American Water Works Company, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, and welcome to American Water's First Quarter 2024 Earnings Conference Call. As a reminder, this call is being recorded and is also being live webcast with an 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.
Thank you, Betsy. Good morning, everyone, and thank you for joining us for today's call. At the end of our prepared remarks, we will open the call for your questions. Let me first go over some safe harbor language. Today, we will be making forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based on our current expectations, estimates and assumptions. However, since these statements deal with future events, they are subject to numerous known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.
Thanks, Aaron. Good morning, everyone. As we announced yesterday, we started 2024 with solid financial results. As shown on Slide 5, earnings were $0.95 per share for the quarter compared to $0.91 last year. The increased results were as we expected and put us on track to achieve our full year earnings guidance, which we are pleased to affirm. First quarter 2024 results included $0.02 per share of additional interest income from the February 2024 amendment of the seller note related to the sale of HOS, which reflected the higher interest rate and the successful earn-out of the $75 million contingent consideration as we detailed in our February call. Here, you can also see a recap of some of our other key accomplishments so far in 2024, and John and Cheryl will add to these in their remarks.
Thanks, Susan, and good morning, everyone. Let me start by turning to Slide 9 and reviewing the U.S. EPA's drinking water rule on PFAS published in April. As Susan stated, we fully support the EPA's efforts to protect drinking water quality. These contaminants are among the multiple challenges that the water industry faces regarding water quality, quantity and reliability. We remain steadfast in our commitment to be a leader in the U.S. water and wastewater industry and a provider of solutions to these challenges. EPA's final rule was unchanged in terms of the drinking water limit of 4 parts per trillion for PFOA and PFOS. However, the federal timeline to comply was extended from 3 years to 5 years in the final rule. The federal compliance window now includes the 2-year extension that states would have been allowed to grant the water systems for capital improvements.
Thank you, Cheryl, and good morning, everyone. Turning to Slide 15, I'll provide some further insights into our financial results for the quarter. Earnings were $0.95 per share for the quarter, up $0.04 per share versus the same period in 2023. As Cheryl mentioned, we have completed rate cases recently in Indiana and West Virginia in addition to rate outcomes achieved last year and we are seeing increased revenues as a result. And looking at O&M, production costs from increased fuel, power and chemicals as well as increased employee-related costs caused O&M to increase $0.07 per share.
[Operator Instructions] The first question today comes from Richard Sunderland with JPMorgan.
Can you hear me?
Yes, we can.
Great. First, I want to start on the Pennsylvania front. With the rate case, curious about the path forward and if settlement is still an option or if litigating is just the path to close out? And then separately, on Pennsylvania, the fair market value revisions, do you see that 1.68 cap limiting willingness to sell at all?
Yes. Good questions, Rich. I think first on the rate case, I would say probably just where we are in the process. I'd say settlement is probably unlikely at this stage. And as Cheryl, I think, outlined, we would expect some activity by the Commission here in the next probably several weeks, and then we'll wrap that case up later in the summer. So I don't expect to settle at this point. And again, we're pleased with where we are in the process related to that case.
Got it. Appreciate the commentary there. And then separately, on Slide 9, the latest around these new circular designations, curious how you view litigation risk under these new classifications or anything we should be thinking about on the litigation front, given the commentary around the liability protections that you also referenced?
Yes. And Cheryl certainly can weigh in here too. I think our view is we'll continue to be proactive here in trying to get resolution to a CERCLA designation. But we're also just confident in our ability to execute our plan here to be compliant with the rules. We've been doing it for some time in many of our jurisdictions already. So we're quite confident in our plans and don't expect this to be a huge risk for us. Cheryl, anything you want to add?
Yes, I would just add that we're working really hard on the legislative front to get the language fixed so that we are protected from those CERCLA rules, and we'll continue down that path. We've had lots of conversations with EPA around this, and their intent is not for us to be impacted by that, but those conversations will continue until we get to a solution that we're all really comfortable with.
The next question comes from Angie Storozynski with Seaport.
I do want to go back to Pennsylvania rate case. I understand the sensitivity around it, but there are just a number of issues raised in it by I mean many intervenors, the commission itself about how often you file rate cases, the allowed ROE? I mean you guys mentioned a number of other rate cases that seem to be going smoothly, but I'm just wondering if there's -- if there are any thoughts about a change in the strategy of still how often you file rate cases, any impact of these comments that you're seeing on the level of capital investments, especially in Pennsylvania. Again, I don't think that we've ever seen filings like these in Pennsylvania.
Yes, Angie, it's a good question. And again, we remain very confident in our plans, both in terms of how we execute them and the regulatory process that supports the work that we're doing in the State of Pennsylvania. There's just tremendous need in the State of Pennsylvania as there is in many of the jurisdictions that we operate in. So our focus on investment is really around the need for infrastructure improvement and we'll continue to do that work. I think the Pennsylvania case is a great example of that. We spent over $1 billion or will have spent over $1 billion in that case, and it's all focused on rate base growth. It is all focused on infrastructure renewal and replacement and the necessary work to be done in the State of Pennsylvania to bring these systems up to appropriate standards so that we can consistently provide safe and reliable water service.
Okay. And then just one other point, which is being mentioned is the inclusion of a pending acquisition in that rate case. I thought that, that's happened in the past. So I'm a little bit surprised that this is a point that is being raised. And I'm wondering if this has anything to do with the changes that are happening to Act 12. You guys referenced that it could take longer for to get regulatory approvals for some of these pending acquisitions. And I'm assuming that, that is in response to those questions being raised in this rate case. But I'm just wondering, again, going forward, how do you expect actually these many deals to be approved or reflected in rates?
Yes. I think it's probably a fair assumption to say that all of this is getting a bit tied together. The landscape around the potential legislative changes in fair market value, I think, do sort of spill over into the rate case analysis a bit. And to be clear, we included in this case, acquisitions that we have approved and expected to close during this period of time. And so as the commission sorts through that, obviously, they've got to take into consideration the status of those acquisitions and their findings in the case, which we would fully expect them to do.
The next question comes from Gregg Orrill with UBS.
More of a general question just in might have covered this before, but on sort of the impact of with so many discussions are around these days, just data center presence and how that impacts your growth and any constraints that, that has on your business?
Yes, it's a good question. Cheryl, you want to talk about any preliminary thoughts we have about potential water usage in some of these large data center moves.
Yes, Gregg, we haven't seen a big uptake in the amount of water that our customers are asking for related to the data center moves at all. So we're thinking that's a minimal impact for us unlike our electric utility peers.
[Operator Instructions] The next question comes from Aditya Gandhi with Wolfe Research.
Can you hear me?
We can.
Just on the PFAS legislation that you're advocating for, could you give us some color on whether it's attached to other related bills? And if there's any sort of milestones we should be watching for there? And then could you also just explain what steps you're taking to sort of secure support on both sides of the aisle as it relates to legislation.
Sure. Yes. Cheryl, do you want to take that?
Yes, sure. So there has been legislation filed both on the Senate and the House side that it's the Water Systems PFAS Liability Act. On the house side, it's 7944 and I'm trying to see -- I don't have the Senate number, but this act would help protect us along with some other industries as a passive receiver and so we work really hard on both sides of the aisle all the time to connect with our legislators and also educate them on the real issues at hand. We've had some really great conversations on the Hill and are hopeful that this still will continue to move forward both in the House and the Senate, so that we can push this forward. And I think you would just watch for the key things like getting out of committee, getting a floor vote. And so we'll continue to push that forward and update you in these calls as things unfold there.
And Cheryl, it is stand-alone, right? There's nothing else defined.
Yes. It's not tied to anything else except to try to protect passive users or passive receivers from this liability.
Right. That's helpful. And maybe just 1 follow-up there. Is there a particular timeline by which you're expecting this legislation to either pass or by when -- by when should we know whether this thing is going to pass or not?
Yes. I think it's impossible to anticipate the timeline. We would love to say it will be all completed by the next couple of months, but it could take much longer. The political process is really challenging at times. So we think we've got good support, and we'll continue to push on it as fast as we can, but there's just no timeline for it.
We do think it probably helps a bit that we now have the final rules out. We've been working on this particular angle for quite some time even before the final rule was published. So now that the final rule is here, that sort of eliminates one reason why legislators didn't want to take this issue up. If they were waiting to see what the final rule was, and that was sort of an excuse to not address this issue, I think that's been removed from their list of reasons not to move. So hopefully, that helps, and we'll see continued movement here.
Yes. And in addition, the EPA said that they want to be able to use discretion. So part of this is some discretionary flexibility for them because they did not intend by designating these compounds as hazardous substances that it would apply to water and wastewater utilities. So they're planning to use discretion, but we think it's a much tighter protection to have this legislation. So we'll continue to pursue that in addition to working with EPA.
This concludes our question-and-answer session. That concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.