American Water Works Company, Inc.

He will continue to report to me, and our executive leadership team will report to John. Cheryl will expand her COO role and now lead business development. When you consider how she has led our increased capital program, her extensive water quality expertise given the ever-increasing regulations, and her reputation in this industry, this is a natural expansion of her role as we continue to bring solutions to even more communities across the country. David Bowler, who you will hear from next quarter, has been named executive vice president and CFO, and Nick Furia has been named vice president and treasurer. Let me just say a few words about John, Cheryl, David, and Nick as we are really pleased to have all four expand their roles. You know John well. He has more than 25 years of industry knowledge and expertise and significant experience in leading high-performance teams, strategy development, and execution. Most importantly, he has a deep understanding of our company's purpose and a strong commitment to our customers, employees, and shareholders. Cheryl has more than 35 years of experience and expertise. She has led our lab, served as president in three of our states, and does an incredible job leading all areas of our operations. She too has a strong sense of the purpose of American Water. David has nearly 20 years of deep experience in the utility industry and has been our deputy CFO and treasurer since 2022. He has significant experience in all aspects of financial management and strategy, including finance strategy and planning, treasury, accounting, enterprise risk, and capital markets. And Nick Furia has 10 years of experience with American Water and has served as our assistant treasurer since 2021, overseeing key treasury-related functions, including financing, cash flow, liquidity, overall cap structure management. He also served as the director of acquisitions at American Water and has nearly 20 years of experience in accounting and finance roles. All have a strong commitment to the success of our company and are well-suited for their new and expanded roles. We firmly believe we have further solidified an already top talent leadership team. Our leadership team and the American Water Board of Directors are excited about these changes and highly confident this team will support the execution of our plans now and well into the future. And with that, I'll turn it over to Cheryl to talk more about our recent regulatory updates, affordability, and the capital plan. Cheryl?

Thanks, Susan, and good morning, everyone. Let me start by saying how excited I am about today's leadership news, and I look forward to working even more closely with our business development team to provide water and wastewater solutions to many more new communities. I'm also very confident that we have the right team for the long-term success of this company. On slide nine, I'll cover the latest regulatory activity in our states. In Pennsylvania, as Susan just laid out, the commission issued an order in July authorizing an additional $99 million in annualized revenues effective August 7th. There are two other items from the order worth noting. The PUC encouraged Pennsylvania American Water to set a target donation to its hardship fund of an additional $1 million. Of note, as part of its acquisition of the Butler Area Sewer Authority, Pennsylvania American Water already committed to increase its shareholder contribution to the H2O Help to Others grant program by $3.5 million over five years. As you know, the BASA acquisition was approved by the PUC in November of 2023, but it was appealed to the Commonwealth Court. So the PUC approved expansion of these assistance programs awaits a decision from that court. Regarding the water quality issues raised in the order, we acknowledge that some customers in the northeast part of our Pennsylvania service area experience temporary aesthetic disturbances associated with system improvements and operational maintenance. Let me be clear, our water meets all state and federal drinking water regulations. We take customer comments about water quality very seriously and we'll work with the Commission on the matters raised. As part of this commitment, we attempted personal outreach to every customer who raised a water quality concern during the public hearings to better understand and resolve their issues. With 33 Pennsylvania American Water's water treatment plants nationally recognized with the Director's Awards for participating in the EPA's Partnership for Safe Water, we are fully committed to high quality, reliable and affordable water and wastewater services. Switching over to Kentucky, the Commission there issued an order on May 3rd authorizing an additional $11 million in annualized revenues. Since the company had implemented interim rates effective February 6th based on the requested revenue of $26 million, the order requires a refund with interest to customers retroactive to this date. It does not include the infrastructure surcharge revenues of $10 million which add to our investment recovery in the state. We filed with the Commission a petition for a rehearing of the rate case order seeking clarification or correction of certain quantifications with respect to the authorized amount of annualized revenues. Of the handful of issues we have raised, the one of most significance appears to be a that once corrected would result in a higher revenue requirement. We expect resolution of this proceeding later in 2024. Turning to active cases, you can see we have general rate cases in progress in seven jurisdictions. All of these cases are centered around the capital investments we've made and will continue to make in these states and all of them are proceeding as we expected. On July 1st, we filed a general rate case in Missouri reflecting a $1.5 billion in system investments covering January 2023 through May 2026. We are seeking $148 million of additional annual revenue. Rate cases in Missouri usually take up to 11 months and we expect new rates to become effective mid 2025. In Illinois, the next milestones in the case will be evidentiary hearings in August followed by briefing from all parties in September and then a proposed order due in October. In California, we still expect the final rate case decision in the second half of 2024. New rates will be implemented retroactively to January 1st, 2024. As a reminder, we reached the partial settlement agreement in November of 2023 with the CPUC's Public Advocates Office, which would address our revenue requirement requests, but does not address rate design or certain other matters, including our request for continuation of a revenue stability mechanism. Also of note, the California Supreme Court issued a unanimous opinion concluding that the Commission aired when it prohibited water utilities from proposing to continue their water revenue adjustment mechanisms. According, accordingly, the court vacated the portion of the Commission's 2020 decision relating to this prohibition. Decoupling is a critical tool for conservation efforts in California. Adequate water supply reliability for all uses is essential to the future economic and environmental health of the communities we serve there. In New Jersey, as outlined in the procedural schedule, the company is in confidential settlement discussions among the parties to the proceeding and we hope to have a resolution soon. To show the magnitude of our regulatory execution efforts, you can see on slide 10 that we have $266 million in annualized new revenues and rates so far in 2024. This includes $176 million from general rate cases and step increases and $90 million from infrastructure surcharges. In total, we have $546 million of total annualized revenue requests pending. Most of the annual authorized revenues we are expecting in 2024 have effective dates which will have a stronger impact on financial results in the second half of the year. Moving to slide 11 and a topic you've heard us cover just about every quarter, customer affordability. And as we've said, we are very focused on balancing customer affordability and the magnitude of the system investments that are needed. An example of this is included in the Missouri general rate case we filed on July 1st. We are proposing a new income base discounted rate for customers below 150% of the federal poverty level. We also currently offer assistance through our H2O help to other program which is available to any Missouri American Water customer and meets the basic needs criteria as set by the Community Action Agency caseworkers. We also continue to strongly advocate for a permanent federally funded low-income water assistance program similar to what's been in place for many years for gas and electric utility customers and what was temporarily in place for water customers during COVID. Turning to slide 12. As Susan reviewed earlier, highlighted here is an example of the constructive regulatory and legislative environments we operate in. Our theme here is not only around timely consistent recovery of investments and operating costs, but also around offering affordability programs and tariffs to those customers who need it the most. As I alluded to earlier, American Water has consistently engaged with policymakers and regulators over the years to find the best ways to invest in water and wastewater infrastructure to serve the long-term best interest of our customers while also achieving timely recovery. When we achieve timely and consistent recovery, it promotes affordability by leveling out customer bill impacts over time, making those bills more manageable for our customers. I'd like to point out that we offer affordability programs in most of our states, which is something we have been doing for some time now. We also have specific low-income tariffs enacted in four of our biggest states, Pennsylvania, New Jersey, Illinois, and West Virginia. And as I mentioned on the last slide, we are seeking to add Missouri to this list once our general rate case concludes next year. Lastly, slide 13 shows that our state and corporate leaders and their teams again did a great job in the quarter executing on our increased capital plan. They safely completed the hundreds of projects that improved our systems and drove capital investment higher by almost $200 million in the first half of 2024 compared to the same period last year. This result keeps us on pace to hit our goal of approximately $3.1 billion of capital investment in 2024. With that, I'll hand it over to John to cover our financial results and plans in further detail. John?

Thank you, Cheryl. And good morning, everyone. I, too, look forward to all of our new roles. We have a great future ahead of us and much work to do as we continue to make communities stronger through the essential water and wastewater services we provide. Turning to slide 15, I'll provide some further insights into our financial results for the quarter. Earnings were $1.42 per share for the quarter, down 2 cents per share versus the same period in 2023, but up 2 cents per share on a weather normalized basis. Recently completed rate cases in Indiana, West Virginia, and Kentucky, in addition to rate outcomes achieved last year, are driving increased revenues. While weather led to a net unfavorable impact on earnings quarter over quarter of an estimated 4 cents per share, earnings in the second quarter of 2024 were favorably impacted by an estimated 3 cents per share of weather due to warm and dry conditions, primarily in New Jersey, while earnings were favorably impacted in Q2 of 2023 by an estimated 7 cents per share of weather due to warm and dry conditions, primarily in Missouri, New Jersey, and Pennsylvania. In looking at operating costs, increased employee related costs caused O&M to increase 3 cents per share as expected from normal wage increases somewhat offset by lower head count. Production costs related to fuel, power, and chemicals costs were flat compared to this period in 2023. Next, depreciation increased 7 cents per share and long-term financing costs increased 11 cents per share, both as expected and support of our investment growth. Long-term financing costs include interest on the $1 billion convertible note issuance from last June and the $1.4 billion long-term senior note issuance this February. And finally, we had 2 cents per share of additional interest income from the February 2024 amendment of the seller note related to the sale of HOS. We will continue to break this out quarterly so investors will be able to track the ongoing growth of American Water from its core regulated strategy without this additional interest income. Turning to slide 16, earnings were flat for the -to-date period compared to the same period last year, driven by many of the same factors as in the second quarter. On a weather normalized basis, earnings have increased 4 cents per share -to-date, which as Susan mentioned is in line with our expectations for the first half of the year. Turning to our discussion of growth through acquisitions, on slide 17, you'll see that we successfully closed on five systems for $119 million through June 30th, which added approximately 33,400 new customers. The newest additions include the water and wastewater systems in Salem, New Jersey and Cape Charles, Virginia, which followed the Granite City, Illinois wastewater treatment plant acquisition we closed in Q1. We've also added 9,600 customers through organic growth through June 30th. We continue to be well positioned for strong growth through acquisitions with 59,000 customer connections and $483 million under agreement as of quarter end. Many states in our footprint are contributing to this total, which mirrors the broad-based pipeline of opportunities we have in progress across the country. As a reminder, we have received PUC approval for the acquisition of the 15,000 customer Baso wastewater system in Pennsylvania. The PUC's approval is under appeal and we await a decision from the Pennsylvania Commonwealth Court to proceed with closing. On June 13th, the Pennsylvania Commission voted to adopt revisions to procedures around Act 12 fair market value. The provisions in this final order were largely the same as the proposed version we covered on the first quarter call. And as we said on the first quarter call, we believe these provisions are a constructive step for continued consolidation in Pennsylvania as they reaffirmed the core principles of Act 12. We do expect the closing of current pending transactions will likely take more time than usual, but to be clear, we are confident in our Pennsylvania acquisition pipeline. Slide 18 is a summary of our continued strong financial position. Our total debt to capital ratio as of June 30th, net of our $48 million of cash on hand is 56%, which is comfortably within our long-term target of less than 60%. And finally, on slide 19, yesterday we announced that we are raising our 2024 EPS guidance by narrowing it to the top half of the range we first disclosed in February. The 2024 EPS guidance range is now $5.25 to $5.30 from $5.20 to $5.30 previously, and still on a weather normalized basis. As Susan mentioned, this change is driven by lower than expected declines in customer usage, which is something we track closely and now believe we can count on for the remainder of the year. Coupled with the fact that we have several revenue increases effective in Q2 and Q3, we expect second half 2024 will deliver financial results to achieve this narrowed guidance range. This puts us on track to deliver .5% EPS growth in 2024 at the new midpoint. Our high level outlook for 2024 otherwise remains unchanged from what we previously disclosed, and we again affirm our long-term financial targets. We believe our industry-leading EPS and dividend growth, coupled with our affordability and our position in DSG leadership will continue to be highly valued and rewarded by investors. We believe these aspects of our business and our position as the largest and most geographically diversified water and wastewater utility in the country distinguish us from all other utilities. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. The first question comes from Durgash Chopra from Evercore ISI. Please go ahead.

Hey team. Good morning. First off, congrats on all the leadership announcements here to all of you. Good morning, good morning, Susan. Susan, thank you for all the color you provided as it relates to Pennsylvania rate case. I'm just thinking about how, if at all, this changes your regulatory strategy in the state, the timing of rate cases, the ask, the capital spending. How should we think about that? Just thinking about the impacts of the order.

Yeah, I think it's a great question. It's obviously something we're going to continue to analyze very closely as we continue to work on our plan update for the fall. But as we said in prepared remarks, the need is not going away. The state of infrastructure and the need for continued focus on improvements and resiliency is not declining in any way. So we know we have investments that need to be made in Pennsylvania. We will need to look though at how we, how and how much capital we allocate to the state of Pennsylvania relative to our other states given this low ROE result in Pennsylvania. You know, it is a real balance of shareholder expectations and the allocation of capital that we really need to think through. Again, we're not going to compromise service. We're not going to compromise safety in any way. But as we think about the pace at which we are making investments, we do have to take into account the return opportunity provided to investors. So I think it's just a question or guess we're going to have to continue to evaluate a bit. And we'll have more to say about that as we get into sort of our fall planning and updates that we'll provide later in the fall. In total, we don't expect our capital plans to change at all. We again know that the need exists across our entire territory and to the extent we shift dollars from one state to the other should not impact our total expectations.

Got it. That's very helpful. That's all I had. Thank you.

Thanks, Sir Gash. The next question comes from Richard Sunderland from JP Morgan. Please go ahead.

Hi, good morning. Thank you for the time today and congratulations as well for all the leadership updates.

Thanks, Rich.

Following up on the capital reallocation question earlier, understand the considerations you just laid out, particularly around ROE, but wanted to ask this specific to M&A in Pennsylvania. You said something you're also looking at potentially slowing the pace of acquisitions in the state.

Yeah, again, I think there's so many opportunities in all of our states really from a acquisition growth perspective and we know we've got a great pipeline in Pennsylvania, a lot of good opportunities there and our team continues to work very, very hard to identify those opportunities and move them all along. And we're not going to slow that pace at all. I think if there's a pace issue at all in Pennsylvania, it'll really be around just the environment related to fair market value and the commission's process they put in place to review acquisitions, which we think, by the way, is very positive. We think the approach the commission has taken there to really put some guidelines around looking at acquisitions and benefits being provided to customers we think will be helpful. But it's still a difficult environment to get those transactions across the finish line. So again, our view is we don't change anything about what we're doing. We'll see how the process works with all the parties involved in those types of proceedings and how the commission handles all of that through the approval process.

Got it. That's helpful commentary there. And then separately, you pointed out the 2-H weighting to earnings and very clear what the drivers of that are. I guess thinking about this dynamic over your forecast period, how do you see your EPS profile tracking over the period? Do you expect any lumpiness in results?

Yeah, I'll probably turn to John on that. John, you want to comment there?

Sure. Rich, not lumpiness. So we maintain our 7 to 9% long-term growth. We've been asked a question in the past off of what base year. We don't pick a base year. As you know, we came out of a transition in 2021 selling HOS, selling New York. That was 21 to 22, 22 to 23. We were inside of the 7 to 9%. We expect to be this year. And we frankly think our goal is that it shouldn't matter a lot what year somebody picks. We do, as everyone is aware, have the note coming due in 2026. But that's an event that we've been planning for and we will continue to plan for. So we expect to remain in the 7 to 9% range.

Got it. Thank you for the time today. I'll leave it there. Thanks,

Rich. The next question comes from Paul Zimbardo from Jeffries. Please go ahead.

Hi, good morning, team. Thanks for taking the call.

Hey, good morning, Paul. Good morning.

Great. Now, my first question is just if you could unpack a little bit some of the detailed guidance changes within the subcomponents, like in particular, you mentioned that decline, lower than expected decline in customer usage. Like how much of that was the guidance raised? And just if that carries forward, also, there's some moves in like MSG and other, if you could just help unpack some of the more material pieces in the change.

Yeah, John can add to it. I just say high level, Paul. That's really it. You know, we've continued to track customer usage trends pre and post COVID. And we've certainly expected some measure of customer behavior and it's probably not tracked quite as we'd expected. And that's really the driver, I think, of what we're seeing so far in results this year and the reason that we've increased our guidance by narrowing the range. John, anything to add there?

No, if you think about kind of a midpoint to midpoint change, Paul, you know, we're talking about a few cents here. So I think you've, I think Susan got it right. Yeah.

Okay,

great.

And then just to follow up on Jurgesh's, Richard's questions about Pennsylvania. Does the commentary about like potentially shift capex around also carry to interest in M&A in Pennsylvania? I know it's been kind of a long, arduous road and the changes legislative at the commission. Just any change in your views about kind of growing inorganically in Pennsylvania as well?

Yeah, as I said, Paul, just a minute ago, I think in response to Richard's question, it really doesn't change our behavior. We've got a very dynamic and robust process in Pennsylvania to identify opportunities. We've got a great team there that's very focused on identifying opportunities and we'll continue that. We think that the guidance that the commission is laid out to analyze these transactions going forward is very helpful. But as I said, it's an environment where multiple parties have opinions relative to these transactions. And so we'll have to see how that continues to play out before the commission. Again, we think the guidelines are helpful and our part doesn't change in terms of our interest in growing through acquisition in the state of Pennsylvania.

Great. Now, thank you very clear. And also congrats again to everyone on the leadership changes.

Great.

Thank

you.

The next question comes from Angie Storzinski from Seaport. Please go ahead.

Thank you. So just again, I know there was just one decision in Pennsylvania, but I'm wondering, you know, this is the largest base for your company. The ROE reduction is quite substantial versus again, you had a black box settlement, but again, versus the 10% we were all counting on. So as you look to the future, I mean, is there an offset to the lower profitability of the largest asset in your portfolio or is it just that, you know, you're still within the range? And so that's why you're reiterating your growth rate from a learning perspective.

Yeah, Angie, I think it's again sort of a good question. First, I would just remind folks, and I don't know back in the back of our deck, we've got detail around rate base on the various jurisdictions. Of course, it changes quickly because we're so active in the regulatory environment. But I think you'll see the gap closing from Pennsylvania to some of our other larger states pretty quickly in terms of rate base. We've been making significant investments all across our territory. So while Pennsylvania is large, we have many other states that are gaining ground in terms of size of investment. I think the other answer to your question, though, you know, we addressed in prepared remarks, but across our 14 states, we have a lot of opportunity to continue to invest. This need is the same across the country. The need for investment in infrastructure and replacement and resiliency, which I think doesn't get enough of a play. The resiliency issue is a huge one as we see climate changing in different ways in different parts of the country. So we need to continue to focus on our resiliency investment. We have a ton of opportunity across all of our states to deploy capital. So as I said, I think in response to the first question, we don't envision any change in our total capital spending. Where we spend it, we will continue to look at.

Okay, that's all I have. Thank you. Thanks, Angie. The next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.

Hey, good morning, team, and congrats on the management leadership announcements today. Good morning, Jonathan. I wanted to build on a couple of the questions that have already been asked, but where exactly does that legal challenge related to Butler stand? And how soon do you think that's going to get resolved by the Commonwealth Court?

Well, I think that's really it. It's in the court, and we're waiting. I don't know that we have a whole lot more to add in terms of timing, mostly because we don't have any idea. I think the court will act when it's prepared to do so, and we are really just at this point waiting on the court's decision.

Okay, but there's no precedent in terms of how long from the point that the challenge was filed or just waiting on the court order, all the processes played out at this point?

Yeah, not really. We've looked at that, but we don't really see any definitive pattern here that would give us the ability to kind of predict timing.

Okay, I understand that. On the Talimentsum deal, I know that's the other kind of large, pending one in PA for you. With the fair market value revisions, does that one need to potentially be recut, or what's the latest thoughts on when that will be filed and potentially approved and closed?

Yeah, it's in limbo two. John or Cheryl, you want to comment on current status there?

Yeah, Jonathan, we're still moving forward with the approval process on Talimentsum in terms of going to the PUC, so there's no additional update on that.

Has the filing been made with the PUC or not yet? Not yet. Okay. All right, and then I did want to dive a little deeper into Paul's question earlier about the components. I saw there's a 15-cent increase in the lower end of the revenue. Is that all due to the -than-expected declines in customer usage, or was there even more downside cushion baked into the previous 105 to 125 range around uncertainty related to the PA outcome or something like that?

John, you want to cover that?

Sure. Jonathan, I think you said it right. We're seeing on the demand side a little bit lower or not as much customer usage decline as we expected to see, and that's a significant driver for the change here.

Okay, and that's lower weather normalized customer usage, right?

Correct.

Okay. Correct. What about the long-term financing headwind? I saw the midpoint there came down to like seven and a half cents. Does that at all relate to the pushback and the expected closing dates of like Butler and Talimentsum?

No, the financing, Jonathan, really just relates to the timing of the financings that we've done to date in terms of the convert that we issued last June and then the straight debt that we issued this year. Okay. Yeah,

I think that's the bulk of it. I think there is a little bit of an impact from just a delayed closing on the VAS acquisition too since we have not financed that essentially. So there's a little bit of contribution there too.

Okay.

Yeah, no,

I thought the last time you updated it you had already done that February $1.4 billion offering, so I thought that was already wrapped in there.

Well, we've been sort of waiting on the closing of that for a while. So we probably didn't have fully baked in our expectations around that earlier in the year.

Okay, thank you for that. And then on the MSG and other, I guess kind of what caused it to turn into a potential headwind in 24 versus like kind of a five-cent benefit, is that something that is kind of ongoing or is it timing related?

No, that's not an ongoing MSG issue. That's just a collection of smaller modest puts and takes that are one-offs.

Okay. All right, great. Thank you so much for the time today. I appreciate it. Thanks,

Jonathan.

As a reminder, if you have a question, please press star one. The next question comes from Aditya Gandhi from Wolf Research. Please go ahead.

Good morning, Susan, Cheryl, and John. Can you hear me?

We can. Good morning, Aditya.

Good morning. Congratulations on the leadership updates. I just wanted to follow up on one of the Pennsylvania questions that was asked earlier as it relates to the lower ROE and your 7 to 9 percent EPS giga. I understand you just reaffirmed it today. I would say

in a word, no. We raised our guidance by narrowing the range to the upper half, and we obviously were taking into account this decision on Pennsylvania. So no impact, and we reaffirmed our long-term targets.

Got it. And have there been any material updates on the PFAS multidistrict litigation where you're still waiting for proceeds from some of the defendants there?

Cheryl, you want to cover that?

Yeah, sure. Yeah, so we have submitted all of our data that was requested to determine what that payout would be, and now we're just waiting to hear that they've closed that period. It was supposed to close last week, and it could get extended, but we think that the date will hold firm. But now we just have to wait for them to do all the calculations to determine what the payout will be. We don't know for sure when that's going to

happen. That's all I had. Thank you.

Seeing that there are no further questions, this concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.