliance, for every $1 million we invest in our infrastructure, we create 15 high-paying jobs for our communities. So our planned investment of $13 to $14 billion over the next five years has the potential to create or sustain about 200,000 jobs in the communities we serve. As we've refined our overall spending plan, we have also refined the mix of the plan spend. Let's spend a couple of minutes discussing some adjustments we've made to our allocation of capital expenditures, specifically the increase of our infrastructure renewal and resiliency segments. As you are hearing throughout our presentation today, our capital plan is very much aligned with our environmental goals and other ESG-related values that we prioritize as a company. The largest component of our capital investment continues to be infrastructure renewal, now at 68 to 70% of our total capital plan through 2031. These investments are primarily for pipe replacement and upgrading water and wastewater treatment facilities. We've also expanded our capital spend related to resiliency to further invest in reducing and eliminating leaks, improving cyber and physical security, and increasing resiliency of essential assets to climate variability. We now expect these investments to represent 10 to 12 percent of our 10-year capital plan. Our commitment to make needed investments to enhance water quality remains very strong, including steps we're taking to improve our water sources, such as expanding our comprehensive source water protection programs in five states. Every water provider must be prepared to address a broader range of contaminants and be ready to meet more stringent regulations. Finally, we'll continue to invest in new technologies to enhance our customer experience and enable our employees to drive efficiencies. Here in New Jersey, we recently experienced a stark reminder of why resiliency is such an important component of our capital investment plans. In the aftermath of Hurricane Ida, I'm proud to share that New Jersey American water successfully withstood widespread flooding and drinking water quality was not impacted in any of its service areas. We also witnessed the value of our resiliency investments in our Pennsylvania, Maryland, and New York operations. As pictured on slide 24, this includes our crucial Raritan Millstone Water Treatment Plant. This plant was reinforced with a $37 million flood protection project in 2018 to withstand floods that are categorized to occur on a 500-year frequency, in line with standards supported by the U.S. Environmental Protection Agency and the Army Corps of Engineers. Prior to the investment, the Raritan Millstone facility was designed to sustain a 100-year flood event, which is marked by walls with an elevation of 44 feet. During what became Tropical Depression Ida when it hit New Jersey, the Raritan River crested at a record of nearly 45 feet, well below the new protection threshold of 48 feet. If this storm had happened prior to 2018, we would be telling a different story today. The investments we made to protect this critical facility have proven to be invaluable by holding up against this historic flood and enabling us to continue to provide water service to the more than 1 million customers who get their drinking water from this plant. Moving on to our regulatory strategy on slide 25, our theme continues that we are most successful when we operate where we can leverage our strengths. As Walter said, we create value when we focus our resources and efforts where we have scale and where we can drive efficiencies, all while enhancing our customers' experience and keeping their bills affordable. It's beneficial to our customers that across our diverse geographic footprint, we operate in many states that have constructive regulatory mechanisms that enable needed investments and provide a reasonable rate of return for those who invest in our company. We have engaged with policymakers and regulators for well over a decade to find the best ways to invest in water and wastewater infrastructure while always putting the customer first. In the states where we operate, 17 new mechanisms have been added over the past 10 years. As water and wastewater industry challenges grow, we will continue to focus on constructive regulatory and legislative outcomes in the years to come. Let's move to slide 26 and discuss timely recovery of our investments across our footprint. Through regulatory mechanisms, such as forward test years, we are able to reduce regulatory lag and extend the time between general rate case filings. This enables us not only to earn our allowed return, but also to mitigate the size of any rate increases for our customers. We expect nearly two-thirds of capital investments over the next five years to be recoverable through these mechanisms, and we continue to engage with policymakers where we operate in similar efforts to support critical investments and solutions to water and wastewater challenges. Moving on to slide 27, as we've shared with you before, we take a strategic approach to managing our cost that is centered on value added technology, leveraging our size and scale to create a cost effective supply chain, and embracing our culture of continuous improvement. Technology enables us to drive efficiencies in our business and to provide an excellent customer experience, such as through making data available to our customers so they can better manage their usage. Technology investments also enhance customer and employee safety by leveraging intelligent alert systems to detect and fix leaks earlier. Through our supply chain strategies, this year we have saved over $60 million by leveraging our buying power across our business, such as cost savings related to purchases of pipes and vehicles. Our supply chain strategies also continue to mitigate cost increases for chemicals, valves, construction materials, and other safety supplies. Our team has 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, and it continues to be critical as we see significant pressures on the national supply chain currently. Our industry position has allowed us to avoid much of the significant price and availability impacts experienced by others. Of course, technology and supply chain strategies are only as good as the people who execute them. A key part of our culture and our success in achieving efficiencies is that our employees are passionate about our customers and keeping their bills affordable. Our employees understand that for every reduced operating dollar, we can invest $8 in capital with no customer bill impact. Additionally, by embracing a spirit of continuous execution and innovation, we expect to continue our long-term success in managing operating costs for the business. Moving to slide 28, you can see that we have made steady and significant progress in driving efficiencies in our business. Just to put things into perspective, our adjusted O&M expenses are just slightly higher today than they were in 2010. Since that time, we have welcomed approximately 342,000 customer connections, while expenses only increased at a compound annual growth rate of just over 1%. Customer growth and managing costs over the last decade have been key to our strategy of keeping our customers' monthly bills affordable as a percentage of their household income. Over the past 10 years, our O&M efficiency ratio has improved from 46.1% to 34.3%, and we've challenged ourselves with a new O&M efficiency target of 30% by 2026, which we're confident we can achieve. To get there, we'll continue executing on the cost management strategies and regulatory recovery of invested capital as we have discussed here today. We'll also continue executing on our target for growth through regulated acquisitions to gain scale efficiencies and achieve reasonable O&M costs per customer. Importantly, I'll close with a few comments about our continued commitment to ESG principles throughout our business. At American Water, ESG is not simply environmental, social, or governance individually, but it's the sum of all three areas coming together and overlapping with our corporate values and strategy. Let's talk about a few of our goals for a moment on slide 30. Earlier this year, we added two new goals regarding water efficiency and water resiliency, and I am pleased to share that we are on track to meet both targets. By 2035, our goal is to reduce the amount of water delivered per customer by 15% compared to a 2015 baseline. Over the past five years, we've already accomplished a 4.3% reduction in water delivered per customer, and as I just mentioned, are in line to realize this long-term goal. We are also on track to meet our water resiliency goal, which states that by 2030, we will have improved our water system resiliency by increasing our utility resilience index weighted average by 10% from a 2020 baseline. These goals are the right thing to do for the communities we serve, and they will enhance our leadership position in ESG. We also encourage you to check out American Water's sixth biennial sustainability report that was released in September and covers our industry-leading performance in 2019 and 2020. With that, I'll turn it over to Susan.