Good morning, and welcome to American Water's Fourth Quarter and Year-End 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 February 24, 2022. U.S. callers may access the audio archive toll-free by dialing (877) 344-7529. International callers may listen by dialing 1 (412) 317-0088 and the access code for the replay is 8387509. The audio webcast archive will be available for 1 year on American Water's Investor Relations website. And I would now like to introduce your host for today's call, Aaron Musgrave, Senior Director of Investor Relations. Mr. Musgrave, you may begin.

Thanks, Tom. 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. 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 December 31, 2021, Form 10-K, each filed yesterday with the SEC. The reconciliation for the calculation of the O&M efficiency ratio, a non-GAAP financial measure can be found in our earnings release and in the appendix of the accompanying slide deck, which has been posted to the Investor Relations page on our website. All statements during this presentation related to earnings and earnings per share refer to diluted earnings and earnings per share. In addition, for the purposes of the presentation, our long-term EPS CAGR range is anchored off of the normalized 2021 earnings per share results, our last reported actual results. And with that, I'll turn the call over to American Water's President, CEO and CFO, Susan Hardwick.

Thanks, Aaron, and good morning, everyone. Before we get started, I want to take just a moment to say thank you for all of the thoughtful comments sent our way over the past few months to express your best wishes for Walter in his recovery. I also want to thank those who have reached out over the last few weeks with your encouragement for me in the role as CEO. It's an honor and a privilege to serve this great company. And as I begin this journey, I want to reassure you that our strategy remains unchanged from what we shared with you in November of last year. This team is energized and is in execution mode to deliver on our commitment of 7% to 9% long-term earnings growth by continuing to invest in our infrastructure, grow our regulated operations through acquisition and support our military by growing our military services footprint. We are focused on operating where we create the most value. And now as we've transitioned to a 100% regulated and regulated-like business, we believe we are positioned to deliver even higher quality earnings. There is no other water and wastewater service provider in the United States with our scale and capability. And for our investors that rely on our dividend, we are committed to grow our dividend at the high end of the 7% to 10% range. We know that the best way to secure your confidence in us is to deliver. That's exactly what we did in 2021 and what we are committed to do going forward. And with that, let's get to it. Turning to Slides 5 and 6. I'll start by covering our financial results and then share some highlights of our operational excellence in 2021. For the 12 months ended December 31, 2021,…

Thanks, Susan. Before we dive into our growth triangle to review key operational and financial goals this year, let's turn to Slide 16 to cover our foundations for success in 2022. As Susan mentioned earlier, our strengths start with our unwavering commitment to safety, which is a leading indicator of our company's health, but we must get the other fundamentals of a high-performance culture right as well. Striving for operational excellence helps us work smarter, and it enables us to provide safe, clean and affordable water services for our customers. This means we go well beyond minimum requirements in order to be the industry leader in operational and environmental excellence. This can only be achieved over the long run with a commitment to building collaborative high-performing teams. We know that creating an equitable culture where people feel valued, included and empowered is critical to our ability to serve our customers every day. We share with our employees the ways that they contribute to the success of our company, which inspires them to make a positive difference for our customers and for the communities we serve. The recognition of New Jersey and Illinois American Water for being ranked #1 within the J.D. Power 2021 Water Utility Residential Customer Satisfaction Study is truly a testament to our employees' commitment to delivering exceptional customer service. I'll talk more about growth in a few minutes. But regarding ESG, we believe the spirit of ESG is just an affirmation of the values we've upheld for decades. From environmental leadership and sustainability to employee engagement and equity, to transparency and good governance, these principles are foundational to our corporate strategy. Turning to Slide 17. I want to start by expressing my gratitude to our regulated business leaders and their teams for achieving our goal of $1.9…

Thanks, Cheryl. Turning to our final slide, Slide 27. And before we begin Q&A, I want to reiterate what I said at the beginning of the call today. I am confident in the plan that we have in place to grow this business, and I'm confident we have the right teams in place throughout our states at the bases we serve and here in our corporate office to achieve our goals in 2022 and beyond. Our team has consistently delivered on our earnings and dividend growth goals year-over-year. Nothing has changed regarding our team's ability and determination to continue that record of execution. We have, without question, consistently raised the bar in the water and wastewater industry for standards of operating excellence, ESG leadership and financial performance as evidenced in part by our exceptional 5-year total shareholder return of 185%. That's why we're reaffirming the long-term targets we initiated last November. And with that, I'll turn it back over to our operator to begin Q&A and take any questions you may have for us.

And the first question comes from Insoo Kim with Goldman Sachs.

And first of all, I do definitely wish Walter the best of luck and Susan definitely good luck in this new role and I think an important 1 at that.

Thank you, Insoo. We certainly appreciate that.

First question I think just the -- on the financial side, I just wanted to verify that on your 5-year plan, I think at the Analyst Day, you had talked about, I think, $1.1 billion of equity needs. Just want to confirm that, that is still the right number that we should be thinking of? And if that's the case, and related to that, any thoughts around types of equity issuances, whether it's trade or potential for equity in unit converts?

Yes. And Insoo, we didn't specifically call that out today in the call, but you're absolutely right. The $1.1 billion of equity that we laid out in November is still our current plan. And it is still -- we're still anticipating it in. What I've always sort of characterized as sort of the middle of this 5 years. So you can expect it in the '23, '24 time frame, I think. We are still looking at options. We certainly think there are lots of tools in place to be able to execute effectively here. The size of the issue at just over $1 billion starts to get interesting in terms of size. I think we could easily do that in a single issue, but we want to make sure that we thought through how best to sort of time the issue with the spend. So we may look at sort of staging that over a period of time. Again, roughly sort of in that middle of the 5 years, as I said. So no change in the total, no change in the timing, still need to figure out exactly the final strategy on how we'll issue it. But I think that the sort of basics are unchanged.

Got it. That makes sense. And then just on the CFO process of finding the permanent CFO, are you looking both internally or is it mostly external? And any type of profile that you're looking for, whether it's someone with the experience in the utilities industry or whatnot. just any thoughts you have there so far?

Yes, it's a good question. We have engaged Korn Ferry to help us with the search. We do expect the search to move very quickly. And this is a highly regulated business, as we've talked about. So certainly, individuals that have utility experience, have been in or around the industry will certainly be high on our list of potential candidates.

The next question comes from Durgesh Chopra with Evercore ISI.

Susan, congrats on your appointment, and also my best wishes for Walter.

Thank you. Appreciate it.

Okay. So just 1 thing I wanted to clarify. I think Aaron touched on this, but just on the 7% to 9% EPS growth rate starting point, did you guys effectively move that from '20 to 2021 now?

It is anchored off of our normalized '21. And our practice here typically has been to anchor it off of the most recent actual results. So as we are affirming guidance here and talking about long-term plans, we are anchoring off of '21.

Okay. Excellent. And then I think, Susan, you also touched this in your remarks, but -- and I hear you on the strategy being the same. Anything big picture that you would do differently? And I know you've been part and parcel of the strategy, but just any thoughts there.

No. We think the strategy is quite strong. We obviously made some changes when we came out in November with the plan we laid out in November, and we are absolutely committed to that plan. We think it is the right plan. And as I said at the outset, and I think Cheryl demonstrated in her remarks, we're very confident in our ability to execute on this plan.

Excellent. Okay. And then just 1 last follow-up, if I may, and I'll jump back in the queue. Any things, how are you feeling about this New Jersey rate case that you just filed anything for investors to watch on? What are the drivers? anything specifically that we should be focused on as this case progresses?

Yes. I'll let Cheryl comment in a second. But certainly, it's a large case for us. We've got a lot of investments since the last case, believe it or not, in that case, I think it was just 2 years ago. So it's a very important case, large jurisdiction for us. We think we can be and have been very effective in the New Jersey jurisdiction. So we would expect sort of typical issues in this case, but we're very optimistic about the case we have filed and our ability to work through it effectively. Cheryl, anything you want to add to that?

No, Susan, I think really, as you said, the main drivers are the amount of capital that we've invested in the system. And it's a pretty standard case for us, strong team filing the case, and I will just go through the process as we have in the past, and it is important for us, but we feel like we've filed a really strong case with great investments.

The next question comes from Angie Storozynski with Seaport.

Susan, congratulations.

Thank you, Angie.

I just wanted to follow up on the equity. So I understand that you have plenty of liquidity right now and that you're trying to match that incremental funding with the spend. But I mean, you could consider an equity forward. There is maybe a way to also monetize some of the smaller, less core assets to avoid the equity. Could you comment on either of those just to get this equity overhang out of the way?

Yes. It's a good question, Angie. And I didn't specifically mention this in response to Insoo's question, but certainly, equity forward is on the list of options for us. We have executed some strategic transactions. We covered that in our remarks here today with the exit of HOS in New York and Michigan. Those are all aimed at creating – essentially creating equity, creating proceeds for us to be able to invest that lowers the amount of equity we have to do in the marketplace. And obviously, those things were considered in the plan that we laid out in November and are contemplated in the $1.1 billion. We'll continue to do those evaluations to see if there are other things we should be doing. At our current position, though, we think this is the right set of assets for us to be invested in, in the right jurisdictions. I think the plan, as we have laid out, again, supports the need for that equity in the middle of the plan. And as you've heard me say many times, while I know there's an anticipation for us to issue in the overhang that goes with that, I don't want to prematurely issue it and sort of carry that – the dilution associated with it unless we've got investments to match it. So we absolutely have it timed in the plan that we think is appropriate. We'll continue to look at options on how best to do it. And any adjustments we would make to that plan, we'll certainly make sure we communicate that. But I don't anticipate any dramatic changes at this point.

Okay. And then secondly, on any sort of inflationary pressures that you are seeing on the regulated side? And then how, if at all, that could actually help you with any municipal M&A because I'm assuming that those municipally-owned systems also face the same pressures and that might exacerbate their need for funding. So if you could comment on these.

Yes, I'll let Cheryl weigh in here on the impact potentially to municipals. Largely, though, on the inflation side, we are active in the regulatory process. So we'll be hopefully current in reflecting cost impacts to the business through the regulatory process. Obviously, it impacts our customers. So we do our best to maintain or hold those cost impacts down. We've been very successful on the supply chain side over the course of the year and certainly going into the future to be able to hold those cost increases down. And we think, again, we've done so pretty successfully. So any real impacts ultimately to us or the customer should be mitigated. On the municipal side and is it a driver for them to potentially push them over the edge to want to privatize, I think it's a good question. I think we'll see some reaction to that. We'll see some -- we'll certainly have conversations with some of these municipals on those additional pressures. I don't know that we've seen any real direct impacts yet or any sort of change in the dialogue yet. But I’ll ask Cheryl to comment on if -- what are her thoughts are around that topic.

Yes, Angie, I think it's just 1 more thing that piles onto those municipal systems that just kind of adds to the load that they're feeling right now. The regulatory environment is absolutely significant for putting pressure on those municipal systems to try to find a better solution than operating their own systems. And I think this inflation piece and also the availability of pipe and chemicals and things like that can absolutely just add more pressure. But Susan is right in that, we haven't seen a big push yet as a result directly of that, but anticipated adding to the load.

Okay. And if I may, Susan, I know you said that you're sticking with the strategy that you've announced, well, back in -- that you announced back in October or November. Now -- but taking a step back, given the recent pullback in valuations of other water utilities as well, unfortunately, do you actually think that there is -- you could create some value through any larger strategic transactions involving public water utilities?

Well, Angie, that's a difficult question to answer here. I'm just going to say what I said at the outset. We're very confident in this plan. We have a long track record of execution. We have continued to prepare for this plan and prepare for execution against this plan, and that's what we're intending to do. We are always looking and thinking about the strategy and how it evolves. We have plenty of work to do with this plan, and we're going to continue to execute against it.

The next question comes from Julien Dumoulin-Smith with Bank of America.

All my best to Walter here and congratulations, Susan. Appreciate the opportunity to connect. So perhaps to kick off here. Absolutely. I look forward to it. So if I can, I think most of them have been answered. On Chester, just to come back to this conversation, I know that you all have indicated your relative confidence. Where does that stand as far as your involvement in that process and your continued confidence there in?

Yes. It's a great question, Julien. Obviously, lots continuing to go on, on that particular system. And I'm going to ask Cheryl actually to comment on what our current thinking there is, which, by the way, has not changed much. But Cheryl?

Yes, it really hasn't changed, Julien. We believe we bid on the system on the RFP and came in with the highest bid. And it's really up to the receiver to decide what is the best thing for that community. And we believe that the very strong bid puts us in a good spot to be able to close that deal.

Fair enough. Excellent. And Susan, maybe if I can, strategically, I mean, I know the last 2 questions kind of put it out there. But -- any new fingerprint that you're looking at in terms of revised strategy thought process? I know you covered the top of the remarks here, and in Q&A on M&A, but really what I was thinking about is different states, geographies you're looking to enter to. I know that there's a variety of different legislative efforts that you highlighted in your prepared remarks earlier, but as you think about putting your fingerprints on the company here, any revised thinking on state entry, et cetera, or exit for that matter?

Yes, Julien, I wouldn't say revised. I mean, I think our plan has been and always will be to continue to survey the landscape. We like the states that we're in now, and you saw again us make some moves here to sort of refine our footprint to make sure we're in the jurisdictions that we think are most effective for us. And we certainly think that's where we are now. We will continue, as we always have, to continue to evaluate other jurisdictions, both in terms of regulatory climate and legislative climate and the ability to enter a state in a material way. We haven't changed our metrics around that, what we expect to be able to accumulate in a particular jurisdiction.We got to see ourselves to, in our view, at least 50,000 customers within a 5-year period, that hasn't changed. But we are constantly looking at those -- at all those options. We're constantly evaluating the landscape in each of the other states that we don't currently operate in, just to make sure that the current footprint is the 1 that is most effective for us. So it's an ongoing process, and it has not changed.

This concludes our question-and-answer session, which also concludes today's conference call. Thank you very much for attending. You may now disconnect.