Good morning and welcome to American Water's first quarter 2021 earnings conference call. As a reminder, this call is being recorded and is also being webcast with an accompanying slide presentation through the company's Investor Relations website. Following the earnings conference call, an audio archive of the call will be available through May 11, 2021. U.S. callers may access the audio archive toll free by dialing 1-877-344-7529. International callers may listen by dialing 1-412-317-0088. The access code for the replay is 10155150. The audio webcast archive will be available for one year on American Water's Investor Relations website at ir.amwater.com/events.

Thank you, Nick, and good morning everyone. And thank you for joining us for today's call. At the end of our prepared remarks, as usual, we will open the call up for your questions. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events. These statements are predictions based upon 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 other factors, as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our May 3, 2021 Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information related to O&M efficiency ratio and return on equity can be found in our earnings release and in the appendix of the slide deck for this call. Also, this slide deck has been posted to our Investor Relations page of our website. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share. For the purposes of the anchor year on long-term EPS growth guidance, the anchor is weather adjusted 2020 EPS of $3.84. With that, I will turn the call over to American Water's President and CEO, Walter Lynch.

Thanks, Ed. Good morning everyone and thanks for joining us. Before we move to quarter results, let me speak for a moment about our recent growth news. A key part of our strategy is to operate in states where we can best serve customers, drive efficiencies, and continue to grow our regulated business. Recall that earlier in the year, we announced the sale of our Michigan operation and as you know in late 2019, we announced the sale of our New York operation. This slide shows what our new regulated service territory will look like after the announced transactions are completed. Moving to slide six. We recently announced what will be the largest municipal acquisition in Pennsylvania American Water's history. On April 6, we signed an agreement to acquire the wastewater treatment and collection system for the City of York, Pennsylvania. This agreement will add an equivalent customer connection total of more than 45,000. As part of the agreement, Pennsylvania American Water will also continue to provide contracted wholesale wastewater treatment and disposal for seven surrounding communities of York. We look forward to developing strong relationships that meet the needs of all customers, including those outside the city.

Thanks, Walter. Let's start on slide 13 with a bit more detail on the results. As Walter highlighted, first quarter 2021 earnings were $0.73 per share compared to $0.68 per share in the first quarter 2020. Results for the regulated business segment were $0.74 per share, an increase of $0.06 per share, primarily driven by continued growth from infrastructure investment, acquisition, and organic growth. Results for the market-based business were $0.09 per share, a decrease of $0.03 per share as we saw an increase in claims in the homeowner services group, due largely to weather-related events. Parent company results improved $0.02 per share in the first quarter of 2021 as compared to the same period in 2020. Moving on to slide 14. Regulated results increased $0.06 per share. We saw a $0.19 per share increase in revenues from new rates in effect, as well as earnings from acquisitions. O&M expense increased by $0.08 per share, and somewhat offsetting was an increase in depreciation of $0.05 per share in support of growth in the business. As previously mentioned, the market-based business results decreased $0.03 per share in the first quarter of 2021 as compared to the first quarter of 2020. The lower results were due to increased claims expense which was driven by extreme cold weather, primarily in Texas and Illinois, and the continuation of stay-at-home activity that we saw throughout most of 2020 due to the pandemic. The parent results improved $0.02 per share in the first quarter of 2021 compared to the first quarter of last year. The improved results were largely driven by a number of small items that increased expenses in the first quarter of 2020, offset by higher interest expense to support growth in the regulated business.

Thanks, Susan. Before we move on to your questions, in April, we were very proud to issue our first annual Inclusion & Diversity Report. This report highlights the efforts we have undertaken and the strides we have made advancing our commitment to inclusion and diversity. ESG is a journey, and our I&D Report is another way that shows how we are constantly striving thanks to the contributions of every employee to build an inclusive and respectful workplace. To launch this report internally, we were honored to have Mr. Earvin 'Magic' Johnson join us virtually for a conversation on inclusion, diversity, and allyship. Additionally, we had an incredible community healing discussion with our employees to provide a chance for even more open and honest dialogue on inclusion. We believe that a company's strength is its people, and the diversity of our workforce makes us even stronger. With that, we are happy to take your questions.

First question comes from Durgesh Chopra of Evercore ISI. Please go ahead.

Hi. Good morning, Walter and Susan.

Good morning.

Good morning, Durgesh.

Thanks for taking my question. Just to clarify, the New York American sale process, I know there's a lot of moving pieces, but are we still targeting a this-year close? Is that the current plan?

Yes. That's right, Durgesh. We are still working through with, as I said in prepared remarks, still working through with staff and others. We are hoping to expect this year.

Understood. Thank you. Just on the subpoena, can I clarify that this is related specifically to homeowner services within American Water's Resources business? And the information that you might be sharing, is that just New York specific, or are there other states involved in the subpoena?

Yes. It's specific to our New York City Metropolitan operations in HOS. That's exactly right, Durgesh.

Got it. And obviously there is no set timeline here as to how this matter gets resolved?

No, not at this point. Again, we continue to work and cooperate with the investigation.

Okay. Understood. Just one big picture then. Walter, your thoughts on the Biden sort of American Job Plan? They talk about several hundred billion of investment on lead and water and wastewater assets. What are the implications for your existing business and then just your regulated acquisition growth strategy?

Yes. Durgesh, let me start with, we are really happy that the administration is focusing on water and wastewater as part of the infrastructure plan. We like the attention that the industry is getting. We think that the plan will benefit our customers, primarily by having access to low-interest financing that's part of the plan. So we access it right now on the water side. We want to get access on the wastewater side. That's a growing segment of our business and we want our customers to benefit like others from the low-interest loans. Overall, we are very excited about the program and we want to participate like the municipalities do on the wastewater side.

Perfect. And just does it increase your footprint on the regulated acquisition side? Or since there would be a lot of aid given to systems across the country, does it derail your regulated acquisition growth strategy? How would you sort of characterize that?

Well, as we have said and I have mentioned in my remarks, there is significant need out there in the water and wastewater side. For us, it's not going to change our plan. Our pipeline continues to grow. We are going to continue to provide meaningful solutions for communities, and we are committed to our plan. We don't see any change to our plan going forward.

Understood. Perfect. Thanks, guys. Much appreciate the time.

Thanks, Durgesh.

Thanks, Durgesh.

Thank you. The next question is from Julien Dumoulin-Smith from Bank of America. Please go ahead.

Hi. Good morning, team. Thanks for the time and opportunity. Maybe to kick things off after Durgesh's question here. Can I follow-up and ask you guys about your latest thinking on the administration just around the PFAS regulation? Hazardous determinations there and just obviously there are a lot of different pieces that could move here. Any, at least, preliminary thoughts on where things could go and more specifically how that could impact your business?

Yes. Julien, thanks for the question. We think there is going to be a lot more focus on PFAS in this administration. I know they formed a task force, I believe it was last week, to look at what are the next steps to establish an MCL. Right now, there is a health advisory limit of 70 parts per trillion, and we think there is going to be a lot more focus on it. So we will have to wait and see. But the EPA is really science-driven. They may want to make sure it's based on science. I think there is going to be a coming together of the science and the need to establish an MCL, and we look forward to participating and working with the administration to establish that.

Got it. And hazardous determination, that's just part of the broader context here, right?

That's right. That's all part of this work that's going to be going on.

Got it. All right. Excellent. And then I suppose a little bit more nuanced here. As you think about the impact here in the quarter on the market-based business here, you are probably still broadly within plan on the year and have some offsets. Just can you speak to that? Obviously, the payouts and the warranties, etc., obviously still elevated here? Just if you can speak to that a little bit on the offset, etc. and how you are tracking?

Yes. With the HOS business, we are seeing higher claims on the wastewater side. People are spending more time in their homes and that's causing families additional breaks that we are having to repair. On the partnership side, we have seen a little bit of a slowdown in those partnerships. Yet, we still have a really good pipeline of opportunities. Those are the two areas that I think have been somewhat impacted by the pandemic in our business going forward.

Julien, I might just add on that point. In addition to what Walter said, we did see a little bit higher claims in the quarter from these weather-related events. We did see some water claims, particularly in Texas, Illinois, and a few other parts of the country, really driven by the extreme weather that occurred. We would expect, of course, that to now sort of be over. Some of the wastewater claims that Walter's talking about, as long as we continue this bit more stay-at-home, we may see elevated claims there. But I think the exposure to the weather-related, we have isolated in this quarter.

Got it. So how do you think about that relative to the full year? Obviously, if the wastewater continues a little bit elevated, just offsets, etc.? Probably not too material, right?

It's really not too material now. We saw roughly a penny or so of that impact related to the stay-at-home activity in this quarter. As you can see across the country, states are starting to loosen up. So there will be some return. I certainly think we will see this start to mitigate. In any event, we don't see it as material for the year.

Excellent, guys. Thank you all very much. Have a nice day.

Thanks, Julien.

Thanks, Julien.

Thank you. Our next question comes from Insoo Kim of Goldman Sachs. Please go ahead.

Thank you. Just a couple for me. The first one, with the recently announced Pennsylvania, New Jersey transactions, how do you think about potential cadence and magnitude of the equity guidance that you gave at the Analyst Day? Just thinking through 2021 and 2022, if it's going to be split up? Or are we still assuming kind of, say, April's number is one year?

Well, first, let me talk about the growth. We are really excited for these two acquisitions in our two biggest states. It's all part of what we are doing in providing solutions for communities with the City of York on the wastewater side and then Egg Harbor City. In the first WIPA, that's really important, the first WIPA acquisition, and we are hopeful that many other communities are going to see the benefits of that and continue to sell their systems to New Jersey American Water and Pennsylvania American Water. It's really about providing meaningful solutions. Again, as we have talked about having consolidated tariffs and the ability to spread those costs across a big customer base, over 700,000 customer connections, helps those communities to mitigate and minimize customer bill impact. So that's a competitive advantage of ours. It's part of our strategy to make sure that these communities understand the value that we can bring to them through investment. I want to spotlight the follow-on investment and how significant that is to our growth and to providing solutions for communities. We are really excited about these two acquisitions and how they are going to play into future growth in Pennsylvania and New Jersey.

Insoo, maybe let me just comment on the equity needs, because that was a follow-on part of your question, I think. When we built our plan and laid out our financing plan over the five years, we anticipated an increase in our growth from acquisition and reflected that at Analyst Day. Whether or not we have identified these specific transactions, that's a different question. But we had anticipated a step-up in growth and built our plan accordingly. So long answer to your question, I don't see any change from these specific acquisitions that we have now highlighted or any change to our equity financing timing or any of our other financing plans over the course of the five years.

Got it. Just from a timing perspective, is there a possibility that we could see some of that equity in the 2021 timeframe? Or is it more beyond 2021?

No. It's beyond 2021. At Analyst Day, I think we indicated that there is about $700 million of equity in the five years and it's still roughly in the middle of that five-year timeframe. So no, I would not anticipate anything in 2021.

Got it. And then my second question, I guess maybe for Walter is, obviously these two acquisitions in states that have favorable systems in place for such growth. With the pending New York sale and then the recently announced Michigan divestiture as well, when you just look across your footprint in the different states, you don't have to name any, but are there opportunities to potentially monetize some of the other states to concentrate more on the jurisdictions that offer better systems for organic and inorganic growth?

Yes. We do a constant assessment of where we are operating, where we can provide the best value for customers and where we can grow our systems. We will continue to evaluate our footprint. We are really happy where we are right now, and we continue to grow. If you look at our pipeline, we are growing. We have eight states where we have 32 agreements. So it's not just in one, two, or three states. It's really across our footprint, and we will continue to provide solutions again for communities across our footprint.

Understood. Thank you both.

Thank you.

Thanks, Insoo.

Thank you. Next question comes from Steve Fleishman of Wolfe Securities. Please go ahead.

Hi. Good morning.

Hi, Steve.

Good morning.

Hi, Walter. So just a question on the disclosure of this subpoena in homeowner services. I guess it doesn't say, I think, in your release just if the company has done its own investigation and if they determined anything was done wrong? Do you have any color or information on that?

Yes, Steve. And given that it is an ongoing investigation, we really can't comment any more on it other than what we have in the disclosure.

Okay.

All right.

And then, Walter, on your year-end call, you had hinted at a larger acquisition or more growth coming in your tuck-in acquisitions and the like? Should I assume that was the York deal that ended up officially getting announced? Or is that still relevant for something else?

Let me approach from this. We continue to build our pipeline. We continue to, again, provide solutions for communities. If you look over the last year, we have almost doubled our pipeline. We have the biggest acquisition in Pennsylvania American Water's history. We are going to keep doing much of the same, Steve.

Okay. Great. And then just on the New York American sale. If I understood you correctly, it sounds like neither your forecast nor your equity timing should be impacted at all by whatever happens with the outcome of the sale?

Yes. That's correct, Steve.

Great. That was very clear. Thank you.

Okay. Steve, thank you.

Thank you.

Next question comes from Richard Sunderland, JPMorgan. Please go ahead.

Hi. Good morning. Just maybe following up on that last point real quickly. The sale timing, would it impact where you land within the range of your 2021 guidance? Or phrased differently, do you have some timing assumption associated with close presumably baked in? Can you disclose what that assumption is and what a quarter or two difference may do to where you land within the range?

Hi Rich. It's Susan. I am probably going to add much more detail to that. I would just echo what Walter said in his prepared remarks and in his answer a minute ago. We just don't see it having any impact on 2021.

Fair enough. Thank you. And then just separately curious at a high level in terms of your O&M efficiency ratio. What impacts you have seen on your efforts there over the past year under the pandemic and what that may mean for progress and efficiencies going forward as we reopen?

Yes. It's been a big focus for us, as you know, Rich. We are going to continue to focus on every area of our business where we can drive efficiencies. We have improved it from 34.5% to 34.1%, as I said in my remarks. We are confident that we can hit our goal in 2025 of 30.4%. We are going to continue to do the things that we have been doing, focusing on technology, leveraging our supply chain, and really leveraging our culture of looking for every dollar that we can save and continue to provide the service that our customers expect. That's the journey we are on. We are going to continue to execute on that, and we are confident in our goal in 2025.

Great. Thanks for taking my questions.

Thank you.

Thanks, Rich.

Thank you. The next question comes from Verity Mitchell of HSBC. Please go ahead.

Hi. Good morning everyone. I have just got another couple of high-level questions about geography, which is something I am always interested in. When I look at your coverage across so many states, does the Biden proposal change the view of your opportunities across states? I mean, you have already said that it’s not going to change your growth trajectory. But any nuance there? And also in terms of what we see in terms of major regulatory mechanisms in states now that you would like to see? Thank you.

Yes. Hello Verity. Walter here. The administration's proposed plan does not change our outlook at all on acquisitions. Again, we continue to build our pipeline of opportunities. We are providing meaningful solutions and really when you look at the size of our business, how long we have been in business since 1886, and the expertise that we have and the ability to share costs across our customer base, we bring tremendous value to communities and they realize that. That’s why they are talking to us about potentially selling their water and wastewater systems.

Yes. I just want to know whether the states in which you are active, the Biden proposals create new opportunities in particular states?

I’m not sure it will create new opportunities. The great thing is, it really talks about water and wastewater where before we were always left out. There’s a realization in this country that there is so much fragmentation and so many improvements that need to be made so that the private sector and American Water can play a really integral role in moving that forward. That’s what we are excited about.

And so what’s missing in this? What would you like to see that’s missing in terms of fair value or surcharges? What’s missing there?

Yes. We continue to work with states on fair market value legislation. As I said, Kentucky is now the 11th state within our footprint to have fair market value legislation. It’s really an affirmation of the value that we provide and I think the recognition of the legislatures and governors that they want us to play a role in consolidating the market and adding our expertise to many of these small systems that don’t quite have the expertise. We do have in the appendix an overview of fair market value by state and the specific parts of the fair market value. So refer to that and you can see, again, 11 out of our 16 states have fair market value legislation, and we are going to continue to work with states that don’t have it and continue to tell our story about the values we can provide.

Great. Thanks.

Okay. Thank you, Verity.

This concludes our question-and-answer session. Now I would like to turn the conference back over to Mr. Walter Lynch for closing remarks. Please go ahead.

Thank you for joining our call today. We appreciate and value your participation and the work you do on behalf of your clients. We hope our open and transparent discussions give you confidence in our company and the investment in our stock. As a reminder, our Virtual Annual Shareholders Meeting will be held next week on May 12 at 10:00 AM Eastern Daylight Time. We hope that you will join us. In the meantime, if you have any additional questions, please call the IR team and we will be happy to answer them. Thanks again and be safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.