Good morning, everyone. Welcome to today's Conference Call, to discuss the combination of American Water and Essential Utilities. Presenters on today's call include John Griffith, President and CEO of American Water , and Chris Franklin, Chairman and CEO of Essential Utilities. Also on today's call are David Bowler, Executive Vice President and CF O of American Water , Cheryl Norton, Executive Vice President and CO O of American Water , and Dan Schuller, Executive Vice President and CS O of Essential Utilities. At this time, all participants are in a listen-only mode. The call will be open for analyst questions following the presentation, and instructions will be given at that time.
As a reminder, this call is being recorded, and a press release and slide presentation regarding today's news are available on the Investor Relations section of each company's website. I would also like to remind everyone that all statements made during the call that relate to future results and events, including the proposed merger, are forward-looking statements that are based on current expectations. Actual results and events could differ materially from those discussed here. Please refer to the information on the disclaimer slide in the presentation, as well as the additional information contained in the regulatory filings for both companies. With that, I'll now turn the call over to Mr. Griffith. Please go ahead.
Good morning, everyone and thank you for joining us. This is an exciting day for American Water and Essential Utilities. Chris and I are going to spend time this morning discussing our merger, and the significant benefits and growth opportunities we envision for our collective stakeholders. Afterwards, we'll open up the call for your questions. Before we get started, let me just say that we are so thrilled to be entering into this combination with Essential Utilities. One of the many things we have come to understand over the last number of months working with Chris and his team, is how much commonality there is between our two companies in terms of corporate values, customer focus, drive for excellence, and culture. We have terrific people at American Water , and we see the terrific people at Essential Utilities.
It's encouraging to see the early signs of alignment, as we begin the process of planning for the integration of our companies in the best way possible. Let's begin on slide five, which gives an overview of the transaction. Under the agreement, which has been approved by the boards of both companies, the transaction will be consummated through an all-stock merger. American Water Works Company shareholders will own approximately 69% of the combined company, and Essential Utilities shareholders will own approximately 31%. The leadership of the new company will reflect the strengths and capabilities of both American Water and Essential Utilities. Upon closing of the transaction, I will serve as President and Chief Executive Officer of the combined company, and Chris will serve as Executive Vice Chair of the Board of Directors. Chris will also serve as Executive Sponsor of our Integration Task Force.
David Bowler will serve as Executive Vice President and Chief Financial Officer. Cheryl Norton will serve as Executive Vice President and Chief Operating Officer, and all existing executive team members of American Water who report to me will continue to do so post-close. Dan Schuller will serve as Executive Vice President and Chief Strategy Officer, and will report to me. In addition, Colleen Arnold will serve as President, Regulated Operations, reporting to Mike Doran, our Deputy Chief Operating Officer. Mike Huwar will remain President of Peoples Natural Gas. The new company's Board of Directors will be made up of 10 American Water Directors and 5 Essential Utilities Directors, with American Water's independent Board Chair, Karl Kurz remaining in the Board Chair role. Importantly, we will remain committed to our communities. Following the close of the transaction, the combined company will be headquartered in Camden, New Jersey.
We'll maintain a strong long-term operational presence in Essential Utilities' Bryn Mawr, and Pittsburgh offices as well. After closing of the merger, we plan to conduct a review of strategic alternatives for the company's non-water and non-wastewater businesses. This is still a ways off, and we won't speculate as to what that outcome might be or whether any transaction will ultimately occur. The combined company will operate under the American Water name. We intend to carry forward best practices from both companies and corporate social responsibility, including commitments to employees, the communities we serve and the environment. More on that in a few moments. The merger is expected to be completed by the end of the first quarter of 2027, subject to customary closing conditions and approvals. Chris, over to you.
Hey. T hanks, John and thank you all for joining this morning. This is truly a historic day for Essential Utilities , and I want to echo John's enthusiasm for the combination. Five years ago, when we formed the Essential Utilities that you see today, we set out to create one of the strongest, most innovative, and customer-focused utilities in the United States. The partnership we announced today with American Water not only achieves that vision, but it also provides substantial benefits to our customers, shareholders, and the communities we serve well into the future. If you look at slide six, it gives you a sense of just how complementary our organizations are. Together, we will be a leading regulated water and wastewater utility in the country. The combined company would have a rate base of approximately $34 billion as of the end of 2024.
We'll have approximately 5.4 million water, wastewater, and natural gas connections, serving customers across 17 regulated states and on 18 military installations. Both companies have histories that extend nearly 140 years. Our companies and our people have worked closely, especially in states where we both serve already, to advocate for our customers. That's also part of the reason that we are considered a trusted partner in those communities we serve. As you can see from the states we've highlighted, we are increasing our geographic diversity and we're increasing exposure in a number of jurisdictions. Let's turn to slide seven. As the partner of choice for the municipalities and counties in which we operate, we'll be optimally positioned to create value and unlock even new opportunities for growth.
Management will continue to work closely with the EPA and federal, state, and local officials, to deliver the quality of water that customers have come to expect from our companies, while also adhering to best practices in safety and sustainability. Our teams are focused on both meeting the needs of customers and keeping rates affordable, which has been integral to the success of both companies. Our significant and continued investment in critical infrastructure supports the economic prosperity of the communities, and protects human health and our environment. While the combined company will be focused on creating a new top 10 large-cap pure-play utility, I think it's important not to lose sight of the team at Peoples , our natural gas local distribution company.
Since joining Essential Utilities, the clear focus of our gas segment has been the increased safety and reliability of our 15,000 mi distribution system, as we work to reduce risk and achieve constructive regulatory outcomes. Peoples is the largest natural gas distribution company in Pennsylvania, and it's a staple of the community in Western Pennsylvania and parts of Kentucky. From making natural gas service safer for our customers and communities to nearly perfect capital execution, I am extremely proud of what we've accomplished, all while keeping customer rates affordable. I know our natural gas team will continue to deliver for our customers throughout this process. John?
Thanks, Chris. Turning to slide eight, as you can see, the merger is supportive of our long-term growth, and we expect to maintain American Water 's long-term target ranges for EPS growth at 7%- 9%, and rate base growth at 8%- 9%. The combined company's scale, operational expertise, and regulatory diversification are all helpful as we make needed investments in our systems, with a keen eye towards customer affordability. As is the case for both American Water and Essential Utilities today, our rate base growth will be driven primarily by investment in our existing systems and supplemented by our water and wastewater system acquisition programs. We intend to maintain our 2% acquired customer growth target on a combined basis.
In addition to our highly visible and consistent earnings growth profile, our total shareholder returns benefit from our 7%- 9% dividend per share growth target, supported by a healthy 55%- 60% dividend payout ratio. On the left side of slide nine, you'll see an overview of pro forma metrics. As Chris mentioned earlier, using 2024 actuals, our combined rate base approach is $34 billion, with more than 5.4 million connections across 17 states. This includes approximately 750,000 gas customers in Pennsylvania and Kentucky. Our estimated 2026 rate base, including gas, is $41 billion. Pennsylvania will remain our largest state, with our combined company-wide water and wastewater rate base in the state increasing to more than $10 billion.
For the combined company, this doesn't just serve to expand the geographies in which we operate and provide new paths to growth, it will also grow our rate base in attractive, constructive jurisdictions and improve the mix. Given the all-stock nature of the transaction, both companies' shareholders will benefit from the regulatory and geographic diversification and upside potential. On slide 10, you'll see the full picture of the combined 17 regulated state footprint. This will be a well-diversified portfolio. We'll have a significant presence across the country, particularly in the Mid-Atlantic and Midwest, serving more than 2,000 communities in total. The scale of this combined entity will give us the flexibility to continue investing in critical infrastructure, enabling us to continue providing superior customer service at affordable rates. We'll share more about these specifics in the coming slides.
Slide 11 reinforces the compelling benefits to each of our stakeholders. First, customers will benefit from the combined infrastructure, resources, and operational efficiencies. Together, we will be better positioned to solve today's water and wastewater challenges across the country, while expanding our customer base. There will be no change in customer rates as a result of the merger. Our employees will remain at the heart of this combination, and we believe the combined company will create new opportunities for long-term development and growth of our people. None of this today would be possible without our strong teams, and John and I are so thankful for their dedication and hard work. By bringing together two exceptional teams with extensive experience in the regulated utility space, we're creating a stronger organization with deeper expertise and an enhanced ability to attract and retain top talent.
The combination will broaden career paths and provide employees with more opportunities to grow, collaborate, and contribute to a larger, more dynamic organization, one that remains deeply committed to investing in its people and fostering a culture of excellence and shared success. The combined company will remain a strong partner to the communities where we operate. We will continue supporting philanthropic initiatives in our existing service territory, as well as extending those efforts to new service areas. Our teams on the ground will remain connected to the people they serve, working together to deliver reliable services and meaningful support where it's needed most. As we've discussed, shareholders of American Water and Essential Utilities will be able to participate in the considerable upside potential created through ownership in the utility platform, with expanded scale, financial strength, and regulatory credibility. Turning it to John, and slide 12.
Thanks, Chris. Together, our company will execute on a robust five-year capital investment plan, strengthened by our enhanced scale and driven by our system needs for infrastructure renewal, water quality, resiliency, technology, and growth. All of our investment ties back to our shared and steadfast mission, of delivering safe and clean water and wastewater services to our customers and doing so reliably and affordably. Our combined capital investment plan includes, investment for PFAS remediation and compliance with lead and copper rules. Turning to slide 13, building on our strong track record, our long-term rate base growth and EPS growth targets position the combined company to deliver top quartile total returns to shareholders. The decades-long need for investment in infrastructure in our industry is without question.
We and our stakeholders understand that regionalization of the extremely fragmented water and wastewater systems in the U.S. offers a unique opportunity to solve challenges and to grow. When you combine these factors with our strong historical and prospective focus on customer affordability, we believe our value proposition is very competitive versus peer- regulated utilities. The merger is expected to be accretive to American Water 's EPS in the first year after closing.
As discussed, we expect that the closing of the merger will not impact our current long-term EPS growth and dividend growth targets of 7%- 9%. Subject to market conditions and board approval, the parties expect the combined company to adopt American Water 's current dividend policy. Our 55%- 60% targeted payout ratio makes room for substantial internally generated cash flow, to enable continued investment in accretive rate- based growth. Both companies expect to maintain their existing dividend policies until the transaction is completed.
Here on slide 14, you can see that the credit profile and metrics of the combined company are expected to remain strong, with a credit profile comfortably within our current single A, B, AA1 ratings band for S&P and Moody's, respectively. We expect to benefit from broad regulatory and geographic diversification, a low-risk asset class, scale, and a track record of conservative financial policies. As a large-cap regulated utility, the combined company will continue to have ready access to the equity capital markets. The combined company will also have an attractive consolidated debt maturity profile spaced out over many years, mitigating refinancing risk. Chris, back over to you.
All right. Now turning to slide 15. Before the transaction closes, there will be a number of key conditions that must be met, including HSR clearance and certain state regulatory approvals. We'll continue to work closely with the regulators and community leaders in the states where we both operate, to ensure a smooth approval process. We believe the regulators will see the benefits of this transaction once they learn more about the details and the benefits to customers and communities. We look forward to discussing this transaction with them. The transaction also requires approvals by American Water and Essential Utilities shareholders. We anticipate filing our joint proxy over the coming months, followed by shareholder meetings for each company, obtaining regulatory approvals and closing by the end of the first quarter of 2027.
During this time, our teams will be collaborating on a thoughtful integration planning process, so we can most effectively bring our two companies together post-closing. To summarize our remarks this morning, I truly believe that our ability to serve our customers will be second to none. Our ability to tackle challenges facing our industry, all while we work to keep customer rates affordable, will be enhanced as a result of this combination.
I also believe that our ability to grow will be significantly enhanced as a result of this transaction. Before I turn the call back to John to finish up, I'd like to thank the Essential Utilities employees for their continued hard work and dedication to our mission. Your unwavering commitment to our customers has built a great company. I feel fortunate to have been part of the Essential Utilities story for nearly 35 years, and I am excited about what the future holds for all of us.
Very well said, Chris. We are incredibly excited about this combination. We expect to capitalize on the compelling strategic and financial benefits to drive growth and value creation, while also benefiting our customers, employees, and other stakeholders. These are two top-notch teams who share similar values and a deep commitment to our communities. We look forward to leveraging an expanded set of resources and strengthening our ability to solve water and wastewater challenges, while delivering safe, clean, reliable, and affordable water and wastewater services to a larger customer base.
For employees of both companies, we believe this combination will provide additional growth and advancement opportunities over the years to come, and I look forward to continuing to work with our best-in-class teams. We believe this combination creates a value proposition that is unique in the utility sector. We look forward to engaging with you as we move through the approval process. We will now take your questions.
We will now begin the question- and- answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your questions have been addressed and you would like to withdraw your question, please press star, then two. We ask that you limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Steve Fleishman with Wolfe Research. Please go ahead.
Yeah, hi. Good morning. Congrats on the merger. First question is just, I'm curious kind of, why now? I think these companies probably could have combined the last 15 years or at any time in the future. A nything in the industry or the company situation that kind of is driving the timing of the merger?
Morning, Steve. John here. I think from our perspective, there are two elements to why now. One is, both companies are really operating from a position of strength. We both feel great about our platforms, jurisdictions, and ability to grow in the future. I think related to that, Steve, is that there is an increasing requirement and opportunity for investment growth. When you think about system needs, regionalization, environmental remediation, and the opportunity to do that from a position of scale, it just makes that proposition more attractive to the companies and frankly better for customers as we bring the companies together. Chris, anything to add there from your perspective?
Yeah. I guess, Steve, I would maybe like to just to add to John's point on scale. I mean, there was a time when smaller companies got premiums, thinking about, there were takeout premiums in them. Today, balance sheet matters, scale matters, and I think even more than it was five years ago when interest rates were low. That's a critical component. There's no secret that our stock at Essential has been trading at a discount for some time here, as we finance a huge capital plan. To trade at American's multiple, still making our capital investment, really, really leverages the strengths at both companies to build earnings and the strength of the company.
Okay. Just one other question on, how are you kind of including or not including the potential gas strategic options in the 7%- 9% growth? Is that embedded in there in some way? Is that not? How should we think about that?
Yeah. I think, Steve, on that, for both our 8%- 9% rate base growth and 7%- 9% earnings growth, we're thinking about those numbers kind of any way you slice it. The reality from our perspective is that Peoples is a terrific platform. It's growing great. Its pro forma represents less than 15% of the combined company. We just see enough in those ranges to be with or without. Certainly, we're prepared to look at that in both ways.
The next question comes from Nick Campanella with Barclays. Please go ahead.
Hey, good morning. Congrats on the transaction. A lot of questions to ask. Just for t he state approvals, can you just remind us just if any of these are no-harm states versus a net benefit state? What has the kind of local reaction been so far since announcing?
Yeah. T hanks, Nick. Good morning. A combination of no harm and net benefits. By our count, we'll have a minimum of seven state approvals. It could be up to 10, and we'll know that as we get more into certain processes. Chris, anything to add there?
Yeah, just that we've begun our regulatory calls. I think at this point, we're in that digestion period of, people are just learning about it and understanding it, but s o far, nothing but positive interaction.
That's great. Just given we're waiting until about the first quarter of 2027 for the deal to close, do you plan to run the businesses as normal course here over the next couple of quarters? We were expecting on the A WK s ide guidance on 2026 to still be provided this Wednesday. Is that still the case? We thought that in Pennsylvania, you might be both filing for rate reviews there on the water side and the gas side for 2026. Is that still the case as well? Thanks.
Hey, Nick. Good morning. This is David. Yeah, we still plan to release guidance for next year on Wednesday, and Essential, the following week as their earnings release. That will come out next week. As far as the Pennsylvania cases, as we've said, we're generally on a two-year cycle, and we still plan to be on that cycle. We'll operate independently until it closes.
The next question comes from Angie Storozynski with Seaport. Please go ahead.
Thank you. I just have a big picture question, John. You are keeping your earnings growth expectations unchanged. I understand that it's better to be a larger company. Do you count on any benefit to earnings from that combination? You are acquiring a system based on the water side that is growing slower than you are. I understand that there is some financing benefit for the combined company, but I'm just again hoping to have more clarity on the potential accretion of this transaction in the long run.
Yeah. T hanks for the question, Angie. As we said in the comments, the transaction will be accretive first year after closing. As it relates to longer-term growth, you know from our perspective, and Chris and I have talked a lot about this, there's no shortage of growth opportunity in water and wastewater, right? Keep in mind that for Essential's earnings and growth, they report theirs without acquisition opportunity, and so you have to consider that as well. We see very good prospects for growth here going forward.
Okay. When you talk about review of strategic options for non-core assets, is there anything else besides the Peoples Gas that you're considering here? Any other non-core operations?
Yeah, Angie, we also have a little bit of unregulated things, not major items, but also could be considered a smaller insurance plan, that sort of thing, so r eally, it's much smaller than Peoples.
The next question comes from Julian Dumoulin-Smith with Jefferies. Please go ahead.
Hey, team. Good morning. Nicely done. Congratulations. [It's happened].
Thanks, Julien.
[crosstalk] that you'll use when it comes to this strategic evaluation of the gas business come post-close, if you will. What are the considerations here? Is EPS accretion in the first year, or how do you think about the wider thought process there and what metrics you hold yourself against?
Yeah. Julian, it's John here. I'd say the only decision we've made at this point is that we'll review alternatives post-closing. We'll start to tackle those questions as we get to that point in our process. Our real focus here and our sole focus is closing on the merger to make this, as the companies are today, the leading water and wastewater utility platform in the country.
Yeah, absolutely. It sounds like, I don't want to put words in your mouth, that given the pro forma size of the gas business, that wouldn't necessarily impact the 7%- 9% though, right? I mean, maybe where you land within the range, given the 11% rate base growth.
That's correct. We intend to maintain our 8%- 9% rate base growth, and 7%- 9% earnings growth and 7%- 9% dividend per share growth.
The next question comes from Gregg Orrill with UBS. Please go ahead.
Yeah, thank you. Congratulations.
All right, Gregg. T hank you.
Maybe a two-part question. Does the combination have any impact on your plans and timing around PFAS spending? Also, just what have you been seeing in terms of large load customer demand out there? Does the combination have any improved approach to serving those types of customers?
Yeah, Gregg, I'll speak to the PFAS work. We don't intend for that to slow down at all. We think we're going to just stay right on track with that, and so no concerns there with the regulatory compliance or the capital spend on that. I'll kick it over to Chris to answer on the data centers and the large load.
Yeah. Gregg, for our PFAS at the Essential side, we're going to stay on track and we should be almost finished with that work by the time the merger closes. We're very focused on staying on the original schedule, and I've said that through all of our calls and that'll stay on track. Now, with regard to activity on larger load, we've announced the Greene County, Pennsylvania data center, where it's our intention there to build an 18 million-gallon-a-day plant to service a very large data center, and its combined turbines to generate power for that center.
We're also actively working with several others in all forms. Most of them are not the same as the Greene County. They're more expansion of existing plants that we have to provide water. Those would all be interestingly, timed to align with data centers in terms of their depreciation, right? 15 years is the life of a data center. These are really good for us in all ways. Most of them would be unregulated, but in the case where we'd expand an existing plant, that would be regulated at tariff rates, so m ore to come.
Thank you.
The next question comes from Anthony Crowdell with Mizuho. Please go ahead.
Hey. G ood morning, team. Congrats. If I could just follow up on Angie's question, just when we build our model and we combine both entities, what level of accretion is the company willing to quantify? What's that level we should be seeing in the first full year or second year of the combined entity? I have a follow-up.
Anthony, we haven't given guidance on accretion levels, other than to say that the transaction will be accretive. I'd say, given that we've said that we'll review alternatives for the non-water and non-wastewater businesses post-closing, you could expect that you could combine the companies for modeling purposes at closing for, as we've said, the first quarter of 2027 and go from there.
Great. Just a follow-up. You know, the water sector has always been challenging with investors on valuation just because, I mean, it's not as robust of a comp group as the electric or gas sector. It was kind of two companies on one end of the barbell, and many small entities on the other. Again, it was challenging. Now we even combine those two companies into one. Does that end up maybe causing more valuation dispersion and pulling the water valuations closer to electric, or is that a concern that now the liquid group even gets more liquid?
I guess at the end of that, Anthony, we'd say market cap is certainly helpful from our perspective. When we think about valuation of waterwaste water, we really think about it in terms of the fundamentals. Our capital investment plan is highly visible for decades, right? We think that's differentiating. If you think about the risk associated with the water asset class, we think that water should be the lowest beta stocks in somebody's portfolio. When you think about those kinds of fundamentals, when you think about the cost capital, you think about the visibility of growth, that's what we see as really driving water valuation.
As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Davis Sunderland with Baird. Please go ahead.
Hey. G ood morning, guys. Congrats on the merger. Appreciate the time. Maybe a question mainly for Chris, but John, you had made the comment that now the top priority is creating the leading water utility. Just looking at the acquisition pipeline and acquisitions that are outstanding right now, I would assume this puts an effective pause on new acquisitions between now and closing. I guess my question is just, one, is that correct? Two, how do you think about adding or any changes to just the other types of growth between now and closing? Thanks, guys.
Yeah, it's a good question, David. The way that John and I have discussed it, and I think for legal purposes, it's business as usual in both companies. Obviously, it's a little bit of an odd dynamic if you're a seller and you're saying American and Essential are coming together, and we're the bidders. That's kind of how it needs to be for the time being while we get ready for closing. We would expect to be in the market actively looking for municipals, and trying to be those solutions as we always have been. Clearly, there will be some careful treading as we work through the process over the next, call it, 15 months.
I appreciate it. Congrats again, guys. Thank you.
Thank you.
This concludes our question- and- answer session and concludes the conference call today. Thank you for attending today's presentation. You may now disconnect.