Good morning, and welcome to American Water's third quarter 2026 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. The audio webcast archive will be available for one year on American Water's investor relations website. I would now like to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.
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 third quarter earnings release and Form 10-Q, each filed yesterday with the SEC.
This call will include a discussion of non-GAAP financial information. It can be found in the appendix of the slides for this call, which are available on our investor relations website. Finally, all statements during this presentation related to earnings and earnings per share refer to diluted adjusted earnings and earnings per share. With that, I will turn the call over to American Water's President and CEO, John Griffith.
Thanks, Aaron, and good morning, everyone. Turning to slide five, I wanted to start today by saying again how excited we are about our proposed merger with Essential Utilities, which we announced one year ago this week. We are combining two top-notch teams who share similar values and a deep commitment to our customers, shareholders, and communities. I also continue to believe this combination creates a value proposition that is uniquely compelling in the utility sector. We expect to capitalize on the strategic rationale and financial benefits of the merger to drive growth and value creation, which ultimately will benefit all of our stakeholders. We greatly appreciate the support we have received over the last 12 months as we have moved through the approval process. On that front, I am pleased to share that we have continued to achieve great progress in the third quarter related to the merger.
You may recall, as part of the update we provided with Q2 earnings, we achieved our first three state approvals during the first half of the year in Kentucky, Ohio, and Virginia. Since mid-year, we have also now reached constructive settlements in three states, Pennsylvania, Texas, and North Carolina. These are key milestones as they demonstrate a collaborative process in each state where many stakeholders have come together and supported the value our merger will bring to the communities we serve. It is also worth noting that settlement discussions are ongoing in New Jersey, and we expect an order in Illinois soon following the ALJ's favorable recommendation in September. Finally, the federal Hart-Scott-Rodino waiting period expired in mid-August, satisfying that closing condition of the merger. Given these positive developments, we continue to expect the merger to close by the end of the first quarter of 2027.
So with that update, as we turn to slide six, the rest of our remarks today will pertain to our standalone results, plan, and outlook. Today's financial plan update that we will share is in largely the same format as usual for us, with minor differences around the edges. While we realize the shelf life of this standalone content likely won't be long, we want to share this update to illustrate that our standalone business plan remains strong and, as I said earlier, represents a uniquely compelling investment thesis in the industry. Moving to slide six, I will start by covering some highlights of the third quarter and first nine months of the year. As we announced yesterday, we delivered solid financial results in the third quarter that were in line with our expectations, adding to an already successful 2026.
Adjusted earnings were $2 per share for the third quarter, compared to $1.89 per share for the same period last year. In the first nine months of 2026, adjusted earnings were $4.63 per share, compared to $4.40 per share in the same period of 2025. Our results reflect the strong execution of our plan in 2026, which David and Cheryl will discuss further in their remarks. With these results, combined with our outlook for the rest of the year, we now expect to achieve the top half of our initial EPS guidance range for 2026, which we have narrowed to $6.07-$6.12 per share. Moving on to some of our other key accomplishments so far in 2026. We have continued our track record of regulatory execution this year, with new rates reflecting investments in infrastructure for the benefit of customers.
We have also invested $2.8 billion in capital projects and acquisitions year- to- date, again, reflecting great work by our teams to complete work that will enable us to better serve our customers and to grow the business. As we have said, growing to scale in our states benefits our operating efficiency and long-term customer affordability. As Cheryl will review, we continued to build momentum with our business development platform with nearly 81,000 customer connections added through September across 10 states. Overall, we are well on our way to executing our capital plan for 2026 and have already achieved our target of 2% customer growth. These efforts align squarely with our mission to provide safe, clean, reliable, and affordable service to our customers. Slide eight highlights that we are initiating our standalone adjusted earnings guidance for 2027 of $6.53-$6.63 per share, reflecting 8% standalone EPS growth over 2026.
David will cover guidance in further detail. Turning to slide eight, as we update our existing five-year plan today, we are again affirming our long-term targets, including 7%-9% EPS and dividend per share growth. I want to emphasize that we expect to achieve consistent EPS growth through 2031 and beyond. As a regulated water and wastewater utility, rate base growth, regulatory and capital execution, expense management, and operational excellence are the key drivers of growth for our company. We also continue to value very highly our Military Services Group. The work that our MSG team performs to serve the military on our 19 installations is highly rewarding and continues to bring organic revenue growth opportunities. We and our MSG leadership team are looking forward to submitting a bid in the coming months to serve another U.S. Army base that is expected to seek utility privatization proposals.
The capital investment needs in our systems and for the broader water and wastewater industry are vast. Our commitment to solving problems for our current and future customers is unwavering, including addressing PFAS, lead and copper, and aging infrastructure, among other challenges. These catalysts are embedded in the foundation of our growth strategy and strongly position us to achieve consistent earnings growth for many years to come. With that, I'll hand it over to David to cover our financial and regulatory update in further detail. David?
Thanks, John, and good morning, everyone. Starting on slide 10, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $2 per share compared to $1.89 per share in 2025, which is on track with our plans for the year. Revenues were higher due to new authorized rates to recover investment across our states, while depreciation, financing costs, and general taxes increased as expected. Importantly, as I mentioned last quarter, O&M costs have modestly increased period over period, highlighting our continued focus on cost control while supporting operational and customer needs. Slide 11 shows our financial results for the year thus far. Consolidated earnings were $4.63 per share compared to $4.40 per share in 2025, which is also on track with our plans for the year. The various drivers here are similar to the quarterly drivers.
Year-to-date results, coupled with additional revenue we'll earn in several states in Q4, gives us confidence we'll achieve our narrowed guidance for the year. Slide 12 covers the latest regulatory activity in our states. In New Jersey, we received a final order in the case that approved a $68 million annualized increase in water and wastewater revenues with an approved return on equity of 9.5% and an equity component of 54%. We believe this was a constructive outcome, and new rates were implemented on September 15th. On active cases, you can see we have general rate cases in progress in five jurisdictions. To highlight a few of these cases, in Illinois, we received a proposed order from the administrative law judge on October 23rd, recommending a 9.67% return on equity and a 50% equity layer.
From a total equity return standpoint, the proposed level would be slightly favorable to our current authorized level, which is comprised of 9.84% ROE and a 49% equity layer. The proposed incremental revenue of $67 million compares to our updated request of $104 million. Final order in this case is expected no later than December 18th, with new rates to be implemented January 1st, 2027. In Missouri, our case is progressing as expected, and the procedural schedule calls for testimony to be filed in November, with rebuttal due in January. Outside of the general rate cases, I want to highlight two important regulatory matters not on this page. First, in Pennsylvania. On September 1st, we filed our third Water Long-Term Infrastructure Improvement Plan, covering proposed distribution system improvement charge investments for the period of January 2027 through December 2031.
This LTIP filing requests inclusion of additional categories of eligible property for recovery within the quarterly DSIC filings, which we believe is aligned with the recent comments from the commission. We expect a decision from the commission by the end of 2027. Next, in California, we submitted an application to the commission last week related to the desalination facilities we're constructing to help serve our Monterey area customers. Our filing updated the project cost estimates, introduced a low-cost financing framework, and outlined the rate-making proposal for the desalination facilities. Reflective of the lengthy approval and permitting process and legal challenges plus escalation of labor, construction, material, and financing costs. The application has updated the total cost estimate to $825 million plus AFUDC. This application remains subject to public comment and commission review and approval.
Slide 13 includes some considerations regarding our outlook for 2027 and our newly established standalone EPS guidance range of $6.53- $6.63 per share. First, as you would expect, our growth will be driven by the returns on the capital invested to serve our customers. Recently completed regulated acquisitions that are being incorporated into active or just completed rate cases will also drive growth next year. Critical to the growth strategy is our ability to prudently manage the operating costs necessary to serve our customers. The focus on operating cost efficiencies goes to the heart of the customer affordability construct we want to protect, which is closely aligned with the interests of regulators and ultimately investors. It's worth noting that approximately half of the O&M variance we expect in 2027 is for expenses to serve customers added through acquisitions, including Nexus, which we closed in June 2026.
The remaining O&M expected variance is modest and aligned with our strong cost management culture. The increases in depreciation, long-term financing, and general taxes are driven by our continued capital investments in our systems, and the annual growth in these categories is consistent with many of our prior plans. As noted, the 2027 EPS guidance here is on a standalone basis, and we'll issue guidance on a combined company basis in the near term after closing the transaction. Slide 14 provides a look at our balance sheet and liquidity profile. On September 14th, we completed a long-term debt issuance of $500 million at 5.55% that attracted strong demand. Our debt-to-capital ratio as of September 30th was 58%, and we project that our debt-to-capital ratio at year-end will improve when we settle the remaining equity forward shares in the fourth quarter.
Due to the all-stock nature of the merger with Essential, we expect our debt-to-capital ratio to improve further once we complete the merger. I want to echo John's comments from the top that we expect to capitalize on the combined company's size, scale, and fundamentals, which ultimately will benefit our customers, employees, investors, and other stakeholders. From this position of balance sheet strength, slide 15 provides a review of our current standalone five-year financing plan that will fund our capital plan. The amount of equity needs in our five-year plan covering 2026 to 2030 remains unchanged, with $1.5 billion anticipated in 2029. The level and timing of anticipated external equity is tied to our need to fund growth and maintain our strong financial position.
Since we are already in alignment with our targets for debt-to-cap and dividend payout, and we will be even in a stronger position in 2027, we have the flexibility to adjust these plans and respond to market conditions as they change for the benefit of our customers and investors alike. Finally, I will note that our current financing plan for calendar year 2027 includes $2 billion-$3 billion of long-term debt financing. With that, I will turn it over to Cheryl to talk more about our capital program, affordability, and recent acquisition activity.
Thanks, David, and good morning, everyone. On slide 17, I will begin my remarks with a discussion of our long-term capital plan. Since the shelf life would be short for a new 10-year standalone capital investment plan, I will focus today on the upward pressure we are seeing on infrastructure investment needs in our current five- and 10-year plans. Then, once we close the merger, we will provide a combined company investment plan for 2027 through 2036. So beginning with 2027, we expect our investment level to be $4.1 billion, inclusive of acquisitions. This includes an increased investment in PFAS compared to 2026. From 2026 to 2035, we now expect to invest more than $20 billion through 2030 and more than $48 billion through 2035. As always, this level of investment reflects the result of our consistent risk-based project planning, analyzed in conjunction with the key variable of customer affordability.
The increase in the current five-year plan is a result of investment to address aging underground pipe. Accelerating the replacement of aging underground pipe is one of the crucial investments we will be making for decades to come to continue delivering safe and clean water and ensure reliability of service to our customers. Meeting compliance requirements for EPA's PFAS and lead and copper rules remains embedded in our long-term capital plan at similar levels as we have previously shared. Slide 18 covers our approach to valuing the affordability of our services to customers. As I just mentioned, we remain very focused on balancing customer affordability and the magnitude of the necessary system investments in our plans. The state and national dialogue in the U.S. on utility bill affordability continues to be significant.
Fortunately, we've been focused on customer affordability for many, many years, so within the current national dialogue, we start from a place of strength relative to other utility bills. We believe the average residential water bill across our footprint will continue to be affordable for most of our customers for many years to come. We'll continue to focus on managing costs on behalf of our customers and proactively designing and seeking approval for customer assistance programs and tariffs. We'll continue to advocate on behalf of customers when polluters create problems with cost of service, such as with the PFAS credits we've given this year. Turning to slide 19, we successfully invested in many needed capital projects across our footprint in the first nine months of 2026.
We've deployed $2.8 billion this year to renew our infrastructure, improve resiliency, address water quality challenges, and remediate for PFAS and lead, as well as add new systems. As we've said before, we strategically choose to operate in a diverse set of regulatory environments that we believe have been and will remain supportive of water and wastewater utility investments and consolidation. Concluding on slide 20, we've had an excellent year of growth through acquisitions across 10 states, as we've already surpassed our 2% customer additions growth with a quarter of the year to go. Along with the Nexus Water Group systems, we closed on eight other systems, which in total added approximately 81,000 customer connections across our footprint. Just last month, we were excited to close on the water and wastewater systems in Neosho, Missouri, adding 5,900 connections each.
That system needs critical capital investments, and we're planning on investing $35 million over the next five years to improve the quality of water and wastewater treatment for our customers there. As of September 30th, we had approximately 36,000 customer connections under agreement across five states, totaling $182 million. We have line of sight on signing asset purchase agreements in many other communities, which gives us confidence in our acquisition strategy going into 2027. With that, I'll turn it back over to our operator and begin Q&A and take any questions you might have.
At this time, we'll begin the question- and- answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Shar Pourreza from Wells Fargo. Please go ahead with your question.
Hey, guys. Good morning.
Morning, Shar.
Morning. Firstly, as you are going through the critical paths of the merger, and obviously congrats on the achievement so far. I guess, when can investors expect updated guidance on the merged company? Will you provide a 2027 consolidated guidance figure on the first quarter call after the close, or do we need to wait until an outcome with Peoples Gas?
Hey, Shar. Good morning. This is David.
Hey, David.
It will be after we close, sometime after we close, depending on when that is in the first quarter. We will need some time to understand, at least for 2027. A big chunk of the earnings in Peoples is in the first quarter, so we will provide guidance once we sort through the time period pre-close for Peoples and then after close.
Okay, perfect. Then just, I guess maybe just what is the status on Peoples? Is there any chance you retain that asset, just given the size of the transaction? Then just any sense on timeline there would be great. It has been kind of quiet. Thanks.
Shar, it is John here.
Hey, John.
As we've said all along on Peoples, we'll review strategic alternatives after we close the merger. Peoples is a terrific company with an excellent management team. We look forward to going through that.
Got it. So just to clarify, there is a chance or retaining the asset could also be part of the review, correct, or not?
Yes. I'd say as a matter of strategic review, we can think of everything as being on the table.
Okay. That is perfect. Thanks, John. See you guys soon.
Thanks, Shar.
Our next question comes from Nicholas Campanella from Barclays. Please go ahead with your question.
Hey, good morning. Thanks for the time and appreciate all the updates. Good progress on the merger. Maybe as we just get ready for 2027, there's been a few dynamics that have played out this year. WTRG did skip, I think, their water filing. How does that impact the accretion outlined on the original merger? Do you see that as absorbable as you line up the plan in 2027 for the 7%-9%? Thanks.
Hey, Nick, this is David. Morning. As I just said, we will come out and update guidance for 2027 once we get the merger closed and provide you an update at that point.
Okay. Then maybe just if I was thinking about the base plan. Is the interest rate impact on the $1.4 billion debt coming due in 2029 assumed at current rates today in the 7%-9% that you put out there? Then, typically, I think you would roll out to 2031, but understand that the merger is still pending. What would equity needs look like for the base business at AWK on a more kind of formal roll forward? Thanks.
Yeah. I will say from an interest rate perspective, we are not overly aggressive on rates going down and not overly conservative on rates going up. So I would say right down the middle of the fairway on our refinances. Then from a long-term perspective, we just affirmed a 7%-9% on a standalone basis. So we did not roll forward 2031 given that we are about to close the merger, and we will provide a full update at that point.
Understood. Looking forward to it. Thank you.
Our next question comes from Paul Zimbardo from Jefferies. Please go ahead with your question.
Good morning, team.
Morning, Paul.
No, thank you. I'll try maybe a slightly different way. In terms of the long-term EPS guidance, should we think about that 2027 standalone as the baseline for that, or will it be the new pro forma 2027 guidance that you'll be giving later?
Paul, good morning. The way we've positioned this and said it before that you can think about 7%-9% for us, in the long term, any way you slice it. We're not establishing a new baseline year, but 2027. We've consistently been at 8% or above the last few years, and you think about 7%-9% over the long term for us.
Okay. Understood. I know you mentioned, I saw the filing, too. If you could help unpack a little bit that California desalination project a little bit more. Is the $825 million in the updated forecast? Just overall, how to think about that project and the scope of the overall plan. Thank you.
Yeah. We've got the project in our forecast. You can think about the full cost in our five- and 10-year forecast period.
Okay. Understood. Thank you, team.
Our next question comes from Anthony Crowdell from Mizuho. Please go ahead with your question.
Hey, good morning, team. Just two quick ones. On slide 13, you give the walkthrough to 2027. The revenue component of $170 million- $180 million. Just how much of that is already locked in from rate decisions, and how much are you still waiting for half decisions? How much is that still up in the air? I have one follow-up.
Anthony, hey, good morning. I would say the vast majority of it is locked in when you think about the timing of the PA and New Jersey cases this year coming in late in the third quarter. We have new rates that we are expecting in Illinois. We just got the proposed decision there. Obviously, we need a final order there. We have a Kentucky case. We will have new rates, going into 2027. But, with New Jersey and Pennsylvania representing 40%-45% of the business, a fair amount of it is locked in.
Great. Then I think I am going to jump on the same question thread as the earlier questions. Just once the merger approvals go through, do you wait until an earnings call when you give us the revised update? Or just the method, is it an 8-K after the approval that we get the new guidance?
Yeah. It will depend on when we get the approval, and final approval. So I will leave it at that. We will come back to you as soon as we get the approval.
Great. That is all I had. Thanks so much.
You are welcome.
Our next question comes from Gregg Orrill from UBS. Please go ahead with your question.
Yeah, thanks. Good morning. The capital plan to 2030 is now $20+ billion . On slide 17, you talk about some of the factors there, including energy and chemicals, et cetera. Are you communicating something new there? Do you see a regulatory implication for that, like a regulatory lag issue that you're highlighting as a risk?
No. Good morning, Gregg. We're not seeing any regulatory lag issues that we're highlighting as a risk here. As we updated our plan here internally, it's on the, I'd say, north side of the $19 billion- $20 billion, which is why we went to $20+ billion . We just did not roll forward the full plan. But we wanted to just indicate that it was in the $20 billion range and not the $19 billion- $20 billion range.
Okay. Sounds good. Thanks.
You are welcome.
To ask a question, please press star and then one . To withdraw your questions, you may press star and two. Our next question comes from Richard Sunderland from Truist. Please go ahead with your question.
Hey, good morning. Thanks for the time today. I will ask another question on this sort of guidance and outlook post-close. Understanding gas is under strategic review.
After you acquire Essential, how are you thinking about incorporating gas or not incorporating gas into that long-term view? Just any flavor for kind of a with gas plan or without gas plan or offering both. Any guidance there would be helpful. Thank you.
Well, morning, Rich. It's John here. I think as we said a year ago when we signed the merger, and we retain the view today, that we anticipate maintaining our long-term EPS growth at 7%-9% with or without Peoples. That remains the case today.
Understood. Thanks for that. Then turning to this Pennsylvania LTIP filing, could you speak a little bit more to process and evaluation between now and, I think I heard, a by year-end 2027 decision? Is this essentially you need the permission to opine via an order, or are there other paths, maybe including settlement, to resolve the expanded capital eligibility element of that in particular?
Yeah. Good morning. This is David. Yeah, the filing, they go through the typical process for the LTIP review, which occurs every five years. The commission will have to make a ruling on that filing. As this plays out, it may look a little different, may feel a little different because of the expansion. Normally, we'd see the approval, I think, on a faster timeline. We just said by the end of 2027, allowing for a little bit longer of a timeline for this review, to see where we end up.
Great. Appreciate the color. Thank you.
You are welcome.
As there are no further questions at this time, this will conclude our question-and-answer session. We thank you for attending today's conference call. You may now disconnect your lines.