American Water Works Stock

Good morning, and welcome to American Water's Second Quarter 2026 Earnings Conference Call. As a reminder, this call is being recorded and is also being webcast with accompanying slide presentation through the company's Investor Relations website. The audio webcast archive will be available for 1 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'll 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.

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 and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And 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'll turn the call over to American Water's President and CEO, John Griffith.

Thanks, Aaron, and good morning, everyone. Let's turn to Slide 5, 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 in the second quarter and through the first half of 2026. Adjusted earnings were $1.61 per share for the second quarter, compared to $1.49 per share for the same period last year. In the first 6 months of 2026, adjusted earnings were $2.62 per share, compared to $2.51 per share in the same period of 2025.

With this strength across the business, combined with our expectations for the rest of the year, we continue to be on track to achieve our full year earnings guidance, which we've again affirmed along with our long-term targets. David will share more about our results and guidance a bit later. I also want to acknowledge the great work of our state and corporate regulatory teams as they continue to successfully execute our regulatory strategy with rate cases and merger proceedings, which I'll talk more about shortly.

We have completed 3 rate cases already in 2026 in West Virginia, Maryland, and Pennsylvania, all of which authorized recovery of nearly 100% of the capital investments we have made in each state. As we've discussed with investors many times over the years, 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.

American Water continues to receive healthy support at the state level for the work that we do. We, along with utility commissions, all share a strong desire to promote customer affordability, resilient and reliable services, and financially strong utilities. We look forward to continuing to provide common sense solutions for the benefit of customers and communities across our 14-state footprint.

Moving on to some of our other key accomplishments so far in 2026, we have invested $1.8 billion in capital projects and acquisitions year-to-date. This reflects our focus on making investments to better serve our customers and to grow the business. As we've said, growing to scale in our states greatly benefits our operating efficiency and long-term customer affordability.

Speaking of customer growth, we were very pleased to close on the acquisition of systems from Nexus Water Group ahead of schedule on June 1. Our teams did a great job of achieving all 8 requisite state approvals in a timely and constructive manner. We're also excited to continue our progress on the municipal acquisition front with approximately 57,000 customer connections under agreement as of June 30.

Overall, we are well on our way to executing our capital plan for 2026 and achieving our target of 2% customer growth. These efforts align squarely with our mission to provide safe, clean, reliable, and affordable service to our customers.

Turning to Slide 6. I'm pleased to share that we've continued to achieve new milestones in the second quarter related to our proposed merger with Essential Utilities. You may recall, as part of the update we provided with Q1 earnings, we achieved our first state approval, Kentucky, in April. In May and June, we added Ohio and Virginia to the list of approvals received.

It's also worth noting that so far, we're hearing good support for the merger during public input hearings, including in Pennsylvania in April and May. In other states, the merger cases are proceeding as planned, including very good progress in Texas, where we've reached a settlement in principle. We remain very pleased with our integration planning to date and the constructive relationships that continue to develop between the American Water and Essential Utilities teams. Consistent with our messaging from the merger announcement last October, we expect the merger to close by the end of the first quarter of 2027.

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 8, I'll provide further insights into our financial results for the quarter. Consolidated earnings were $1.61 per share compared to $1.49 per share in Q2 of 2025, representing just over an 8% growth rate. Revenues were higher due to authorized rate increases to recover investments across our states, while depreciation, financing costs, and general taxes increased as expected. Importantly, O&M costs were flat period-over-period, highlighting our continued focus on cost control while supporting operational and customer needs.

Slide 9 shows our financial results for the year so far. Consolidated earnings were $2.62 per share, compared to $2.51 per share in 2025, which is well on track with our plans for the year. The various drivers here are similar to the quarterly drivers and our outlook for these categories for the year remains unchanged, as you can see from the full year waterfall in the appendix. As a reminder, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect later in Q3.

Slide 10 provides a look at our balance sheet and liquidity profile. Our total debt-to-capital ratio as of June 30 was 58%. On May 20, we successfully completed a long-term debt issuance of $500 million at 4.625% that attracted strong demand. In June, we settled 3.4 million shares of our approximately 8 million share equity forwards for a net proceeds of $476 million. Our financing plan for 2026 assumes we'll settle the remaining equity forwards in Q4.

Slide 11 covers the latest regulatory activity in our states. In Pennsylvania, we received a final order in the case that approved a $75 million annualized increase in water and wastewater revenues, compared to the filing that had requested $160 million increase. The order also approved a return on equity of 9.55% and an equity component of 54.2%. As John mentioned, we believe this was a constructive outcome, and we will implement new rates on August 13.

On active cases, you can see we have general rate cases in progress in 6 jurisdictions. To highlight a few of those, in June, we entered into a black box settlement with staff and several intervenors in Virginia, as well as a partial settlement with the Public Advocates Office in California. In New Jersey, we -- as outlined in the procedural schedule, the company is in confidential settlement discussions with the parties to the proceedings, and we hope to be able to announce a resolution soon.

In Illinois, our case is progressing as expected, and the next milestones in the case will be evidentiary hearings in August, followed by briefings from all parties in September and then a proposed order due in October. On May 15, we filed a general rate case in Kentucky, reflecting $108 million in system investments covering January 2027 through December 2027. We are seeking $18 million of additional annual revenue, and we expect proposed rates to go into effect on an interim basis in December of 2026. Intervenor testimony is set for August and rebuttal testimony in September. And lastly, on July 1, we filed a general rate case in Missouri, reflecting $1.6 billion in system investments, covering the period from June 2025 through May 2028. We are seeking $179 million of additional annual revenue, and we expect proposed rates to go into effect in June 2027. Importantly, with this case, this is the first case using the fully forecasted future test year legislation that was passed last year.

Turning to Slide 12. As John mentioned yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of, again, delivering 8% EPS growth in 2026, while continuing to provide high-quality, affordable service to our customers. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond.

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

Thanks, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many needed capital projects across our footprint in the first half of 2026. We've deployed $1.8 billion this year to renew our infrastructure, improve resiliency and address water quality challenges, as well as add new systems, including those acquired from Nexus.

These investments are crucial for us to deliver on our core mission of consistently providing clean and reliable water and wastewater services, and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers. We are hyper-focused on staying balanced between affordability and making necessary investments in our systems. We remain confident that American Water's average monthly residential water bills will stay at or below 1% of median household income for many years to come.

Concluding on Slide 15, we continue to be well positioned for growth through acquisitions across many states as our track record of signing and closing deals continues in 2026. We were excited to begin serving the customers of the acquired Nexus Water systems in the beginning of June, which was a few months ahead of our initial estimated time line. We look forward to leveraging our scale and size to deliver safe, clean, reliable and affordable water and wastewater services to the 47,000 new customer connections and to welcoming the 70 local employees who already call these communities homes.

Zooming out, as of June 30, we had approximately 57,000 customer connections under agreement across 6 states totaling $236 million. There are many systems across our fragmented industry that have underinvested in the necessary capital to operate their systems, and we believe we can be a solutions provider for these communities.

With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

[Operator Instructions] And the first question will be from Paul Zimbardo from Jefferies.

I promise no Pennsylvania questions for a change. Starting in Missouri, just with that forecast year, is there any way to quantify what the benefits of that kind of change would be? Or said differently, what the rate increase would have been versus that $179 million, if it was more of a historical filing?

Paul, this is David. We have not quantified it. I mean, in practical purposes, I think one way you can do it is, if can you go back and look at our prior cases and what that filed increase would be. I mean that's not a complete apples-to-apples, but that could give you an idea.

Okay. Got it. It looked like a decent pickup potentially. So I was just curious there. And the other was Indiana, kind of 2 parts. I know there's kind of an affordability process in the state. It seems like it's not focused on water, but curious to your thoughts there. And also, I know there was some legislation passed, which seemed like it could give you a little bit incremental recovery on some chemical costs and others. Just curious overall Indiana affordability and the legislation, if you could.

Yes. Paul, I'd say we still feel good about Indiana from everything we're seeing in the state. It's focused on the electric affordability story there. Our rates are very affordable in Indiana and continue to be in our forecast to be there. So we feel good. As far as the legislation, yes, it's -- I mean, it's beneficial to us. I mean, it's not overly material from an American Water standpoint, but it's certainly -- little wins like that help.

And the next question will be from Shar Pourreza from Wells Fargo.

Actually, it's Andrew Kadavy on for Shar. Has the Pennsylvania PUC commentary on the frequency of your rate cases changed your regulatory strategy in the state? Or do you see the 25 basis points of ROE for less regulatory lag as an acceptable trade-off?

Thanks for the question, Andrew. With regards to our strategy in Pennsylvania, our real focus and what underpins our rate cases in the state is the capital investment that we make. They're really investment-driven rate cases. As we look to recover, we can continue to do that under general rate cases. Another area that we're exploring is a broadening of our DSIC mechanism, which could be useful in a couple of ways, giving us interim recovery in between rate cases, which also has the benefit of smoothing in increases over time, which is helpful from an affordability perspective.

I'd say water in the state as it relates to mechanisms is a little bit behind electric. In other states, we've had the opportunity to update the mechanism. And certainly, from our perspective in PA, if we can get some traction in being able to do that, that could be helpful from a cadence perspective. But at the end of the day, for us, we need to continue to -- our obligation in PA as in all of our states is to provide good service that requires capital. That's what drives the rate cases. And so we'll look for the most constructive form of recovery.

Makes sense. And then staying in Pennsylvania, has the affordability noise and Shapiro's intervention in the Peoples Gas case, does that have any potential impact maybe on the approval of the Essential merger? How should we think about that?

Well, approval for the merger is really just under a standard in the state. Each state has their own standard. In the case of Pennsylvania, it is substantial affirmative public benefit that can come in a variety of ways. Certainly, affordability is a theme across the state and other states. But our job with respect to the merger is to be able to demonstrate substantial affirmative public benefit, which we think that we've done in our testimony. So we're in settlement discussions there, and so we'll continue to push there.

[Operator Instructions] Our next question is from Angie Storozynski from Seaport.

I was about to ask about the DSIC structure in Pennsylvania. So thank you for your comments. So could you maybe tell us what percentage of your CapEx currently qualifies for recovery under this rider? And what would it take to actually increase how much of the spending is recoverable?

Angie, thanks for that question. It's -- currently, it's about 40%, give or take, depending on the year, but you can roughly think 40% of our capital in PA falls under the DSIC mechanism.

And would you need some sort of a legislation to basically expand the CapEx that qualifies?

Yes. Under the current legislation that allows DSIC, we would need to amend that to include additional capital to fall under that mechanism.

And Angie, John here. Just to follow on David's response. I think there's a cap element to the DSIC and then there's an eligibility in terms of assets that's available. And so David correctly said legislation is required for a wholesale change. There may be work that can be done in a regulatory pathway around the edges that could be helpful. When you think -- so David's 40% answer, I think the answer to that question from an electric perspective, is somewhere in the neighborhood of 90%. And that's really when we look at what's eligible for us, think in terms of underground piping. And that's where water, when you think about treatment, think about PFAS, storage tanks, things like that, the more we can broaden the eligibility, then that would be helpful.

Okay. And then separately, you obviously still have the merger proceeding pending. It didn't seem to have impacted the distribution rate case, which, I mean, is definitely good news. But I'm just wondering, is there any chance that you could actually stay out of rate cases longer once you become a larger company? I mean, there has to be some economies of scale driven by the enlarged operations in Pennsylvania.

There certainly will be economies associated with the merger over time. I will say, in the near term, as we begin to go through our integration planning, there is a -- both companies have a -- and together as one company, we'll have a need really for the people, by and large, that we have today. Both companies individually and together still have the need to invest all of the capital that we're investing. And it's that capital investment that really drives timing of rate cases for capital recovery.

Thank you. And ladies and gentlemen, as there are no more questions, this concludes our question-and-answer session. We thank you for attending today's conference call. You may now disconnect your lines. Take care.

Good morning, and welcome to American Water's First 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 1 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'll 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 first quarter earnings release and Form 10-Q, 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 and other disclosures related to our non-GAAP financial information can be found in the appendix of the slides for this call. And 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'll turn the call over to American Water's President and CEO, John Griffith.

Thanks, Aaron, and good morning, everyone. As we announced yesterday, we started 2026 with financial results that were right on track to achieve our full year earnings guidance, which we are pleased to affirm again this quarter, along with our long-term targets.

Adjusted earnings were $1.01 per share for the quarter and reflect a successful execution of our plan so far in 2026. We expect to again deliver 8% EPS growth in 2026, while continuing to provide high-quality, affordable service to our customers. We are well on our way to executing on our regulatory and capital plans for 2026 with rate cases completed in 2 states and investments in infrastructure progressing well. Our teams have also continued to advocate for our customers in various facets to start the year.

For example, we've now secured approximately $185 million of net payments from PFAS manufacturers that will be passed on to customers or offset the cost of PFAS remediation. And in 2 more states, we've helped advance legislation in 2026 and that should set the foundation for expanded limited income customer bill assistance. These efforts align squarely with our mission to provide safe, clean, reliable and affordable service to our customers.

In sum, for Slide 5, I am confident we'll successfully execute on our plans for 2026 and beyond.

Moving on to Slide 6. As we announced yesterday, our Board of Directors approved an increase in the company's quarterly cash dividend of 8.2% to $0.8950 per share. We have grown our dividend consistently over the last decade, significantly outpacing virtually all of our utility peers. Looking ahead, we continue to expect to grow our dividend at 7% to 9% per year in line with our compelling 7% to 9% EPS growth target. Our Board and management team highly value our dividend and its contribution to our compelling total shareholder return for investors.

In closing, on Slide 7, I'm pleased to share that we've achieved another milestone on the path to closing our proposed merger with the Essential Utilities. You may recall, as a part of the update I provided in February, we filed all of the required state regulatory approvals prior to the end of 2025. Last week, we received our first state approval for the merger in Kentucky. We expect to receive the next decision in Virginia in June. In other states, including in Pennsylvania and New Jersey, the cases are proceeding as planned with procedural schedules expected to continue through the summer and early fall.

Also, late this summer, we plan to file the Hart-Scott-Rodino notification application related to the proposed Essential Utilities merger.

Finally, we continue to expect the merger to close by the end of the first quarter 2027.

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 9, I'll provide some further insights into our financial results for the quarter. Consolidated earnings were $1.01 per share, which, as John noted, is in line with our expectations. Revenues were higher due to authorized rate increases to recover investments across our states, while O&M, depreciation and financing costs increased as expected. Our outlook for these categories for the year remains unchanged, which you can see from the full year waterfall included in the appendix.

As you would expect, the majority of our EPS growth will occur in the second half of the year with revenue increases in key states expected to go into effect in Q3.

Slide 10 provides a look at our balance sheet, and liquidity profile. Our total debt-to-capital ratio as of March 31 was 58% which has improved compared to our year-end following the repayment of the $795 million HOS note in February as we expected. On April 1, we completed a successful long-term debt issuance of $700 million at 5.2% that attracted strong demand. Our financing plan for 2026 also still contemplates settling the roughly $1 billion of proceeds from our equity forward in the middle of this year.

Related to credit, we continue to have strong investment-grade credit ratings at S&P and Moody's. Both agencies note our trend of credit supportive regulatory outcomes and expect to sustain FFO-to-debt ratios that are well within the current ratings thresholds.

Slide 11 covers the latest regulatory activity in our states. We received final orders in West Virginia and Maryland during the first quarter, both of which had reasonable outcomes in terms of revenues and ROEs balanced with our continued focus on affordability. West Virginia American Water now has over $1 billion of rate base and our team there continues to receive positive feedback from stakeholders in the state as a solution provider, which Cheryl will further talk about in a few minutes.

On active cases, you can see we have general rate cases and progress in 5 jurisdictions. Our cases in Virginia, California and Illinois are progressing as expected and are just now entering key phases in their procedural schedules, as you can see on this slide.

In New Jersey, our rate case is progressing with the next major step in the case in Rate Counsel and intervenor testimony due June 22. As a reminder, from our last case filed in 2024, we entered into a settlement agreement in August of that year, with rates effective in September of 2024. We expect new rates for the current case to go into effect later this fall.

In Pennsylvania, briefs from all parties were filed earlier this month in line with the procedural schedule and a recommended decision from the administrative law judge is expected in May. We are encouraged by the tone of the case over the last several months. Prior to filing the case and through testimony filed, we have had the chance to highlight our numerous investments in water and wastewater systems for the benefit of our customers. And throughout this case, we believe our commitment to affordable service and our willingness to help our new communities in need of water quality and wastewater solutions has been recognized.

While settlement wasn't reached before the procedural deadline of April 6, we feel confident in our filed positions and the investments we've made and plan to make to serve Pennsylvania American Water customers. We expect the final order from the commission in July and new rates effective in August.

Turning to Slide 12. As John mentioned, yesterday, we affirmed our 2026 adjusted EPS guidance range of $6.02 to $6.12 per share. This represents our expectation of 8% EPS growth in 2026 compared to 2025, consistent with what we laid out last fall. We also continue to expect to achieve consistent EPS and dividend growth well within the 7% to 9% range through 2030 and beyond.

With that, I'll turn it over to Cheryl to talk more about our capital program, legislative wins, and our recent acquisition activity.

Thank you, David, and good morning, everyone. Starting on Slide 14, we successfully invested in many important capital projects across our footprint in the first quarter of 2026. These projects are mostly focused on pipe replacement, aboveground treatment facilities, including PFAS remediation, removing lead service lines and investing in updated technologies like smart meters. These investments are crucial for us to deliver on our core mission of consistently providing safe, clean and reliable water and wastewater services, and we remain vigilant about utilizing our scale and expertise to control costs and keep bills affordable for our customers, which I'll speak more about in a minute.

Slide 15 outlines 4 important pieces of priority legislation for us that were passed already in 2026. In Iowa, an infrastructure recovery mechanism is expected to go into effect on July 1 of this year that will allow us to recover certain investments more timely outside our general rate cases.

In Indiana, we'll be able to adjust for power and chemical costs if they change by more than 3% during a certain period. This will become effective on July 1. These bills will help to reduce our overall regulatory lag and further demonstrate the constructive regulatory and legislative environments in these states.

Additionally, as John mentioned, Maryland and Virginia both passed affordability-related bills that we pursued to benefit low-income customers. American Water continues to advocate for customer affordability legislation at the state and federal level.

And lastly, on Slide 16, we continue to be well positioned for growth through acquisitions across many states with 105,000 customer connections currently under agreement from deals totaling $565 million. In order to meet our 2% goal for customer additions, we know that growth needs to come from multiple states. You can clearly see that our investment in dedicated originators who are focused on targeting and initiating acquisitions across our footprint is being reflected in deals under agreement in many states.

In March, we completed the acquisition of the Nitro wastewater system in West Virginia for $20 million. This system, like many of those we acquire, needs extensive capital upgrades in the near future in order to remain in environmental compliance and would cause their citizens in the absence of a transaction to absorb the full rate impact of those investments. American Water plans on investing over $40 million in the next 5 years, and we look forward to serving the 4,600 customer connections in that community.

And finally, the regulatory approval process for the Nexus Water Group Systems is progressing very well. We've received approval from the regulatory commissions in 7 of the 8 required states. Based on this progress, we now expect the closing to occur by June 30.

With that, I'll turn it back over to our operator to begin Q&A and take any questions you may have.

[Operator Instructions] The first question is from Jeremy Tonet with JPMorgan.

This is actually Aidan Kelly on for Jeremy today. Just wanted to touch on the 2026 guide. Clearly, you guys reaffirmed today and continue to message higher second half results from the upcoming new rates in Pennsylvania, New Jersey. I guess on that front, will be curious if you could provide any more insight on if you assume ROE increases, especially in PA, do you kind of expect that to bounce back a bit?

Thanks for the question. We certainly feel good about the merits of our case in Pennsylvania and expect to see a recommended decision from the ALJ in May and certainly all of the fundamentals from when we go back to the filing of our last case and the environment in Pennsylvania, I think, is well recognized in terms of the types and amount of water and wastewater investment that are required in the state, including along the lines of PFAS remediation, lead and copper, et cetera.

So I'd say we feel very good about the fundamentals of the Pennsylvania case and same in New Jersey where there's a meaningful amount of PFAS investment that's required. And I think there's broad understanding across administrations and other stakeholders for the need of those investments.

Great. And then just one separate -- simple question on the merger process. Could you just remind us like what is required to get it through? Do you need full approval across Pennsylvania, Texas, North Carolina, New Jersey, Illinois and Virginia? Or is there a scenario where it could go through if some states don't approve, I don't know, if Kentucky just had approved to get signed there, but just curious procedurally, how that's kind of going.

Sure. We need approvals in all of the states where approvals are required. And so there are PUC approvals required in 7 states. As you noted, we've received approval in Kentucky, statutorily will receive decisions in Virginia and Illinois this calendar year. But yes, you need all of the required approvals before we can close the transaction.

The next question is from Paul Zimbardo with Jefferies.

I just wanted to focus also on Pennsylvania. Just there's been a lot of kind of comments from the Governor's office and just more focus on utility bills, again, more the electric side. But just curious kind of what the engagement's been from stakeholders. I know you said going to get the settlement in Pennsylvania. But just curious kind of what the conversations and tone have been in Pennsylvania broadly?

Yes. I'd say, Paul, it's a good question. It's something that we're thinking about all the time and very active on with the Governor's office and with stakeholders. And we frankly see a lot of alignment in our position relative to what we think is necessary in Pennsylvania in terms of affordability and also investment, right, particularly in the era of increasing environmental investments and frankly, just the state of water and wastewater infrastructure in the state.

And again, from our perspective, utilities need to remain transparent, accountable, responsive to customer needs and we strive to be all of those things. And we also see the state being very constructive on growth and the need for growth. And in order to have that good economic development and kind of growth-oriented environment in the state. That requires having good healthy infrastructure, and we think there's broad recognition of that. So we feel very good about the fundamentals of where we are and what we're doing in Pennsylvania.

Okay. And one other small one, more of a technical one. I saw the corporate alternative minimum tax update in New Jersey and something in the Q. Just any impact we should be thinking about earnings, cash flow or otherwise from that new corporate alternative minimum tax guidance?

Paul, this is David. So yes, I mean there is a cash benefit for us. We filed for a refund for the '24 returns, about $84 million that we expect to get sometime this year. And then going forward throughout our forecast period. Prior to this change, we had $100 million or thereabouts throughout the forecast period CAMT payments. So there will be a, I'd say, a meaningful cash benefit for us.

Okay. Great. So that $100 million, that's a multiyear number, so whatever is $20 million, $30 million a year kind of say that...

Sorry, it's about $100 million a year. It trails off towards the tail end, but about $100 million a year.

[Operator Instructions]

our next question comes from Shar Pourreza with Wells Fargo.

Actually, this is Andrew Kadavy on for Shar.

So with the Essential merger pending in Pennsylvania and New Jersey, both net benefit states. Can you give a sense of what kind of customer benefits from the merger that you're highlighting for the commissions?

Yes, Andrew, I'd say we've made our filings in the states, and we're going through public hearing processes now. And certainly, it's still early days in those processes, but we do feel like there's good broad support for what we're trying to accomplish in the States. As you're aware, Pennsylvania is an affirmative public benefit state, and we look forward to demonstrating that, which we think is very consistent with everything that we're pushing for in Pennsylvania and in all of our states, which is affordability and top-tier customer service.

So I think we feel really good about our position there.

And then shifting gears a little bit to your financing plans. How should we think about the timing of the debt issuance for this year? Should we expect that in second quarter, third quarter? And then would it all be in one chunk or would it be spread out throughout the year?

Andrew, this is David. So I'm sure you saw, we just issued $700 million of long-term debt -- 10-year debt on April 1. And then for the balance of the year, we've got our equity forward that we expect to take those proceeds at this point today as around midyear is what we've assumed for modeling purposes. And then in the latter half of the year, we have another debt issuance, long-term debt issuance in the plan. So you can think about Q3, early Q4 for that.

The next question is from Aditya Gandhi with Wolfe Research.

I wanted to start off in -- I wanted to start off in Pennsylvania. You mentioned you weren't able to settle this time before the procedural deadline. One of your electric peers in the States settled their rate case recently. Recognize each case has its own unique circumstances. But can you maybe just speak to sort of your approach to this case, just given the fact that historically, you've been able to settle in Pennsylvania except this one and the prior one. And then also speak to your level of confidence in being able to get a balanced outcome from the commission?

Yes. Thanks for that, Aditya. And I'll go backwards. I think we do feel good about our prospects for getting a balanced outcome in Pennsylvania. Since our last case, we've worked very purposefully across the state to continue doing what we always try to do, which is really a prudent investment in the state to meet all of our system needs while recognizing the need for affordability across customer classes. And we do think that those efforts are recognized. And so we certainly feel good about our prospects there. In any rate case, there's always -- you go down a path and there are opportunities to settle and then you move forward from there.

Rate cases are a combination of financial issues, policy issues, and it's just a process. We feel good about the process that we've gone through so far in Pennsylvania. And again, just look forward to hearing what -- from the ALJ with a recommended decision in May.

Got it. That's helpful color. And maybe just one more question from me. Following up on a previous question about the CAMT. So in your current plan, if I understood David's comments correctly, you're embedding about $100 million of cash tax payments annually. When you do refresh your plan this year with Q3, will you incorporate that benefit into your plan? And could we see some sort of reduction in your equity needs?

Well, we will incorporate the change into the plan when we refresh in Q3, and we'll evaluate the need at that time on equity.

As there are no more questions in the queue, this concludes our question-and-answer session.

And this also concludes the conference. Thank you for attending today's presentation. You may now disconnect.

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 1 year on American websites -- 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 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. And 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.

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 and 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 to $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% to 9% range through 2030 and beyond. We have 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 company's 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 10.

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 2 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?

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 for 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 $0.46 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. And looking at operating cost, O&M expense was higher by $0.42 per share, driven primarily by employee-related costs and increased production costs, mainly higher pricing on purchase 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 6 rate cases we successfully completed in 2025, 5 of which we covered on prior calls. In December, we received a final order in Kentucky, where we're authorized and analyzed 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 1-year extension of the California cost of capital filing to May 1, 2027 and 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 the latest regulatory activity in our states. On active cases, you can see we have general rate cases and progress in 7 jurisdictions. Our cases in West Virginia and Maryland are furthest along, 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 14, 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 16, 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 27, we filed a general rate case in Illinois, reflecting $577 million in system investments through December 2027. We are seeking a 2-step increase totaling $134 million of additional annual revenue, and we expect step 1 of new rates, if approved, to take effect in January 2027. In all of our states, we are taking great care to provide detailed information in our rate cases about the important investments we are making on behalf of our customers. And 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 to $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 interest of our regulators, customers and investors and support 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 midyear 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 slide in the release last night, the $795 million secured seller note due from the sale of HOS was repaid in full on February 13, 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 know our trend of credit supportive regulatory outcomes and expected sustained FFO to debt ratios well within the current rating 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?

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 a regulated rate base at a long-term rate of 8% to 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.

[Operator Instructions] The first question today comes from Julien Dumoulin Smith from Jefferies.

This is Spark on for Julien. I have a question on the portfolio positioning, maybe post close. So what is your latest expectations or plans for the Peoples 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?

Thanks for the question. Just to reiterate, we'll be making decisions on people 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 for -- to reinvest into the business. Certainly, a portion would be for debt repayment and a portion would be for continued rate base investment.

Understood. And maybe just a follow-up. What was your 2025 realized FFO to debt? And how do you forecast that over the period pro forma for the Essential Utilities transactions?

This is David. Yes, we typically don't disclose what our FFO to debt is. You can generally calculate close to it from the financial statements.

Got it. One last one very quickly. So do you expect to reach settlements in Pennsylvania New Jersey and Illinois rate cases pending?

Look, so 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 going to be on terms that are constructive for us and beneficial and provide a fair return.

The next question comes from Gregg Orrill with UBS.

Thank you for the update. 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?

Yes. Thanks, Gregg. This is Cheryl. As far as the Nexus approvals, we've approved -- we've received approvals in a few states, but still have about 5 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 time line. 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...

The next question comes from [indiscernible] with Mizuho.

This is [indiscernible] from Mizuho on behalf of Anthony Crowdell. Going back to Pennsylvania for a second. With the increased affordability scrutiny on the 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?

We'd say that, 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 when -- to ensure we get recovery of those investments. So as far as the current -- the pace, we were generally on a 2-year cycle in Pennsylvania and across all of our states, and we don't see that changing at this point.

Okay. And just a follow-up on that, same question, for New Jersey. As we all know, affordability is also very salient these days under new Governor, Sherrill. You filed the rate case earlier this year with testimony expected in summer. But how does this timing interplay with the 180-day BPU study initiated after inauguration, where the governor direct BPU to decide on affordability levers as we speak.

Yes. 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 all of our cases in 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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. .

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 CFO of American Water; Cheryl Norton, Executive Vice President and COO of American Water; and Dan Schuller, Executive Vice President and CFO of Essential Utilities.

[Operator Instructions] 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.

And 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 2 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.

So let's begin on Slide 5, 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 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; and 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 will maintain a strong long-term operational presence in Essential Utilities in 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 in 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.

Thanks, 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 6, 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.

So let's turn to Slide 7. 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-mile 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 8. 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% to 9% and rate base growth at 8% to 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% to 9% dividend per share growth target, supported by a healthy 55% to 60% dividend payout ratio.

On the left side of Slide 9, you'll see an overview of pro forma metrics. As Chris mentioned earlier, using 2024 actuals, our combined rate base approaches $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 2 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 to John and Slide 12.

Thanks, Chris. Together, our company will execute on a robust 5-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 the 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% to 9%. Subject to market conditions and Board approval, the parties expect the combined company to adopt American Water's current dividend policy. Our 55% to 60% targeted payout ratio makes room for substantial internally generated cash flow to enable continued investment and accretive rate base 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, Baa1 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 2 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 2 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.

[Operator Instructions] The first question today comes from Steve Fleishman with Wolfe Research.

Congrats on the merger. First question is just I'm curious kind of why now. I think these companies probably could have combined for the last 15 years, or at any time in the future. So anything in the industry or the company situation that kind of is driving kind of the timing of the merger?

Steve, John here. I think from our perspective, there are 2 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 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 that perspective?

Yes. I guess, Steve, I would maybe just 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 5 years ago when interest rates were low. So that's a critical component. And there's no secret that our stock at Essential had been trading at a discount for some time here as we finance a huge capital plan. So 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. And then just one other question on the -- how are you kind of including or not including the potential gas strategic options in the 7% to 9% growth? Is that embedded in there in some way? Is that not? How should we think about that?

I think, Steve, on that for both our 8% to 9% rate base growth and 7% to 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. It pro forma represents less than 15% of the combined company. So we just see enough in those ranges to be with or without. And certainly, we're prepared to look at that in both ways.

Next question comes from Nick Campanella with Barclays.

Congrats on the transaction. A lot of questions to ask. So I guess just for the state approvals, can you just remind us just if any of these are no harm states versus a net benefit state? And then just what has the kind of local reaction been so far since announcing?

Yes. Thanks, Nick. Combination of no harm and net benefits. By our count, we'll have a minimum of 7 state approvals, could be up to 10, just -- and we'll know that as we get more into certain processes.

Chris, anything to add there?

Just -- we've begun our regulatory calls. And I think at this point, there's a -- we're in that digestion period of people are just learning about it and understanding it. But so far, nothing but positive interaction.

That's great. And then just given we're waiting until about first quarter of '27 for the deal to close, do you plan to kind of run the businesses as normal course here over the next couple of quarters? So we were expecting on the AWK side, guidance on '26 to still be provided this Wednesday. Is that still the case? And then we thought that Pennsylvania, you might be both filing for rate reviews there on the water side and the gas side for '26.

Is that still the case as well?

Nick, this is David. Yes, we still plan to release guidance for next year on Wednesday and essential the following week is their earnings release. So that will come out next week. As far as the Pennsylvania cases, as we've said, we're generally on a 2-year cycle, and we still plan to be on that cycle. So we'll operate independently until it closes.

The next question comes from Angie Storozynski with Seaport.

So just a big picture question, John. So I mean, you're keeping your growth -- earnings growth expectations unchanged. I understand that it's better to be a larger company. But -- I mean, do you count on any benefit to earnings from that combination? You are acquiring a system, at least on the water side that is growing slower than you are. I mean 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.

Yes. Thanks 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, 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? And 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. But so we see very good prospects for growth here going forward.

Okay. And when you talk about review of strategic options for noncore assets, I mean, is there anything else besides the Peoples Gas that you're considering here, any other noncore operations?

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 really it's much smaller than Peoples.

The next question comes from Julien Dumoulin-Smith with Jefferies.

Team. Good morning, Nicely done. Congratulations.

Thanks, Julien.

[indiscernible] criteria 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?

Yes. Julien, it's John here. I'd say the only decision we made at this point is that we'll review alternatives post closing. And so 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, wastewater utility platform in the country.

Yes, absolutely. But 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% to 9%, though, right? I mean maybe where you land within the range given the 11% rate base growth?

That's correct. That's correct. We intend to maintain our 8% to 9% rate base growth and 7% to 9% earnings growth and 7% to 9% dividend per share growth.

The next question comes from Gregg Orrill with UBS.

Congratulations. Maybe a 2-part question. Are you -- does the combination have any impact on your plans and timing around PFAS spending? And then 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?

Yes, 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.

Yes. 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, so that will 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. And those would all be interestingly time for -- to align with data centers in terms of their depreciation, right? 15 years is the life of a data center. So 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 more to come.

The next question comes from Anthony Crowdell with Mizuho.

Congrats. If I could just follow up on Angie's question. Just when we build our model, 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? And then 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, non-wastewater businesses post closing, you could expect that there's -- that you could combine the companies for modeling purposes at closing for, as we said, the first quarter of 2027 and go from there.

Great. And then just a follow-up. 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, and it was kind of 2 companies on one end of the barbell and many small entities on the other. But again, it was challenging. Now we even combine those 2 companies into one. Does that ended up maybe causing more valuation dispersion and pulling the water valuations closer to electric? Or is that a concern that now an illiquid 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 water, wastewater, we really think about it in terms of the fundamentals. Our capital investment plan is highly visible for decades, right? And we think that's differentiating. If you think about the risk associated with the water asset class, right, we think that water should be the lowest beta stocks in somebody's portfolio. And when you -- so when you think about those kinds of fundamentals, when you think about the cost of capital, you think about the visibility of growth, that's what we see as really driving water valuation.

[Operator Instructions] The next question comes from Davis Sunderland with Baird.

Congrats on the merger. I appreciate the time. Maybe a question mainly for Chris, but John, you 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? And then two, how do you think about adding or any changes to just the other types of growth between now and closing?

Yes, it's a good question, David. And 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 putting -- are coming together and we're bidders. But that's kind of how it needs to be for the time being while we get ready for closing. So we would expect to be in the market actively looking for municipals and trying to be those solutions as we always have been. And then clearly, there will be some careful treading as we work through the process over the next, call it, 15 months.

This concludes our question-and-answer session and concludes the conference call today. Thank you for attending today's presentation. You may now disconnect.