American Water Works Company, Inc. (AWK) Earnings Call Transcript & Summary

Good morning, and welcome to American Water's Second Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast on with accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we'll be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the second quarter earnings release and Form 10-Q, each filed yesterday with the SEC. This call will include a discussion of non-GAAP financial information. A reconciliation of our historical adjusted earnings per share to GAAP earnings per share and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I'll turn the call over to American Water's President and CEO, John Griffith.

Thanks, Aaron, and good morning, everyone. Let's turn to Slide 5, and I'll start by covering some highlights of the second quarter and first half of the year. As we announced yesterday, we delivered solid financial results in the second quarter and through the first half of 2026. Adjusted earnings were $1.61 per share for the second quarter, compared to $1.49 per share for the same period last year. In the first 6 months of 2026, adjusted earnings were $2.62 per share, compared to $2.51 per share in the same period of 2025. With this strength across the business, combined with our expectations for the rest of the year, we continue to be on track to achieve our full year earnings guidance, which we've again affirmed along with our long-term targets. David will share more about our results and guidance a bit later. I also want to acknowledge the great work of our state and corporate regulatory teams as they continue to successfully execute our regulatory strategy with rate cases and merger proceedings, which I'll talk more about shortly. We have completed 3 rate cases already in 2026 in West Virginia, Maryland and Pennsylvania, all of which authorized recovery of nearly 100% of the capital investments we have made in each state. As we've discussed with investors many times over the years, we strategically choose to operate in a diverse set of regulatory environments that we believe have been and will remain supportive of water and wastewater utility investments and consolidation. American Water continues to receive healthy support at the state level for the work that we do. We, along with utility commissions all share a strong desire to promote customer affordability, resilient and reliable services and financially strong utilities. We look forward to continuing to provide common sense solutions for the benefit of customers and communities across our 14-state footprint. Moving on to some of our other key accomplishments so far in 2026, we have invested $1.8 billion in capital projects and acquisitions year-to-date. This reflects our focus on making investments to better serve our customers and to grow the business. As we've said, growing to scale in our states greatly benefits our operating efficiency and long-term customer affordability. Speaking of customer growth, we were very pleased to close on the acquisition of Systems from Nexus Water Group ahead of schedule on June 1. Our teams did a great job of achieving all 8 requisite state approvals in a timely and constructive manner. We're also excited to continue our progress on the municipal acquisition front with approximately 57,000 customer connections under agreement as of June 30. Overall, we are well on our way to executing our capital plan for 2026 and achieving our target of 2% customer growth. These efforts align squarely with our mission to provide safe, clean, reliable and affordable service to our customers. Turning to Slide 6. I'm pleased to share that we've continued to achieve new milestones in the second quarter related to our proposed merger with Essential Utilities. You may recall, as part of the update we provided with Q1 earnings, we achieved our first state approval, Kentucky, in April. In May and June, we added Ohio and Virginia to the list of approvals received. It's also worth noting that so far, we're hearing good support for the merger during public input hearings, including in Pennsylvania in April and May. In other states, the merger cases are proceeding as planned, including very good progress in Texas, where we've reached a settlement in principle. We remain very pleased with our integration planning to date and the constructive relationships that continue to develop between the American Water and Essential Utilities teams. Consistent with our messaging from the merger announcement last October, we expect the merger to close by the end of the first quarter of 2027. With that, I'll hand it over to David to cover our financial and regulatory update in further detail. David?

Thanks, John, and good morning, everyone. Starting on Slide 8, I'll provide further insights into our financial results for the quarter. Consolidated earnings were $1.61 per share compared to $1.49 per share in Q2 of 2025, representing just over an 8% growth rate. Revenues were higher due to authorized rate increases to recover investments across our states while depreciation, financing costs and general taxes increased as expected. Importantly, O&M costs were flat period-over-period, highlighting our continued focus on cost control while supporting operational and customer needs. Slide 9 shows our financial results for the year so far. Consolidated earnings were $2.62 per share, compared to $2.51 per share in 2025, which is well on track with our plans for the year. The various drivers here are similar to the quarterly drivers and our outlook for these categories for the year remains unchanged, as you can see from the full year waterfall in the appendix. As a reminder, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect later in Q3. Slide 10 provides a look at our balance sheet and liquidity profile. Our total debt-to-capital ratio as of June 30 was 58%. On May 20, we successfully completed a long-term debt issuance of $500 million at 4.625% that attracted strong demand. In June, we settled 3.4 million shares of our approximately 8 million share equity forwards for a net proceed of $476 million. Our financing plan for 2026 assumes we'll settle the remaining equity forwards in Q4. Slide 11 covers the latest regulatory activity in our states. In Pennsylvania, we received the final order in the case that approved a $75 million annualized increase in water and wastewater revenues, compared to the filing that had requested a $160 million increase. The order also approved a return on equity of 9.55% and an equity component of 54.2%. As John mentioned, we believe this was a constructive outcome, and we will implement new rates on August 13. On active cases, you can see we have general rate cases and progress in 6 jurisdictions. To highlight a few of those. In June, we entered into a black box settlement with staff and several intervenors in Virginia as well as a partial settlement with the public advocates office in California. In New Jersey, we as outlined in the procedural schedule, the company is in confidential settlement discussions with the parties to the proceedings, and we hope to be able to announce a resolution soon. In Illinois, our case is progressing as expected, and the next milestones in the case will be evidentiary hearings in August, followed by briefings from all parties in September and then a proposed order due in October. On May 15, we filed a general rate case in Kentucky reflecting $108 million in system investments covering January 2027 through December 2027. We are seeking $18 million of additional annual revenue, and we expect proposed rates to go into effect on an interim basis in December of 2026. Intervenor testimony is set for August, a [ rebuttal ] testimony in September. And lastly, on July 1, we filed a general rate case in Missouri, reflecting $1.6 billion in system investments, covering the period from June 2025 through May 2028. We are seeking $179 million of additional annual revenue, and we expect proposed rates to go into effect in June 2027. Importantly, with this case, this is the first using the fully forecasted future test year legislation of its past last year. Turning to Slide 12. As John mentioned yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of, again, delivering 8% EPS growth in 2026, while continuing to provide high-quality affordable service to our customers. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond. With that, I'll turn it over to Cheryl to talk more about our capital program and our recent acquisition activity.

Thanks, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many needed capital projects across our footprint in the first half of 2026. We've deployed $1.8 billion this year to renew our infrastructure, improve resiliency and address water quality challenges as well as add new systems, including those acquired from Nexus. These investments are crucial for us to deliver on our core mission of consistently providing clean and reliable water and wastewater services and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers. We are hyper focused on staying balanced between affordability and making necessary investments in our systems. We remain confident that American Water's average monthly residential water bills will stay at or below 1% of median household income for many years to come. Concluding on Slide 15, we continue to be well positioned for growth through acquisitions across many states as our track record of signing and closing deals continues in 2026. We were excited to begin serving the customers of the acquired Nexus Water Systems in the beginning of June, which was a few months ahead of our initial estimated time line. We look forward to leveraging our scale and size to deliver safe, clean, reliable and affordable water and wastewater services to the 47,000 new customer connections and to welcoming the 70 local employees who already call these communities homes. Zooming out, as of June 30, we had approximately 57,000 customer connections under agreement across 6 states totaling $236 million. There are many systems across our fragmented industry that have underinvested in the necessary capital to operate their systems, and we believe we can be a solutions provider for these communities. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

[Operator Instructions] And the first question will be from Paul Zimbardo from Jefferies.

I promise no Pennsylvania questions for a change. Starting in Missouri, just with that forecast year, is there any way to quantify what the benefits of that kind of change would be? Or said differently, what the rate increase would have been versus that [ $179 ], if it was more of a historical filing?

Paul, this is David. We have not quantified it. I mean in practical purposes, I think one way you can do it is if you go back and look at our prior cases and what that filed increase would be. I mean it's not a complete apples-to-apples but that could give you an idea. .

Okay. Got it. It looked like a decent pickup potentially. So I was just curious there. And the other was Indiana kind of two-part? I know there's kind of an affordability process is the same. It seems like it's not focused on water, but curious to your thoughts there. And also, I know there was some legislation pass, which seemed like it could give you a little bit incremental recovery on some chemical costs and others. So just curious overall Indiana affordability and the legislation, if you could.

Yes. Paul, I'd say we still feel good about Indiana from everything we're seeing in the state, it's focused on the electric affordability story there. Our rates are very affordable in Indiana and continue to be in our forecast to be there. So we feel good as far as the legislation yet. I mean, it's beneficial to us. I mean, it's not overall material from a American Water standpoint, but it's certainly a little wins like that help. .

And the next question will be from Shar Pourreza from Wells Fargo.

Actually, it's [indiscernible] on for Shar. Has the Pennsylvania PUC commentary on the frequency of your rate case has changed your regulatory strategy in the state? Or do you see the 25 basis points of ROE for less regulatory lag as an acceptable trade-off?