Good morning and welcome to American Water's second 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 August 10, 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 replay is 10158766. The audio webcast archive will be available for one year on American Water's investor relations website at ir.amwater.com/events.

Thank you Brad and good morning everyone and thank you for joining us for today's call. At the end of our prepared remarks, we will as usual open the call for any of your questions. During the 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, as 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 June 30, 2021 Form 10-Q, each as filed with the SEC. Reconciliations for non-GAAP financial information related to O&M efficiency ratio can be found in our earnings release and in the appendix of the slide decks for this call. The slide deck has also 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 and for purposes of the anchor year on long term EPS growth guidance, the anchor is weather-adjusted 2020 EPS of $3.84. And with that, I will turn the call over to American Water's President and CEO, Walter Lynch.

Thanks Ed and good morning everyone and thanks for joining us. Once again, the employees of American Water delivered solid results as we continue to execute on our low-risk profile and predictable growth story. Let's move to slide five to cover the highlights of our second quarter and six month results. Our second quarter 2021 earnings per share increased 17.5% compared to the second quarter of 2020. Included in the results is a $0.03 per share benefit from weather, primarily in the Northeast where we saw a moderate impact from warmer and drier than normal conditions. In the first six months of 2021, we invested $782 million with the majority dedicated to needed infrastructure improvements to better serve our customers. We continue to work hard to minimize the bill impacts of these investments by focusing on capital and operating efficiencies, constructive regulatory outcomes and by leveraging the size and scale of our business. As a reminder, we previously announced an O&M efficiency target of 30.4% by 2025. We also continue our disciplined approach to regulated acquisitions. We have added approximately 11,200 customer connections to-date through closed acquisitions and organic growth and look forward to welcoming an additional 86,900 customer connections through pending acquisitions. I will provide more detail on growth in a moment.

Thanks Walter. Let's start on slide 11 with a review of results. Second quarter 2021 earnings were $1.14 per share compared to $0.97 per share in the second quarter of 2020. As Walter mentioned, included in earnings is an estimated $0.03 per share favorable impact from weather, primarily in the Northeast where we saw conditions warmer and drier than normal through the quarter. Results for the regulated business segment were $1.18 per share, an increase of $0.21 per share compared to 2020 earnings. Results for the market-based business were $0.11 per share, a decrease of $0.02 per share. And finally, parent company results decreased $0.02 per share in the second quarter of 2021 as compared to the same period last year. Our 2021 earnings through June 30 were $1.87 per share, an increase of $0.22 per share compared to the same period last year. Results for the six month period include the estimated $0.03 per share favorable impact from weather in the second quarter of 2021. Regulated business results increased $0.27 per share compared to 2020 earnings and our market-based business results decreased $0.05 per share and parent company results were unchanged year-over-year. Moving on to slide 12, let me provide just a few more detailed by business. As I noted earlier, regulated results increased $0.21 per share and we saw $0.30 per share increase in revenues from new rates in effect from acquisitions and from the lower demand in the second quarter of 2020 from the COVID-19 pandemic. As a reminder, we saw the 2020 full year impact on demand due to the pandemic to be nearly zero and we see no real lingering impact on demand in 2021. Also, as I mentioned previously, results reflect an estimated $0.03 per share increase from warmer and drier than normal weather, primarily in the Northeast. Partially offsetting these results, O&M expense increased by $0.09 per share and depreciation expense increased $0.03 per share in support of growth in the regulated business. The market-based business results decreased $0.02 per share in the second quarter of 2021 as compared to the second quarter of 2020. The lower results reflect increased claims in 2021 in the homeowner services group. The parent results decreased $0.02 per share in the second quarter of 2021 compared to the second quarter of 2020, largely driven by higher interest expense to support regulated growth. While on the topic of result, I would like to also reiterate what we told you last quarter with regard to the company's lower effective income tax rate. This results from an increase in the amortization of excess accumulated deferred income taxes as agreed to through the regulatory process and is largely offset with lower revenue, resulting in no material impact to earnings. And we will continue to see this impact as that amortization continues.

Yes. Thanks Susan. Before we move on your questions, I want to take a few minutes to talk about our ESG highlights of the last six months. We have been hearing from stakeholders that they would like to receive more ESG data on an annual basis. We have publish two new documents on our website. First, we made our environmental policy more visible by posting it on our ESG page. We also posted an ESG data summary, which we will update annually. We also continue to implement best practices and respond to surveys and reports. For example, just last week we submitted our annual CDP climate change response which highlights American Water's efforts to address greenhouse gas emissions and risks associated with climate variability. As we have discussed previously since 2007 through year-end 2020, we have reduced our greenhouse gas emissions by approximately 36%. This means we are close to our goal of a 40% reduction by 2025. I also want to mention our recent recognition as a top score in the Disability Equality Index for third year in a row. We firmly believe we are more successful when our workforce reflects the communities that we serve. We are proud to be recognized by DEI and to be an ally to those with different abilities. Finally, as a reminder, we will be publishing and posting our 2019 to 2020 sustainability report this fall. With that, we are happy to take your questions.

. Our first question today will come from Shar Pourreza of Guggenheim Partners. Please go ahead.

Hi. Good morning guys.

Good morning Shar.

Hi Shar.

So just a couple questions here. So first, starting with the sale of the New York utility. Are we too early in the process versus kind of your expectations and guidance? And what is the potential creation of these kind of water authorities mean for the process, assuming the Governor signs them?

Well, we continue to work with Liberty cooperatively to get to the endpoint of selling the systems and we do believe that this sale will happen. We are working with the commission staff, with the commission, with the Governor's office to advance this sale. There's just a lot there as far as the North Shore Water Authority, the South Shore Water Authority, there was legislation passed waiting Governor's approval. That's just all part, I think, of how they are looking at this on Long Island to get this deal done. So again, we continue to work in a cooperative way with everybody to get to the endpoint. We are confident that this will happen.

Got it. And then the infrastructure bill and DC authorizes almost, I think, $15 billion for EPA water funding and millions annually for, like, program like lead reduction and sewer overflows. Do you sort of see this as they crowding out of sort of the private capital like yours, i.e., slowing potential muni acquisition growth? Or is it kind of a drop in the bucket, from a national perspective?

Yes. Thanks for that Shar. And we welcome the attention to the water and wastewater industry. Significant investment is needed over the next 20 years. And we have talked many times about $1 trillion needed. So while this is good money to be put to good causes, there is still a lot to go. And again, we are just happy to be in discussion with the administration as far as in the infrastructure plan. We do think the money set aside for the lead service line replacement and also the PFAS treatment is good and it will help many communities out there. But again, it's a drop in the bucket compared to the overall spending that's necessary. And we don't see it impacting in any way our investment or our growth in the water and wastewater sector through acquisitions.

Got it. And then just lastly, it sounds like Monterey County is getting closer to filing for eminent domain for the local system assets from Cal Am. There is a third-party study that's, I think, forthcoming based on the June 28 quote. Can we just get an overview of sort of what this process could look like from the timing and valuation perspective?

Well, as we know, this is a multiyear process. And right now, they are working through getting approval from the Local Agency Formation Commission and once they get that approval, they have got to go through a series of different trials, the right to take trial and then evaluation trial. And so again, it will take years to work through that. But the first step is getting through what's called LAFCO, getting their approval before they can move forward with the condemnation.

Got it. Fantastic. Thanks guys. That's all I had.

Thanks Shar.

Thanks Shar.

Our next question will come from Ryan Greenwald with Bank of America. Please go ahead.

Good morning everyone.

Hi Ryan.

Any additional color you can offer at this point around the grand jury subpoena, whether it be timeline for resolution or potential implications as the process plays out?

Yes. Ryan, there is really nothing more we can say. It's ongoing. Our disclosure is everything that we can say about it at this point.

Got it. And then you guys highlighted a couple new state legislative items and then obviously the infra bill at the federal level. Any key states that you are watching from here just in terms of other constructive legislation that could come up, but might be in early days still?

Well, in Pennsylvania, there is a Senate Bill that's right in line with the Water Accountability Act, Water Quality Accountability Act. So we are tracking that. That's working its way through in the Senate and then it will be introduced into the House over there. So we are expecting that to progress this year in 2021. So keep an eye out for that. That will be the fourth state. As you know, we are working with Missouri and Indiana to get theirs and also started here in New Jersey. So we are thrilled that Pennsylvania is moving forward with that.

Great. And then maybe just lastly, in terms of the New York American Water sale, piggybacking off the earlier question, is the expectation that the whole New York American Water operations would ultimately get sold to Liberty? Or do you expect to carveout with the new authorities?

Yes. We are working through that. We do expect the sale to go to Liberty in its entirety and then they would work through whatever comes after that.

Great. I appreciate the time.

Thank you.

Our next question will come from Durgesh Chopra with Evercore ISI. Please go ahead.

Hi. Good morning team. Thanks for taking my question.

Hi Durgesh.

Hi Walter. Just a quick clarification on the New York American. Just, Susan, I think you mentioned in last call that the sale doesn't impact whether New York ends up being sold or not, it doesn't impact, A, the amount of equity and timing of the equity? Is that still the case?

Yes. That's still the case, Durgesh.

Okay. Perfect. And then maybe just got two quick things on 2021. Susan, just market-based earnings continue to be down. This is the second consecutive quarter. And you mentioned in claims expense. Can you maybe just elaborate on that a little bit? Is this still sort of the Texas event from Q1 dragging on to Q2? Or are there claims in certain parts of other service territory that are more adverse than others?

Yes. Let me make just a couple comments and Walter can certainly weigh in. I think the weather event that we saw in the first quarter in Texas and Illinois, that was really isolated to the first quarter. But we have seen the continuation of sort of higher claims experience, I think really largely driven by more at-home activities. We have got more folks at home and there is more pressure on systems. And so we are seeing more failures and more work being done by the HOS team and so that claims experience has been a bit higher than we would have expected. And I think you can also expect higher claims just simply from growth in the business. We have seen more of that occur. And there is also a little bit of higher marketing expense. We didn't call that out specifically, but a bit more marketing expense, as we continue to introduce new products throughout the HOS territory. So it really is a factor, I think, of sort of the pandemic itself and just a bit higher experience than we would have anticipated.

Got it. That's super helpful. And then just one last for me. Can you just share the July weather experience across your service territories?

Well, again, we benefit from having diversity across, geographic diversity across our systems. So we have seen some wetter than normal conditions in some areas, but offset by drier in others. But overall, I would say again, some additional precipitation in some areas, in others not so., but all we can set this point, Durgesh.

So it sounds more like neutral. Okay. Thanks guys. Much appreciate the time.

Our next question will come from Insoo Kim with Goldman Sachs. Please go ahead.

Thank you. My first question is on the pace of M&A, tuck-in acquisitions. It seems like you still have a pretty healthy run rate going there. What's a good annualized customer additions rate that we should be embedding maybe in the five-year plan and that might be in your plan as well?

Well, at 1.5% to 2%, we are around 50,000 to 60,000 to 70,000 customers a year, is what you should think in that term. And again, we continue to build our pipeline, Insoo. And we have increase it from 1.23 million to 1.3 million. We continue to have discussions with communities across our footprint because we can provide solutions and that's what they are looking for. So we are really proud of our efforts there and we just continue to build that pipeline. And we are really proud to have 37 different deals signed up, waiting the regulatory approval across eight different states. So the growth is not just happening in two or three or four states, it's happening across our footprint.

Understood. And then just a little bit more broadly, as we see, you just continue to increase focus on whether it's at the federal level or state level on the water infrastructure, water quality, whatnot. And you guys always provide a breakdown of the different investments you make on an annual basis, whether it's pipes, sourcing, IT, others. Where do you think the most upside opportunities exist as we go through time? And if there is, just to address on some of these increased focus on these items, is it more of technological advancements that we might not be baking in? Just curious on your broader thoughts

It's a real combination. I would say, looking at the categories that water quality and resiliency are going to continue to get a good size of our investment and maybe even increasing over time, just because with all the storms and the weather variability out there, we need to continue to make sure that our systems are resilient and we need to continue to address the emerging contaminants like PFAS and other. So it's going to require significant investment. Hopefully that answers your question.

Our next question will come from Jonathan Reeder with Wells Fargo. Please go ahead.

Hi. Good morning, Walter and Susan. A couple for you, start with Missouri. Walter, the revised infrastructure surcharge program, is that going to allow you to extend the time between rate cases or the fact that it kind of encompasses a wider range of eligible standard to kind of keep you on a three-year cadence?

We will continue to evaluate that, Jonathan. We are just really thrilled that we were able to expand the program outside of St. Louis County. And our team has worked hard to provide the input to the commission to see how important that is that we invest across our footprint in Missouri. So we are excited about that. And also increasing the cap so we can make more investment before we have to go into a rate case. So it may contribute in some way to the time in between rate cases.

Okay. And then shifting closer to you, Pennsylvania. What is the latest on the commissioner appointments to fill the open seat post Commissioner sweeps? I know Governor withdrew his one nominee back in May. Is there any updates along those lines?

No. None here. Well, Pennsylvania Commission has always been great to work with and reasonable in their treatment towards us and we expect that going forward.

Okay. Are you assuming or maybe what do you anticipate in terms of the timing of the close of the York wastewater deal? Is that assumed by the end of this year in order to get to that $300 million of M&A capital deployed?

Yes. We are assuming, at this point, the first half of 2022. We submitted our application on July 1. The Commission is looking at it. Once they deem it complete, then they will start processing. And again, we think first half of 2022.

Okay. So without it, I guess I just kind of struggle to get to that $300 million based on what's in the hopper. Is there something I am missing? Or do you just have enough pending deals that close, excluding the York one to get you to that $300 million? Or is that something that might fall a little short this year, but then next year is going to more than offset it with the York deal?

Yes. Let me say, we are confident in the $1.9 billion number and that's from obviously, the investment in our systems and the acquisitions that we are making.

Okay. And then maybe, Susan, going back to Durgesh's question along homeowner services. If the claims, I guess, were year-to-date, if they are more in line with historic levels, how would the market-based businesses year-to-date EPS compare to last year? Would it make up the entire $0.05 lower delta?

Yes, I think that's a fair way to look at it. Again, we have just seen a much higher claims experience than we have in the prior periods. And we really think, again, much of it is related to more at-home activities. The business continues to grow. We continue to execute on our partnership arrangements. We continue to look for new products and roll out new products in that business. So I think the business is just fundamentally doing what we have set out for it to do. This claims experience issue is one that I think, again, is directly related to just activity. And we will hopefully see that mitigate some as we head into the latter part of this year and into next as we hopefully, although it's difficult to sort of imagine that on a day-to-day basis these days, we would return to some sort of a normal environment where people are sort of out of the homes and back in work environments. But that really is the primary driver. I would say the rest of the business is operating as we would expect it to.

Got you. Yes. Amen to getting back to that normalcy. Okay. So it sounds like, I mean everything other than that's kind of going well, whether it's, I guess, you get to reprice the kind of the claims level for some reason, that doesn't, I guess, the overall trajectory of market-based business to that 7% to 10% is still very much, I guess, kind of where you would expect it to be absent this kind of temporary hiccup?

Yes. I think that's right. That's the way to look at it.

Okay. Great. Thanks so much for taking my questions today.

Thanks Jonathan.

Thanks Jonathan.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Walter Lynch for any closing remarks.

Thank you for joining our call today. We value your participation and the work you do on behalf of your clients. We hope that our open and transparent discussions give you confidence in our company and the investment of our stock. If you have any additional questions, please call the IR team. They 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.