American Water Q4 2025 Earnings Call - Merger with Essential Utilities on track, 8% EPS guidance

Conference Operator: Good morning, and welcome to American Water’s fourth quarter 2025 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.

Aaron Musgrave, Vice President of Investor Relations, American Water: Good morning, everyone, and thank you for joining us for today’s call. At the end of our prepared remarks, we will open up 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 fourth quarter earnings release and Form 10-K, each filed yesterday with the SEC.

This call will include a discussion of non-GAAP financial information. A reconciliation of our historical adjusted earnings per share to GAAP earnings per share can be found in the appendix of the slides for this call. Finally, all statements during this presentation related to earnings and earnings per share are meant to refer to diluted, adjusted earnings and earnings per share. With that, I’ll turn the call over to American Water’s President and CEO, John Griffith.

John Griffith, President and CEO, American Water: Thank you, Aaron, and good morning, everyone. Let’s turn to slide 5, and I’ll start by covering some highlights of 2025. You can see here an abbreviated list of some of our key financial and other accomplishments for the year, and David and Cheryl will add to these in their remarks. As we announced yesterday, we achieved 2025 financial results near the upper end of our expectations. Adjusted earnings were $5.64 per share for the year, compared to $5.18 per share in 2024. Our results reflect the clear execution of our plan in 2025, which delivered EPS growth of 8.9%. Our regulatory and state teams were very active this past year, completing and initiating several significant general rate cases in 2025, while enhancing our ongoing communications with key stakeholders. These cases are driven by infrastructure investments needed to serve our customers.

They punctuate the focus we have on providing safe, clean, reliable, and affordable service to approximately 14 million people across our footprint. And as you can see, we invested over $3 billion in 2025 to help achieve that mission. I’m proud to say that we again achieved our goal of keeping residential water bills well under 1% of median household income on average across our footprint. Given the national and state-level dialogue on affordability, including utility bills, our focus on high-quality, affordable service remains very important. This is also why we strive to continue adding new customers to the American Water system as a core piece of our business model. We know through 140 years of experience that scale and regionalization will translate into more affordable and efficient operations for customers we’re privileged to serve.

With over 104,000 customer connections under agreement heading into 2026, we’re pleased to be executing on that aspect of our long-term plan. Finally, our company’s ability to stay focused on serving our customers safely and reliably this past year was tremendous. As you’ll see in this year’s 10-K and proxy statement, we had an outstanding year in 2025 in terms of performance based on several key safety and water quality metrics. And of course, as I’ll talk about more in a few minutes, we ended the year with the announcement that we entered into a definitive merger agreement with Essential Utilities. We look forward to sharing with many of our states, including through the regulatory approval process, the benefits this merger will bring to customers and other stakeholders over the near and long term.

I believe the overall takeaway today for investors is that our strong execution in 2025, coupled with our low-risk, top-tier capital growth plan, demonstrates American Water’s ability to deliver on its long-term plan. I’m confident we will execute on our plans for 2026 and beyond, building on the momentum we have from 2025. Turning to slide 6, we are affirming our 2026 earnings guidance of $6.02-$6.12 per share. This represents our expectation of 8% EPS growth in 2026 compared to our adjusted 2025 EPS, consistent with what we laid out last fall and aligned with our expectation to achieve consistent EPS and dividend growth well within the 7%-9% range through 2030 and beyond. We’ve demonstrated during these last few years, and with our guidance for 2026, that our business plan is strong and compelling.

On Slide 7, we are again affirming our long-term targets and drivers of growth in the business. Our commitment to solving problems for our customers remains steadfast, including addressing aging infrastructure and water quality challenges, and doing so with a keen eye towards customer affordability. We believe this foundation, coupled with the capital investment needs that lie ahead, uniquely positions American Water to achieve consistently strong earnings and dividend growth for many years to come.... In closing, on Slide 8, I’m pleased to share that we’ve already achieved a few milestones on the path to closing our merger with Essential Utilities since the October announcement. I want to thank our respective companies’ legal, regulatory, and financial teams for their excellent work over the last few months to timely file for all of the necessary state, regulatory, and shareholder approvals.

As I mentioned earlier, we are eager to demonstrate to commissions and other important stakeholders in the months ahead, the positive elements this merger will bring to the mission of serving our customers. On the shareholder front, we were pleased to announce last week that shareholders of American Water and Essential overwhelmingly voted in favor of the respective merger-related proposals during the special meetings on February tenth. On behalf of American Water’s board, I want to thank our shareholders for their time, attention, and support of the proposed merger, which we expect to close by the end of the first quarter of 2027. We are very excited about the opportunity to bring together our two great companies to form a leading water and wastewater utility company in the country for the benefit of our combined customers and shareholders.

With that, I’ll hand it over to David to cover our financial results, rate case updates, and balance sheet strength in further detail. David?

David, CFO or Financial Executive, American Water: Thanks, John, and good morning, everyone. Starting on slide 10, I’ll add a few remarks on our full year results. Before I begin, though, I want to note that going forward, we’ll be discussing our EPS results on an adjusted basis, which you heard John reference in his remarks. We believe communicating adjusted earnings per share, which will remove the impact of items such as merger-related transaction costs, will allow the company to more accurately reflect and compare its ongoing performance across periods. As Aaron mentioned, a reconciliation of historical GAAP earnings per share to adjusted earnings per share is included in the appendix of the presentation. So with that said, consolidated earnings were $5.64 per share, up 46 cents per share versus the same period in 2025. Revenues were higher by $1.70 per share, driven by authorized rate increases to recover investment across our states.

Revenues were also higher from recently completed water and wastewater acquisitions and organic customer growth. In looking at operating costs, O&M expense was higher by $0.42 per share, driven primarily by employee-related costs and increased production costs, mainly higher pricing on purchased power. Depreciation increased $0.41 per share, and financing costs increased $0.35 per share, both as we expected, in support of our investment growth. Slide 11 summarizes the six rate cases we successfully completed in 2025, five of which we covered on prior calls. In December, we received a final order in Kentucky, where we’re authorized an annualized revenue increase of $18 million, based on an ROE of 9.7% and an equity layer just north of 52%.

All of our rate cases are built upon the recovery of significant capital expenditures that our systems and systems we acquire very much need. Apart from the general rate cases, we received a further one-year extension of the California cost of capital filing to May 1, 2027, to set its authorized cost of capital beginning January 1, 2028. Our ROE will remain 10.2% through December 31, 2027, unless the water cost of capital mechanism is triggered when the next measurement date is later this year. Slide 12 covers our latest regulatory activity in our states. On active cases, you can see we have general rate cases in progress in 7 jurisdictions. Our cases in West Virginia and Maryland are furthest along, and we expect to receive final orders in both cases in the coming weeks.

Our cases in Virginia and California are progressing as expected, and we have upcoming milestones in those cases, as you can see on the slide. On November 14th, we filed a general rate case in Pennsylvania, reflecting $1.2 billion in system investments through mid-2027. We are seeking $169 million of annual revenue, and we expect new rates, if approved, to take effect in August 2026. On January 16th, we filed a general rate case in New Jersey, reflecting $1.4 billion in system investments through December 2026. We are seeking $146 million of additional annual revenue, and we expect new rates, if approved, to take effect in the fall of 2026. On January 27th, we filed a general rate case in Illinois, reflecting $577 million in system investments through December 2027.

We are seeking a two-step increase, totaling a hundred and thirty-four million dollars of additional annual revenue, and we expect step one of new rates, if approved, to take effect in January 2027. In all of our states, we’re taking great care to provide detailed information in our rate cases about the important investments we are making on behalf of our customers. We are, as always, providing a thorough review of our strategies to enable all customers to afford their water and wastewater service. Turning to slide 13 for a brief review of considerations we shared last fall regarding our outlook for 2026 results. As John mentioned, we affirmed our 2026 adjusted EPS guidance range of $6.02-$6.12 per share, which again represents 8% annual growth.

At the heart of our plan is a commitment to invest responsibly for our customers, while prudently managing operating costs to support customer affordability and earn our allowed returns. The central part of this discipline is our ongoing focus on operational efficiencies... identifying areas that we can control to help moderate O&M growth over time. This focus aligns with the interests of our regulators, customers, and investors, and supports service affordability. We are also affirming the financing plan we shared last fall, covering 2026 to 2030. The plan includes an estimated total of $2.5 billion of external equity issuances, with approximately $1 billion to be settled in mid-year 2026 from the equity forward from last August. No other equity issuances are in the plan until 2029.

The level and timing of external equity is tied very simply to our need to fund growth and maintain our strong financial position. Finally, as highlighted in the release last night, the $795 million secured seller note due from the sale of HOS was repaid in full on February 13th, which align with our 2026 guidance assumption of repayment around year-end 2025. And while not called out on this slide, I’d like to again note that our military services group, which proudly serves 18 military installations across our country, continues to add incrementally to our earnings growth expectation in 2026. And finally, slide 14 provides a look at our balance sheet and liquidity profile. Our total debt to capital ratio as of December 31, net of the $98 million of cash on hand, was 59%.

As I just mentioned, we received payment in full of the HOS note last week and still expect to settle the roughly $1 billion of proceeds from our equity forward in the middle of this year. We anticipate these proceeds, along with our planned long-term debt financing in 2026, will keep us well within our target of less than 60% debt to total capital. We will remain A-rated at S&P with a stable outlook, and just last month, Moody’s affirmed our solid Baa1 investment-grade credit rating and stable outlook. Both agencies note our trend of credit-supported regulatory outcomes and expected sustained FFO to debt ratios well within the current grading thresholds. We are confident our business and financial profile, including FFO to debt, will continue to support our current investment-grade credit ratings.

With that, I’ll turn it over to Cheryl to talk more about our capital program, affordability, and our recent acquisition activity. Cheryl?

Cheryl, Executive (likely COO or similar), American Water: Thank you, David, and good morning, everyone. Starting on slide 16, we successfully invested approximately $3.2 billion of capital into our systems in 2025, which is right on our expected amount. Our low-risk annual capital plan is made up of hundreds of individual projects, which our teams do a great job of executing. These projects are mostly focused on pipe replacement, but we also are upgrading our above-ground treatment facilities, putting in PFAS remediation, removing lead service lines, and investing in updated technologies like smart meters. We continue to expect that these capital investments in infrastructure and acquisitions will grow regulated rate base at a long-term rate of 8%-9%. Investing in needed infrastructure on a continuous basis drives consistent reliability of our services and water quality.

These investments are crucial for us to deliver on our core mission of providing safe, clean, and reliable water and wastewater services. But we are also laser-focused on doing this affordably for our customers. As John mentioned, and we continue to show here, our residential water bills are meeting our target and are projected to remain under 1% of our customers’ median household income over the long term. And lastly, on slide 17, we continue to be well positioned for growth through acquisitions across many states, with 104,000 customer connections under agreement from deals totaling $582 million. The size and breadth of our acquisition program at American Water continues to improve as we invest in dedicated resources and center-led strategies to accomplish our 2% goal for customer additions.

The regulatory approval process for the Nexus Water Group systems is progressing well. Early termination of the waiting period was granted last week under the Hart-Scott-Rodino Act, and we also have received approval from the regulatory commissions in several states. Our progress to date leads us to believe that the closing date remains favorable to occur by August 2026. In addition to the Nexus systems, we currently have 19 acquisitions in 6 states under agreement for $267 million that would add about 58,000 customer connections, not including our proposed merger with Essential Utilities. The need for system consolidation across our footprint is as strong as it’s ever been. This is driven by the need for infrastructure upgrades, regulatory and health-based compliance, and operational enhancements.

Our business development organization has been strengthened over the past few years to support the continued development, execution, and closing of municipal deals. With that, I’ll turn it back over to our operator to begin Q&A and take any questions you may have.

David, CFO or Financial Executive, American Water: We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you’re using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Julian Demoulin-Smith from Jefferies. Please go ahead.

Park Ong, Analyst, Jefferies: Hey, good morning, team. This is Park Ong for Julian. I have a question on the portfolio positioning, maybe post-close. So what is your latest expectations or plans for the People’s Gas business use of proceeds to the extent that you opt for a sale? And is your plan to still dedicate proceeds primarily to debt paydown?

John Griffith, President and CEO, American Water: ... Good morning. Thanks for the question. Just to reiterate, we’ll be making decisions on People’s after closing of the merger, when we’ll begin a review of strategic alternatives. At that point in time, if we were to proceed down a path of sale, then proceeds would be used to reinvest into the business. Certainly, a portion would be for debt repayment and a portion would be for continued rate-based investment.

Park Ong, Analyst, Jefferies: Understood. Thank you. And maybe, just a follow-up, and what was your 2025 realized FFO to debt, and how do you forecast that over the period pro forma for the Essential Utilities transaction?

David, CFO or Financial Executive, American Water: Hey, good morning. This is David. Yeah, we typically don’t disclose what our FFO to debt is. You can generally calculate or calculate close to it from the financial statements.

Park Ong, Analyst, Jefferies: Got it. Thank you. One last one, very quickly. So do you expect to reach settlements in the Pennsylvania, New Jersey, and Illinois rate cases pending?

David, CFO or Financial Executive, American Water: Look, so we, you know, the cases are progressing as we expect at this point. We’re always open to settlements if we can reach a constructive settlement, but it’s got to be on terms that are constructive for us and beneficial and provide a fair return, so.

Park Ong, Analyst, Jefferies: Got it. Thank you.

Conference Operator: The next question comes from Greg Ory with UBS. Please go ahead.

Greg Ory, Analyst, UBS: Yeah, thank you for the updates. Appreciate it. With regard to Nexus, what are the key approvals that are remaining to close there? And also, the PFAS settlement monies that are coming in, have you received all of those at this point, or are there incremental dollars to come in going forward? Thank you.

Cheryl, Executive (likely COO or similar), American Water: Yeah, thanks, Greg. This is Cheryl. As far as the Nexus approvals, we’ve received approvals in a few states, but still have about five states left. All those states are progressing very well. I think we’re close on several states of getting additional approval. And right now, everything seems to be progressing as we would expect on the normal timeline, so no challenges or concerns there from our perspective. As far as the proceeds for the PFAS payback, we have gotten some proceeds and have been giving them back to our customers as our commissions have allowed us to do that. We’re still working through the regulatory process on some of those paybacks to the customers at this point, but there will be future payments.

Some of the payments were structured in a way that we’ll get additional payments next year and the year after that, so.

Greg Ory, Analyst, UBS: Got it. Thank you.

Conference Operator: Again, if you have a question, please press Star, then one. The next question comes from Ru Jai with Mizuho. Please go ahead.

Ru Jai, Analyst, Mizuho: Hi, good morning. This is Ru from Mizuho on behalf of Anthony Crowdell. Going back to Pennsylvania for a second, with the increased affordability scrutiny under Shapiro, how does that affect the likelihood and pace of your ongoing rate cases in Pennsylvania? I’m curious to see how you would characterize your approach to proceedings in Pennsylvania in general going forward. Thank you.

David, CFO or Financial Executive, American Water: Hi, Ru. Good morning. We’d say that, and, you know, generally all of our rate cases are driven by the investment that we’re making in our systems, and that really dictates when we go in for rates, to ensure we get recovery of those investments. So, as far as the current pace, you know, we’re generally on a two-year cycle in Pennsylvania and across all of our states, and we don’t see that changing at this point.

Ru Jai, Analyst, Mizuho: Okay, thank you for the color there. Just to follow up on that, same question, but for New Jersey. As we all know, affordability is also very salient these days under new Governor Sherrill. You filed a rate case earlier this year with testimony expected in summer. How does this timing interplay with the 180-day BPU study initiated after inauguration, where the governor, you know, directed BPU to decide on affordability levers as we speak?

David, CFO or Financial Executive, American Water: Yeah, I’ll try to make sure I answer your question if I understood it correctly, about filing our case related to the governor’s comments. And I’ll revert back to what I said for Pennsylvania, that, you know, all of our cases and then the New Jersey case is driven by the investment that we’re making in the systems. When you look at affordability, for us as compared to other utilities, our bills are less than 1% of median household income, which we view as very affordable, and we’re forecasted to be below 1% through 2035 across our system.

Ru Jai, Analyst, Mizuho: Great. Thank you so much. Appreciate it.

Conference Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.