American Water Works Company - Earnings Call - Q2 2025

Executive Summary

• Solid quarter with regulated-driven top-line growth, but mixed print: revenue beat, EPS and EBITDA slightly below consensus; FY25 EPS guidance narrowed to the top half ($5.70–$5.75) on weather-normalized basis, affirming LT 7–9% EPS/dividend CAGR and 8–9% rate base growth.
• Q2 revenue rose 11.1% YoY to $1.276B and EPS increased to $1.48; weather was a ~$0.06 EPS headwind vs prior year, with wet conditions in 2Q25 and dry/warm in 2Q24.
• Guidance confidence underpinned by rate execution, stronger customer usage, and continued 2025 rate increases; capex on track ($1.3B 1H, ~$3.3B FY) and ~87k customer connections under agreement including Nexus Water Group in eight states.
• Potential catalysts: constructive rate outcomes (e.g., CA decoupling bill progress), steady M&A close cadence, financing execution (H2’25 ~$1B debt; equity expected 2026 via forward structure announced subsequently).

What Went Well and What Went Wrong

What Went Well

• Regulated revenue growth and acquisition contribution drove double-digit top-line growth; rate execution remained a strength across multiple states.
• Management narrowed FY25 EPS guidance to the top half ($5.70–$5.75) on a weather-normalized basis, citing stronger usage and ongoing rate increases through Q3 as supports.
• Strategic M&A momentum: announced agreement to acquire Nexus systems (~47k connections) and ~87k total connections under agreement platform-wide; management expects benefits from scale and in-state expansion.

Selected quotes

• “We now expect to achieve the top half of our initial EPS guidance range for 2025, which we’ve narrowed to $5.70 to $5.75 per share.”
• “We are continuing to build momentum with our business development platform, with 87,000 customer connections under agreement totaling over $500 million.”
• “We expect the second half of 2025 to deliver financial results to achieve this narrowed guidance range.”

What Went Wrong

• Weather headwinds (~$0.06 EPS adverse YoY) muted otherwise stronger underlying performance; 2Q25 wet weather and 2Q24 dry/warm compare weighed on YoY.
• O&M, D&A, and financing costs rose as expected to support capital plan, compressing flow-through vs rate increases; O&M +$83M YoY in Q2 and D&A +$28M.
• Against consensus, EPS and EBITDA came in slightly below while revenue exceeded, highlighting cost absorption and weather normalization effects (see Estimates Context).

Transcript

Operator (participant)

Good morning. Welcome to American Water Works Company's second quarter 2025 earnings conference call. As a reminder, this call will be 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 Works Company's investor relations website. I would like now to introduce your host for today's call, Aaron Musgrave, Vice President of Investor Relations. Mr. Musgrave, you may begin.

Aaron Musgrave (VP of Investor Relations)

Thank you, Alan. 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 second quarter earnings release and Form 10-Q, each filed yesterday with the SEC.

Finally, all statements during this presentation related to earnings and earnings per share refer to diluted earnings and diluted earnings per share. With that, I'll turn the call over to American Water Works Company's President and CEO, John Griffith.

John Griffith (President and CEO)

Thank you, Aaron, and good morning, everyone. Let's turn to slide five, and I'll start by covering some highlights of the second quarter and first half of the year. As we announced yesterday, we delivered solid financial results through the first half of 2025. Earnings were $1.48 per share for the second quarter compared to $1.42 for the same period last year. In the first six months of 2025, earnings were $2.53 per share compared to $2.37 per share in the same period of 2024. With this strength across the business combined with our expectations for the rest of the year, we now expect to achieve the top half of our initial EPS guidance range for 2025, which we've narrowed to $5.70 to $5.75 per share. David will share more about our results and guidance a bit later.

Moving on to some of our other key accomplishments so far in 2025, we invested $1.3 billion in capital projects year to date, again reflecting great work by our teams responsible for planning and completing these investments. We were also very pleased to announce several new acquisition agreements in the first half of the year, including the Nexus Water Group systems that will add nearly 47,000 customer connections, which we expect to close by August 2026. As Cheryl will discuss, we are continuing to build momentum with our business development platform, with 87,000 customer connections under agreement totaling over $500 million across our platform. We continued our track record of regulatory execution in the first half of 2025, with new rates effective in several states and new cases filed to reflect investments in infrastructure for the benefit of our customers.

Which leads us to slide six, which describes the drivers of American Water Works Company's very competitive and sustainable shareholder return profile. We have a clear top-tier capital growth plan underpinned by decades of fundamental water and wastewater infrastructure renewal and water quality investment. This, combined with our strong regulatory and operational execution, results in a value proposition that we believe is unique in the utility sector. We are again affirming our long-term targets for both earnings and dividend growth at 7% to 9%, driven by 8% to 9% rate base growth. We expect to consistently grow earnings and dividends at an industry-leading pace over the next five years and beyond. With that, I'll hand it over to David to cover our financial results, rate case updates, and our 2025 outlook in further detail. David.

David Bowler (EVP and CFO)

Thanks, John, and good morning, everyone. Turning to slide eight, I'll provide further insights on second quarter results. Consolidated earnings were $1.48 per share, up $0.06 per share versus the same period in 2024. Revenues were higher by $0.50 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. Weather, on the other hand, was unfavorable by an estimated $0.06 per share year over year. This was due to wet weather in 2025 across many states, resulting in an unfavorable $0.03 impact, combined with the $0.03 unfavorable weather variance from the warm and dry conditions experienced in the second quarter of 2024.

In looking at operating costs, O&M was higher by $0.17 per share, driven primarily by employee-related expense, increased maintenance, and technology cost, as well as cost-related acquisitions completed in 2024, which we expected. Depreciation increased $0.10 per share, and financing costs increased $0.08 per share, both as expected in support of our investment growth. Turning to slide nine, year-to-date consolidated earnings were $2.53 per share, up $0.16 per share versus the same period in 2024. On a weather-normalized basis, EPS was up 9.4% year-to-date compared to the prior year. Many of the same drivers I described for the quarter apply to this period as well, including the unfavorable impact of weather. Revenues were higher by $0.94 per share, and O&M was higher by $0.32 per share. Depreciation increased $0.21 per share, and financing costs increased $0.18 per share, both as expected in support of our investment growth.

Turning to slide ten, I'll cover the latest regulatory activity in our states. First, on completed cases, we received a final order from the Missouri Public Service Commission in May, approving our settlement agreement, which we discussed last quarter. In Iowa, we received a final order from the Iowa Utilities Board, approving an annualized revenue increase of $13 million based on an ROE of 9.6% and an equity layer of 52.57%, in line with Iowa's approved capital structure in its previous rate case. As a reminder, interim rates were effective on May 11, 2024, in the amount of $5.1 million, and final rates will go into effect tomorrow on August 1. In Hawaii, we received a final order last week from the Commission, approving an annualized revenue increase of $1.5 million based on an ROE of 9.75% and an equity layer just north of 52%.

We expect new rates to go into effect in early August. Turning to active cases, you can see we have general rate cases in progress in three jurisdictions. On May 5, we filed a general rate case in West Virginia, reflecting $300 million in system investments covering the period March 2024 through February 2027. We are seeking $48 million of additional annual revenue, which would be reflected in two steps, in March 2026 and March 2027. We expect this case to be completed by the end of February 2026. Intervenor testimony is set for October and rebuttal testimony in November. On May 16, we filed a general rate case in Kentucky, reflecting $212 million in system investments covering February 2025 through December 2026. We are seeking $27 million of additional annual revenue, and we expect proposed rates to go into effect on an interim basis in December 2025.

Intervenor testimony is set for August and rebuttal testimony in September. Finally, on July 1, we filed a general rate case in California, reflecting system investments through 2028. We are seeking $63 million of additional annual revenue in 2027 compared to authorized 2025 revenue, and a total increase in revenue over the 2027 to 2029 period of $111 million. If approved by the Commission, the new rates would take effect on January 1, 2027, with subsequent increases expected in January 2028 and 2029. As a reminder, our request for a one-year extension of our cost of capital filing to May 1, 2026, was approved earlier this year, which maintains our current authorized cost of capital through 2026, absent significant movements in interest rates. Another piece of our filing is decoupling. We currently have partial decoupling in California, but again are requesting full decoupling to promote affordable rates and conservation.

On a similar front, on the legislative side, a decoupling bill related to water utilities has passed out of the California Senate and is currently awaiting action in the California Assembly Appropriations Committee. On slide 11, as John mentioned, yesterday we announced that we are narrowing our 2025 EPS guidance to the top half of the range we first disclosed last October. The 2025 EPS guidance range is now $5.70 to $5.75, from $5.65 to $5.75 previously on a weather-normalized basis. We are seeing strength in the business across several regulated states so far in 2025, including solid customer usage. Coupled with the fact that we will continue to have revenue increases year over year in several states through Q3, we expect the second half of 2025 to deliver financial results to achieve this narrowed guidance range.

This puts us on track to deliver 8.6% EPS growth in 2025 at the midpoint of the narrowed guidance range. I'm confident in our team's ability to execute on our financial and operating plans, including delivering cost-effective financing while maintaining our balance sheet strength and credit profile. Our total debt-to-capital ratio as of the end of the quarter, net of $94 million of cash on hand, was 58%, which was within our target of less than 60%. As a reminder, our 2025 financing plan still includes another long-term debt issuance of roughly $1 billion to be completed in the second half of 2025. Finally, on slide 12, I want to re-emphasize that we continue to expect to achieve consistent EPS growth within the 7% to 9% range through 2029 and beyond.

We believe our industry-leading EPS and dividend growth, coupled with our affordability position and sustainability leadership, will continue to be highly valued and rewarded by investors. We believe these aspects of our business and our position as the largest and most geographically diverse water and wastewater utility in the country distinguishes us from all other utilities. With that, I'll turn it over to Cheryl to talk more about our capital program, our recent acquisition activity.

Cheryl Norton (EVP and COO)

Thank you, David. Good morning, everyone. On slide 14, our capital program delivered $1.3 billion of investments in the first half of the year. This result keeps us on pace to hit our goal of approximately $3.3 billion of capital investment in 2025. Our low-risk annual capital plan is made up of hundreds of individual projects, which our teams do a really great job of executing. As a reminder, the nature of the program also gives us the ability to flex up or flex down our organic CapEx spending annually in order to achieve our overall planned capital spend, including acquisitions. We continue to expect these capital investments in infrastructure and in acquisitions will grow regulated rate base at a long-term rate of 8 to 9%.

Turning to slide 15, we continue to be well-positioned for growth through acquisitions across many states, with about 87,000 customer connections under agreement from deals totaling $535 million. In May, we were pleased to announce an agreement with the Nexus Water Group subsidiary to purchase multiple water and wastewater systems located in eight states for $315 million. This acquisition will add nearly 47,000 customer connections and approximately $200 million to rate base. Through this transaction, we will grow in eight of our existing regulated states, supporting our long-term growth target of 2% for customer additions. As with other acquisitions, we'll be able to leverage our scale and size to deliver safe, clean, reliable, and affordable water and wastewater services to these new customers. We also believe this expansion will help lead to more growth since it will expand some of our in-state geographies.

We expect closing will take place by or before August 2026. In addition to the Nexus systems, we currently have 20 acquisitions in seven states under agreement for $220 million that would add about 40,000 customer connections. This represents significant progress on the business development front, including in West Virginia and Pennsylvania. Importantly, we've seen renewed activity in Pennsylvania, including four systems closed so far this year and an additional eight systems under agreement. The most recent acquisitions announced were the Pittston Wastewater System and the Indian Creek Valley Water Authority, where we plan to utilize fair market value under the new guidelines set by the Commission. We've negotiated purchase prices that we believe will result in approval by our regulators of transactions at full cost recovery. We remain confident in our acquisition pipeline, and we are continuing to invest in regulated acquisition opportunities across our footprint.

In all of our states, the acquisition opportunities are driven by the need for system consolidation, infrastructure upgrades, regulatory compliance, and operational enhancements. With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

Operator (participant)

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 your question has been addressed and you would like to remove it, please press Star then Two. We will pause momentarily to assemble our roster. Our first question comes from Richard Sunderland of JP Morgan. Please go ahead.

Richard Sunderland (Equity Research of North American Utilities and Power)

Hi, good morning. Thank you for the time today.

John Griffith (President and CEO)

Morning, Rich.

Richard Sunderland (Equity Research of North American Utilities and Power)

How are you thinking about Pennsylvania stakeholder relationships and engagements in advance of the next rate case application in the state? Have you been seasoning the time given application, and are you seeing recognition of that?

Cheryl Norton (EVP and COO)

Hi, Richard, Cheryl. Thanks for the question. We really appreciate it. We've been doing a whole lot of work in that stakeholder space. First and foremost, we continue to provide really great customer service across the state. We know that that is the ultimate way for us to keep our customers happy. That's what they expect. We have created a stakeholder plan where we continue to reach out and build relationships across all of our stakeholder groups. We feel like we're in a really good spot in Pennsylvania. We are continuing to plan for our rate filing just as you would normally expect and as we've talked about in the past.

Richard Sunderland (Equity Research of North American Utilities and Power)

Got it. That's helpful color there. On the financing side, I know you've been clear on sort of strategy for the equity with blocks. Curious if you would explore a forward issuance to take care of the 2026 equity needs. Seen a lot of peers in the space get ahead of equity. Thank you.

David Bowler (EVP and CFO)

Hey, Rich, this is David. Yeah, thanks for that question. Obviously, we keep all options on the table and are always evaluating the options that we have to issue. Our plan is to take proceeds in 2026 and issue the equity in '26.

Richard Sunderland (Equity Research of North American Utilities and Power)

Great. I'll leave it there. Thank you.

Operator (participant)

The next question comes from Angie Storozinski of Seaport. Please go ahead.

Angie Storozynski (Senior Equity Research Analyst of U.S. Utilites & Power)

Thank you. I wanted to ask about the Nexus Water Group acquisition. Anything you guys can provide as a basis for the earnings power of this asset and how it compares to municipal M&A that you would typically pursue, and what does it say about the availability of larger municipal targets that you guys are going after a private set of assets? Thank you.

Cheryl Norton (EVP and COO)

Thanks, Angie. I'll take a stab at that question. We see the Nexus Water Group acquisition. It was a great opportunity for us to get a group of customers in states that we already provide service to, but it does help us to expand our footprint in those states. We don't see it being a lot different than most of our acquisitions. We're going to go through the same processes to bring these customers online. We've already started outreach with employees and communities so that we can get to know them and they can get to know us a little bit as we go through the process, which is just typical for what we would do in any acquisition type of scenario. We don't see this as being any kind of an indication. Regarding municipal deals, those municipal deals are still out there.

We're still pursuing them, and we're still getting lots of interest across our footprint. We think that it's just another step in right-sizing the organizations across the U.S., and this consolidation piece that we've been pushing on and seeing all across the footprint is going to continue, and that will happen in various ways. We're excited about this deal, but it certainly has not taken our eye off the ball on the municipal systems.

Angie Storozynski (Senior Equity Research Analyst of U.S. Utilites & Power)

It is not going to have diminished profitability because of the goodwill that is being paid and then just a different treatment of privately owned asset acquisitions?

Cheryl Norton (EVP and COO)

No, I don't think that it's going to have a negative impact at all. I think it's going to be, again, we'll just roll them right in and we'll just keep moving forward. I don't see a negative impact at all.

Angie Storozynski (Senior Equity Research Analyst of U.S. Utilites & Power)

Okay. That's all I have. Thank you.

Operator (participant)

Just a reminder, if you have a question, please press Star then One. Our next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.

Jonathan Reeder (Equities Research Associate Analyst)

Hey, good morning, team. Congrats on a solid update. I wanted to start first, I guess, piggybacking off of Angie there and say congrats on the Nexus deal as well as the resumption of some Pennsylvania fair market value deals. Cheryl, could you just kind of talk a little bit more on the landscape in Pennsylvania on the fair market value front? Were these deals that were kind of already in the pipeline just waiting to get done once the PUC finalized the revisions to the rules, or is this just kind of more the tip of the iceberg of the backlog of deals that are kind of waiting to come, and we should expect to see a lot more Pennsylvania fair market value activity in the quarters ahead?

Cheryl Norton (EVP and COO)

Yeah, Jonathan, thanks for the question. These deals are all long lead-time deals. We've been working on all these deals for quite some time. Nothing happens overnight in the acquisition space. I would say these deals have just gone through the natural progression. I don't think they were necessarily waiting in the wings for these rules to get finalized or anything like that. I think the timing is what it is, just based on the conversations that we've been having. We look at each deal to determine, does it make sense to do a fair market value deal, or does it make sense to do a more traditional type of deal? We've had a mixture of those. When you talk about all the deals that are happening in Pennsylvania, they're not all fair market value deals. Do we expect more to come to the table? Absolutely.

We'll continue to manage through those deals. We were glad when the Commission gave us guidelines that we can follow along so that it makes that process of getting a deal closed smoother and hopefully faster. We're going to follow those guidelines with our fair market value deals so that we can really push all these deals forward, whether they're fair market value or not. We think there's still a lot more deals. There's a lot of consolidation that needs to happen out there.

John Griffith (President and CEO)

Hey, Jonathan, it's John here. I'll just add to Cheryl's comments, and Cheryl's spot on there in terms of the Pennsylvania landscape. We really are seeing additional contribution from across our entire platform as well. Pennsylvania remains healthy, but those same dynamics that drive Pennsylvania in terms of the need for investment, economies of scale, which leads to the regionalization, all apply across our platform. We've spent the last couple of years organizing to be able to move on those dynamics broadly across our states.

Jonathan Reeder (Equities Research Associate Analyst)

Awesome. That's great to hear the momentum is broad. One other question I had was on your reference to the bill, the decoupling bill in California. Can you kind of expand a little bit more what exactly that says, or maybe what's the goals of the bill? I believe the legislature in previous years kind of passed a decoupling bill, but it didn't require the Commission to adopt decoupling. Does this bill require them to approve full decoupling for the California water utilities?

Cheryl Norton (EVP and COO)

Jonathan, this bill was designed to try to close that gap for us. We are hopeful that it continues to make its way through and that the governor signs off on it. We are hoping to have a decision over the next few months.

Jonathan Reeder (Equities Research Associate Analyst)

Okay, at this point, it still needs to pass both chambers before even going to the governor. Is that correct?

David Bowler (EVP and CFO)

Yeah, it's passed, Jonathan, David, it's passed out of the appropriations committee. Now it's got to go to the full legislature, and then once it passes there, it goes to the governor's desk.

Jonathan Reeder (Equities Research Associate Analyst)

Excellent. All right. Thanks so much for taking the time to answer my questions. Again, congrats on a good update.

Cheryl Norton (EVP and COO)

Thanks, Jonathan.

David Bowler (EVP and CFO)

Thank you.

Operator (participant)

The next question comes from Paul Zimbardo of Jefferies. Please go ahead.

Paul Zimbardo (Managing Director and Research Analyst of Energy Research)

Hi, good morning, team. Thank you.

John Griffith (President and CEO)

Hi, good morning, Paul.

Good morning. I just had one quick one here, comprehensive before. Just on the strength in the 2025, pushing up the guidance towards the top end. I know you attributed it to some stronger usage and just outperformance across the footprint. Is there anything else in particular that kind of drove that strength? If we should think about that, those drivers, whatever they may be, contributing in 2026 plus?

David Bowler (EVP and CFO)

Hey, Paul, this is David. No, I mean, what we disclosed in the call here was really the primary driver. We've just seen strong usage. We saw that last year, a continuation of that. That's the main driver.

John Griffith (President and CEO)

Yeah, Paul, just to add to that, it's a lot of consistent regulatory execution and the strength of our diversified platform geographically as well as from a regulatory perspective.

Okay. Understood. Thanks very much. Have a good one.

This concludes our question and answer session. Our presentation is now finished. You may now disconnect.