Walter J. Lynch
President and Chief Executive Officer at American Water Works
Thanks, Aaron. And good morning everyone. I am Walter Lynch, President and CEO of American Water. I want to welcome and thank you for taking the time to join us today. We know you have a choice and where to invest your money and we thank you for your confidence in American Water. We are confident that throughout our presentation today, you'll continue to see that we're well positioned for success for decades to come and have an even more compelling long-term value profile for you our owners. We look forward to sharing our story.
Turning to the next slide. As outlined in our press release issued yesterday, American Water continues to execute on our strategies we laid out for you in February, operating where we can create the most value and now becoming a 100% regulated and regulated like business positioned to deliver even higher quality earnings. Today, we'll update you on our strategic focus and why becoming a fully regulated business allows us to accelerate on our commitment to build and maintain safe, reliable, and resilient water and wastewater infrastructure continue to put our customers first and deliver water and wastewater solutions where we can create the most value for customers and communities. Cheryl Norton, our Chief Operating Officer, will talk about our regulated business, focusing on our significantly increased capital investment plan, efforts to maintain affordable service, and our continued commitment to embed ESG principles throughout our operations. Susan Hardwick, our Chief Financial Officer, will cover the recently announced sale of Homeowner Services, our long-term financial strategy, 2022 earnings guidance and longer-term business plan along with our year-to-date and expected strong 2021 results. We will then look forward to answering your questions.
Let me start with our clear transparent strategy to operate where we can leverage our strengths and create value for all stakeholders. We create value when we focus our resources and efforts where we have scale, where we can drive efficiencies, invest in reliable and resilient infrastructure while enhancing our customers' experience and keeping their bills affordable. There is no other water and wastewater service provider in the United States with our scale and capabilities and that starts with a dedicated and talented people of American Water. Our company has an intentional long-term commitment to build and higher talent, inspire and reward high performance, create long-term development paths, and build a strong diverse team. Our successful strategic execution is driven by our inclusive high performing culture and our continued commitment to being a values-led company. Our values of safety, trust, environmental leadership, teamwork, and high performance guide us every day. We're cultivating deeply committed and passionate teams that care about our customers, our communities and each other.
Let me take a moment to talk about our business and our continued execution of our strategies. I'll start by reviewing our recent decision to sell our Homeowner Services business. Susan will cover the structure of the deal in greater detail. The strategic reason we executed this transaction was to further support our focus on the regulated business resulting in what will be a fully regulated and regulated like pure play water and wastewater company at close. Simply put, our core regulated business is strengthened by this transaction. We will be able to invest more capital in our water and wastewater systems as well as in acquisitions. I'll discuss our growth pipeline shortly, but there are many communities looking for solutions to serious water and wastewater challenges. The Homeowner Services business is a great business that we've grown over the past 20 years. Because of the nature of the business and its presence in the marketplace, we concluded that the opportunity to monetize that value and use the proceeds to accelerate our regulated investment strategy was in the best interest of all stakeholders. I want to say a special thanks to our employees of Homeowner Services for building this successful business. You're a tremendous team. We're thrilled with the transaction we've entered into with Apex partners and know that the business and its employees will continue to grow under their leadership. With a sharpened focus on our regulated business, we can grow and put our resources where we have scale, leverage constructive regulatory and legislative tools, drive further efficiencies and best serve our customers. After closing on the sale of HOS, our earnings will come exclusively from our regulated and regulated-like businesses providing long-term stable and steady growth. We know that higher quality earnings matter to those who invest in us. The opportunity to lessen the risk of more volatile earnings growth in exchange for the steady growth of regulated earnings adds to the American Water value proposition and the sale of Homeowner Services is just one example of our strategic execution. It's worth noting that we've announced multiple acquisitions in 2021 including our largest acquisition in York, Pennsylvania, which will add an equivalent customer connection total of more than 45,000. To date, we've closed on 14 acquisitions in 6 different states, adding approximately 7450 new customer connections. We also added 12,600 customer connections through organic growth to date, and we look forward to adding another 82,700 customer connections through 31 currently signed agreements in 8 states. Additionally, we continue to make progress on the sale of New York American Water. We fully expect the transaction to close by the end of the year.
So let's look at what the company will look like upon the closing of these 2 large sale transactions. This map clearly demonstrates our geographic diversity and how our scale and size are of key competitive advantage. American Water is the largest and most geographically diverse water and wastewater utility in the United States. Upon the closing of the sales of HOS and New York American Water will provide drinking water and wastewater services, including the 70 military installations we serve to an estimated 14 million people in 23 states. We operate in over 700 communities in United States with 3.4 million customer connections. In 2020, our top 7 states provided over 80% of our regulated businesses total revenue. Our Military Services Group is the largest provider of water and wastewater services for the military now proudly serving 17 installations across the United States. It's truly an honor to serve the men and women who serve our country.
Now turning to Slide 10. I want to highlight our industry-leading earnings growth outlook of 7% to 9%. As I mentioned, our regulated and regulated-like businesses will soon provide 100% of our projected EPS. Investments in the water and wastewater infrastructure and communities we currently serve and the ones we strive to serve will lead the way in our growth outlook and as Cheryl and Susan will cover, we will stay focused on prudent and efficient operating and financial strategies to continue to deliver on our growth targets. Turning to slide 11, as you may know, there is a bipartisan effort at the federal level related to an infrastructure package that we're dedicated $5 billion over the next 5 years to improve water and wastewater systems across the United States. The need for significant investment in water and wastewater infrastructure is widely recognized. Just this past fall, we saw the havoc the extreme weather caused for many water systems. This is in addition to an aging infrastructure, contaminants of emerging concern, ongoing efforts to replace lead and copper lines, and ever more complex water quality regulations. American Water is executing on our well planned asset renewal and upgrade strategy to drive modernization, improve efficiency, and increase reliability and resiliency. It's far better to address these challenges proactively than to wait until disaster strikes. Our new accelerated capital plan includes an increase of nearly $6 billion over the next 10 years, reflecting the continued needs in our existing systems as well as the increase in potential regulated acquisitions. American Water's investment thesis is unique because of the predictable and stable way we deploy our capital. We have the flexibility to scale our infrastructure investment plans up and down as capital needed for regulated acquisitions may vary because of deal timing. We've included $3 billion to $4 billion for regulated acquisitions in our new 10-year plan.
Let's move to Slide 12 to discuss how we balance investment opportunities with customer affordability. This is a disciplined and holistic approach focusing on operating and capital efficiencies, constructive regulatory and legislative policies, and a large increase in customer base. It comes down to driving efficiencies in areas where we've been successful effectively leveraging technology, taking advantage of our size and scale through supply chain, not only around price but access to critical supplies and driving our cost management through a culture of continuous improvement. We reinforce our operational efficiency efforts by focusing on capital efficiency. We understand that driving capital efficiency allows us to do more with the same amount of money. We employ a value engineering step in all large projects to optimize cost and performance of our project. We also continue to receive timely recovery of our investments through regulatory mechanisms across our footprint. These mechanisms reduce regulatory lag and extend the time between general rate case filings, which enables us to mitigate the size of rate increases from base rate cases.
Finally, our large customer base plays an important part in minimizing customer bill impact for this needed investment. We're able to spread the cost of these investments over a large state customer base, and again, leverage our efficiencies to minimize customer bill impact. Over the past 10 years, our O&M efficiency ratio has gone from 46% to nearly 34%, and we've challenged ourselves with a new O&M efficiency target of 30% by 2026. We're confident in our ability to hit that target. None of this would be possible without our people. Our employees are passionate about our customers and know how savings directly benefit them by keeping bills affordable. This is our culture and it's been so instrumental to our success in driving efficiencies. As you're aware and we've shown you many times before, our industry remains highly fragmented, creating ample opportunity for consolidation and efficiencies. There are approximately 51,000 community water systems and approximately 16,000 community wastewater systems in the United States compared to approximately 3800 electric utility systems and 1400 gas utility systems. This is significant for 2 reasons: first, these numbers illustrate the large volume of opportunities available. Second, many of these smaller communities are facing infrastructure challenges that require capital investment. Due to competing priorities, funds may or may not be readily available and the large amount of capital investment required must be distributed across a small customer base. This can significantly impact rates and affordability.
Turning to Slide 14 in our competitive advantages, because of our large customer base, we're able to spread capital investment costs, helping to maintain affordability for our customers. Another advantage, an important piece of our growth strategy is our ability to acquire wastewater systems within or near our water footprint. Our water operations make up approximately 93% of our business while wastewater is only 7%. This presents a tremendous opportunity because we have the operational infrastructure, equipment, expertise, personnel and relationships with communities where we already provide water service. We've executed a multiple successful wastewater acquisitions adjacent to and within our existing water operations. Some of these include Scranton and Exeter, Pennsylvania where we added 31,000 and 9,000 wastewater customer connections respectively and in Alton, Illinois where we added 23,000 wastewater customer connections and in Long Hill, New Jersey, we added 2800 wastewater customer connection. Wastewater acquisitions are a key growth opportunity and will continue to be going forward.
Turning to Slide 15, foundational to our strategy is operating and constructive regulatory environments with supportive business climates. We're proud to have worked with many stakeholders and constructive regulatory and legislative outcomes at the state level ultimately benefiting the communities we serve. This foundation gives communities more options to solve water and wastewater challenges and American Water more opportunities to help those communities through acquisitions.
Let's move on to Slide 16 for an update on our pipeline of acquisition opportunities. As we communicated earlier this year, we've increased our regulated acquisition EPS growth target to 1.5% to 2.5% and at the same time, sharpened our focus on our regulated investment and acquisition strategies. American Water is focused on growing in states where we can leverage our competitive advantages. As of today, we have a total of 31 acquisitions under agreement in 8 states and our 5-year opportunity pipeline is increased by over 60% in the past 12 months, growing from about 800,000 customer connections to over 1.3 million today.
Moving to Slide 17, let's discuss our Military Services business. Our business model centers on adding new military installations to our portfolio and then optimizing revenues on those bases. As you can see here, we have a potential of about 70 additional opportunities in the years ahead. Additionally, we can optimize revenue through constructing new infrastructure projects on base. A military installation's mission can change or expand or new technologies or system improvements maybe identified that improve efficiency or sustainability. We work with our bases to identify and leave these needed infrastructure projects. This regulated-like business has also been a key part of building talent within our organization. For example, our President of New Jersey American Water, Mark McDonough, previously served as president of our Military Services Group, because serving a military installation is very similar to serving a large system. The experiences our employees gain in safety, customer service, and asset management are highly applicable in our regulated operations, and again, we're extremely proud to provide essential services for the military men and women and their families.
Let's turn to our long-term growth story in Slide 18, covering our 5-year plan. You'll recognize our projected growth triangle with our regulated infrastructure investment serving as the foundation reflective of an increased capital plan made possible by the proceeds from the Homeowner Services sale and our previously announced larger growth expectation from regulated acquisitions. You can also see that we have narrowed our long-term EPS CAGR range to 7% to 9%. This narrow target range reflects the shift to higher quality earnings as we increase our capital spend for both system improvements and acquisitions. Of course, the accelerated spend will take time to be deployed and ultimately to be included for rate recovery. That ramp up will result in a bit slower earnings growth rate early on as the spend accelerates, but the result is earnings that are more consistent and predictable. We're confident that we can deliver on the components of this triangle and believe moving to a 100% regulated and regulated-like business best positions us for long-term success. We have a clear strategy focused on what we do best, and it starts by operating, where we can create value, leverage our critical mass, drive efficiencies, and increase opportunities to provide water and wastewater solutions. We're able to advance our capital plan making critical investments in our pipes, pumps, and plants hardening our assets against extreme weather events and deploying technology that will help us work smarter and more efficiently. We'll will balance that investment through a disciplined regulatory strategy and strategic cost management to support customer affordability, and again, while there is a ramp-up time related to increased capital and acquisitions and the recovery of those activities, out earnings will be more consistent and stable in the long term. And finally at American Water, ESG is core to our business and integral to our success. It's who we are, what we do, and how we do it. Living by ESG principles is our commitment to operate in the most responsible manner possible. I'd like to highlight a great example of how we embed ESG into our operations on Slide 19. In 2016, Pennsylvania American Water acquired the wastewater system assets of Scranton Sewer Authority, a combined sewer system that provides wastewater service to approximately 31,000 customer connections in Scranton and Dunmore. Pennsylvania American Water was already the public water service provider for these communities and brought both the technical expertise and financial resources to meet the Scranton Sewer Authority's unique challenges, provide a long-term wastewater solution, and maintain reasonable rates for the customers. Prior to significant upgrades made by Pennsylvania American Water, it was estimated that during a typical year, nearly 700 million gallons of combined sewer overflow discharged into the Lackawanna River, negatively impacting the water quality of the receiving streams. After Pennsylvania American Water purchased the system implemented numerous improvements and invested capital, the overflow volume had been reduced by 70%. We continue to work collaboratively with the state DEP on additional capital investment to further reduce the overflow volume and protect the local environment. This story demonstrates the interrelationship of our competitive advantages and how our leadership in applying ESG values complements our regulated growth strategies, all to improve the communities we serve and to deliver meaningful value to shareholders.
Let me now turn the call over to Cheryl to talk about our regulated business.
