American Water Works Company Inc

NYSE:AWK

Earnings Call Transcript 2020-Q4

[Ed Vallejo, Vice President of Investor Relations]

Good morning, everyone. I’m Ed Vallejo, Vice President of Investor Relations at American Water. And on behalf of our entire company, I'd like to welcome you to our Virtual 2021 Investor Day. Let me first go over some Safe Harbor language. Today, we will be making some forward-looking statements and those statements, those projections are made with the best estimates we have on hand. However, since these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties and other factors that may cause actual results to be materially different from the results indicated or implied by such statements.

The reconciliation for non-GAAP financial information used in the O&M efficiency ratio can be found in our Investor Day press release and in the appendix of the accompanying slide deck, which has been posted to the Investor Relations page of our website. All statements during this presentation related to earnings and earnings per share, refer to diluted earnings and earnings per share.

In addition, for the purposes of the presentation, our long-term EPS CAGR range is anchored off of the 2020 earnings per share results. Let me now spend a few minutes on safety, a very important topic for us. So much so that for every meeting we have, we start with a safety message. And you'll see this message woven throughout our presentation today. It's embedded in our culture. There is nothing more important than the safety of our employees and our customers.

At the heart of our safety objective is our pursuit of zero injuries at work. You've heard us say that we want to send our employees home at the end of every day in the same or even better condition than when they came to work. A safe and inclusive work environment is key to achieving this path to zero. The safety and health of our team is the reason we decided to hold a Virtual Investor Day this year. The format allows our speakers and those working behind the scenes to remain in remote locations and maintain social distancing.

We've practiced these and other COVID-19 safety measures throughout the year for our field teams, as well as those colleagues that work in offices. We're also taking into account all CDC and local and state guidance as we work on plans to return to a more normal state of operations when possible, with safety as our continued primary driver.

And with that, I would now like to introduce American Water’s President and CEO, Walter Lynch.

[Walter Lynch, Chief Executive Officer]

Thanks Ed and good morning, everyone. I'm 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 in where to invest your money. We thank you for your confidence in American Water. We're confident that throughout our presentation today, you'll continue to see that we're positioned for success for decades to come. And we continue to have a compelling long-term value profile for you, our owners. We look forward to sharing our story.

Before we discuss our agenda today and move to the presentation. I want to echo Ed's message on safety. Nothing matters more to everyone at American Water than the safety of our team and the public. As a company that provides essential services to communities across the country and an employer of more than 7,000 people with families and loved ones, no injury is ever acceptable to us. Safety is embedded in everything we do and is that the foundation, the plane will lay out for you today.

Turning to our next slide. As outlined in our press release issued yesterday, American Water continues to execute on our strategies and we're well positioned for long-term success. Today, I'll start by discussing our strategic focus and our commitment to building and maintaining reliable and resilient water and wastewater infrastructure, cultivating an inclusive high performing culture, delivering water and wastewater solutions, where we create value for customers and communities and continuing our commitment to being a values-led company.

Bill Varley, our Chief Growth Officer will discuss our regulated growth strategy. Cheryl Norton, our Chief Environmental Officer and President of New Jersey American Water will talk about our commitment to ESG principles and our new, and we think critical environmental targets. And Susan Hardwick, our Chief Financial Officer will cover in more detail, our 2021 guidance and long-term business plan along with our strong 2020 results.

We'll then look forward to answering your questions. Everything we'll discuss today starts with a clear, transparent strategy. We've been providing essential water and wastewater services dating back to 1886. Our success is rooted in our values of safety, trust, environmental leadership, teamwork, and high-performance, and the strategies we built around our safety, people, operational excellence, growth and customers. As we look to the future and our long-term success. Today, I want to spend some time and how we'll continue to create value for all our stakeholders.

This starts with operating where we can leverage our strengths, including areas where we have customer concentrations. Fragmentation has long been a challenge for water and wastewater providers across the United States. But for American Water, we're able to focus our resources and efforts where we have scale, where we can drive efficiencies, invest in reliable and resilient infrastructure while enhancing our customer's experience and keeping their bills affordable.

The COVID-19 pandemic has highlighted the importance of clean, safe, reliable water, and wastewater services like never before, by strategically focusing our resources, we strengthen our operations and continue to provide excellent local customer service. This strategic effort also provides greater opportunities to deliver meaningful water and wastewater solutions to communities building on our proven success.

Last year, we invested more capital than any previous year. We continued our disciplined focus in O&M efficiencies. We added approximately 38,000 customer connections through acquisitions in 10 states. And we were recently named one of the Top 10 World's Most Sustainable Corporations by Corporate Knights.

Now we'll build upon that success by continuing to hone our strengths. There's no other water and wastewater service provider with our scaling capabilities. We're uniquely positioned to help our country address long existing water and wastewater challenges and strengthen the communities that we're privileged to serve. And that starts with the dedicated and talented people of American Water. This goes beyond investing in training. It's an intentional long-term commitment to building and hiring talent, inspiring and rewarding high-performance, creating fulsome development paths and building a strong, diverse team.

A perfect example of our bench strength is last week's news that Cheryl Norton has been named American Water's Chief Operating Officer, effective March 1. We’re so pleased to have Cheryl take on this key leadership role for our company. Cheryl has deep utility experience, a strong commitment to safety, a passion for excellent customer care and a collaborative approach to building high performing teams.

Importantly, she fully embraces our values and the culture we continue to build at American Water. 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 the continued execution of our strategies. American Water is the largest and most geographically diverse water and wastewater utility in the United States.

We have more than 7,000 employees who provide drinking water, wastewater, and other related services to an estimated 15 million people in 46 states. We provide services to customers through our two business segments, our regulated business, and our market-based businesses. Our regulated business is our core business, providing more than 89% of our projected EPS by 2025. We own and operate a significant amount of assets, including more than 53,000 miles of pipes, 609 water treatment plants, 150 wastewater treatment plants, 1,100 wells and 75 dams.

We treat and deliver more than 1 billion gallons of water every day for our customers. Our market based businesses include homeowner services and our military services group, which I'll speak to in a moment. Before we move on to the next slide let me comment on recent transactions that illustrate the execution of our strategy.

As you know, we're in the process of selling our operations in New York, and we recently signed an agreement to sell our Michigan operation. We're working on additional opportunities that will further strengthen our presence in states where we're eager to grow. We expect to have more to share on that in the very near future. These agreements and other opportunities that we're exploring are a key part of our strategy to operate in states where we can best serve customers, drive efficiencies and continue to grow through regulated investment and acquisitions.

I would also note that Pennsylvania-American Water was the successful bidder to acquire the wastewater treatment and collection system for the city of York, Pennsylvania. We're currently working through the approval process. This potential agreement would add an equivalent customer connection total of about 45,000 and would be another example of growing where we can add value.

Let's turn to our long-term growth story on Slide 9, covering our five-year plan. You'll recognize our projected growth triangle, now reflecting a larger growth expectation from regulated acquisitions. This plan also reflects our increasing capital plan. There continues to be a significant need to invest in water and wastewater infrastructure, not just within our system, but broadly across the United States.

On the water side, there are 1 million miles of pipes in the United States, and there's a major main break every two minutes. The country loses about 2 trillion gallons of treated water every year through more than 240,000 main breaks. That's roughly 20% of all treated water in the United States. On the wastewater side, through about 800,000 miles of collection pipes in the United States, many of those pipes are in dire need of replacement and pose a risk to groundwater.

Every year, nearly a trillion gallons of untreated sewage are discharged into our rivers and streams. We understand the urgent need for a well-planned and executed asset renewal and upgrade plan to drive monetization, improve efficiency and increase reliability and resiliency. Our 2021 to 2025 capital plan includes an increase of $1.3 billion, reflecting the continued needs in our existing systems, as well as the increase in potential regulated acquisitions.

Bill Varley will give more detail on our pipeline of acquisition opportunities in a moment. We expect our market-based businesses to contribute about 1% of our growth over the next five years, compared to our prior plan. This slightly lower growth rate is not a reflection of slower growth at our market-based businesses, but rather the increasing growth potential we see from regulated acquisitions. As a reminder, our capital-light market-based businesses generate cash as well as enhance our customer experience.

And again, we're incredibly proud to provide water and wastewater services to the men and women of our military at 17 installations. These components of our triangle give us confidence that we can continue to grow our long-term EPS CAGR of 7% to 10% over the next five years.

Let me now talk about our capital plan in greater detail. We're committed to providing safe and reliable water and wastewater services to the hundreds of communities we serve. We achieve this level of service by incorporating established best practices in our operations and implementing an investment strategy that balances infrastructure needs with affordability for our customers.

American Water has a demonstrated ability to service and maintain distribution and treatment infrastructure, including improving water quality, fixing leaks, and providing water for fire hydrants to name just a few. These efforts help communities remain strong and attractive to residents and businesses. We plan to spend $1.9 billion in 2021 and about $10.4 billion over the next five years.

Again, that's a $1.3 billion increase over the plan we share with you last year. The largest component of this investment is infrastructure renewal, which is primarily for pipe replacement and upgrading water and wastewater treatment facilities. Over the next five years, we plan to replace about 2,200 miles of pipes and makes significant upgrades to our water and wastewater facilities across our footprint.

We're also making needed investments to enhance water quality, as well as taking steps to improve our water sources. Every water provider must be prepared to address a broader range of contaminants and be ready to meet more stringent regulations. Finally, we'll invest in new technologies to enhance our customer experience and enable our employees to drive efficiencies.

On the longer horizon, you can see that we plan to spend approximately $22 billion to $25 billion in our regulated business over the next 10 years. American Water's investment thesis is unique because the predictable and stable way we deploy our capital. Our capital deployment is made up of many small investments across our footprint, which gives us the flexibility to scale our infrastructure investment plan up and down as capital needed for regulated acquisitions may vary because of deal timing. You can see that we set aside $3 billion to $4 billion for regulated acquisitions.

Let me also point out that our capital investment generates significant economic benefits to the local and regional economies. According to the U.S. Water Alliance for every million dollars, we invest in our infrastructure. We create 15 high paying jobs for our communities. So our plan investment of about $10.4 billion over the next five years has the potential to create over 156,000 jobs in the communities we serve.

Let's move to Slide 11 and discuss how we balance the investment opportunities with customer affordability. This is a holistic approach focused on operating and capital efficiencies, constructive regulatory and legislative policies and leveraging the size and scale of our business. It comes down to driving efficiencies in areas where we've been successful, effectively leveraging technology, taking advantage of our size and scale for supply chain, not only around price, but access to critical supplies and driving our cost management through a culture of continuous improvement.

When we achieve smart O&M reductions, we can invest in our water and wastewater systems while mitigating the impact on our customer's bills. We continue to improve our O&M efficiency ratio, which I'll discuss in a moment. We reinforce our operational efficiency efforts by also 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 our large projects to optimize costs and performance of a 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 any rate increase. I would note that 64% of capital recovery comes from regulatory mechanisms. We continue to engage with policymakers in similar efforts to support critical investments in solutions to water and wastewater challenges.

Finally, our large customer base plays an important part, minimizing customer bill impact for this needed investment. We're able to spread the cost of these investments over a large customer base. And again, leverage our efficiencies to minimize customer bill impact. As you know, small water systems across the country aren’t able to do this as they grapple with aging infrastructure and contaminants that threaten the quality of their drinking water.

Let's move to Slide 12 for other ways, where strategically managing costs. We take a strategic approach to managing our costs, centered on deploying, enabling technology, leveraging our supply chain and embracing our culture of continuous improvement. Our technology is three areas of focus, enabling our employees, enhancing our customer experience and driving best-in-class operations. Technology enables us to drive efficiencies in our business and to provide an excellent customer experience, whether it's through automating manual tasks so employees can focus on higher value work, making data available to customers so they can better manage their usage or leveraging automatic meter reading solutions with an intelligent alert system to detect and fix leaks earlier.

We continue to drive efficiencies through our supply chain. Just last year, we saved over $80 million by leveraging our buying power across our business. For example, we saved more than $50 million on pipes and vehicles, and we replicated this effort in other areas such as chemicals, valves, construction materials, and safety supplies. Our team has established strong relationships with key suppliers to ensure we have priority when items are essential to operating our business or in short supply.

This was especially important during the initial phases of the COVID-19 pandemic. 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 their bills affordable. We enable our employees to find better, more efficient ways to work. This is our culture, and it's been so instrumental to our success in driving efficiencies. Our employees understand that for every operating dollar we take out of the business, we can invest $8 in capital with no customer bill impact.

Moving to Slide 13. You can see that we continue to make steady progress and driving efficiencies in our business. Over the past 10 years, our O&M efficiency ratio has gone from 46.1% to below 35%. And we've challenged ourselves with a new O&M efficiency target of 30.4% by 2025. We're confident in our ability to hit that target. Just to put that into perspective, our adjusted O&M expenses are just slightly higher today than they were in 2010. Since that time, we welcomed approximately 322,000 customer connections while expenses only increased at a compound annual growth rate of 1%. That could only be done with the great work of our employees and our commitment to controlling costs and keeping bills affordable for our customers.

Our market-based businesses are complimentary to our regulated business, they’re capital-light businesses, and they provide positive cash flow to help us with our growth in the overall business. Homeowner services now serves approximately 1.5 million customers, reaching that customer milestone is a testament to our ongoing dedication and commitment to serving our customers, delivering quality protection programs and fostering innovation in the home warranty sector.

Our military services group is the largest provider of water and wastewater services for the military, now probably serving 17 installations across the country. We were also extremely honored in 2020 to be awarded Department of Defense contracts for the water and wastewater systems at Joint Base Lewis-McChord in Washington State. It's truly an honor to serve the men and women who serve our country.

Let's turn to the next slide and I'll conclude my remarks before turning it over to Bill. We have a clear strategy focused on what we do best. Our future success is based on our proven success. Our long-term perspective has informed our business strategy 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.

Our regulated investment remains the foundation of our growth and we'll balance that investment through strategic cost management. We'll continue to focus on our customers and enhance their experience through technology, efficiencies and innovation. Our market-based businesses will continue to compliment our regulated business through operating results, free cash flow, and an enhanced customer experience. And finally, it's not just what we do, but how we do it. That's at the core of our ESG philosophy. It's who we are today and how we plan to challenge ourselves in the future.

Let me now turn the call over to Bill to talk about our strategic growth.

[Bill Varley, Chief Growth Officer]

Thanks, Walter. Hi. I'm Bill Varley, Chief Growth Officer for American Water. Prior to my current role, I've held many leadership positions at our company, including President of New Jersey American Water, Senior Vice President for the Northeast and Midwest divisions and Deputy COO. Before I review our growth strategy, let's take a look at the landscape of the utility industry in general.

Our industry is highly fragmented, there are more than 50,000 community water systems and approximately 15,000 community wastewater systems in the United States compare that to the U.S. electric utilities, which are comprised of approximately 3,800 systems and gas utilities, which are even more consolidated with approximately 1,400 system. The water industry's fragmentation provides ample opportunities for systems consolidate and bring efficiencies across the entire sector. To put that in perspective on the water side, 84% of the population is served by municipal water systems. And more than 90% of those systems serve a population of 10,000 people or less.

This is significant for two reasons. First, these numbers illustrate the large volume 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 invested required must be distributed across a small customer. This can significantly impact rates and affordability. Because of our scale, we're able to spread capital investment costs over a much larger customer base, help we can maintain affordability for our customers.

Opportunities on the wastewater side are also significant because many of these systems are already part or near our water footprint. This gives us the opportunity to leverage our existing infrastructure and drive operational and cost efficiencies. Let's move to the next slide.

Beyond our scale, other competitive advantages include a large customer base. Let me take you through an example where both scale and a large customer base played an important role prior to New Jersey American Water acquiring the water and wastewater systems of Haddonfield, New Jersey, the town faced the daunting need to invest over $20 million in capital improvements over a short timeframe. This investment was required to maintain compliance for their wastewater system and to make necessary improvements to their aging water infrastructure. These costs would have significantly increased rates for their 10,000 customer connections.

When New Jersey American Water purchase Haddonfield system, we're able to spread the capital costs across a customer base of over 650,000 connections throughout New Jersey. Our ability to leverage scale of our footprint enables us to accelerate the capital program. At the same time, rate impacts were far less than if the town had decided to do the work themselves. Deep utility experience and expertise was also relevant in Haddonfield, as it is in other acquisitions. We have a culture of continuous improvement and our employees are passionate about finding solutions and serving our customers

Technology and purchasing capabilities along with our culture of continuous improvement, also bring added benefits. As Walter mentioned, for every dollar of O&M costs, we can remove from the business. We can invest $8 of capital without increasing customer bills. Another advantage 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 services. It's a natural transition to acquire wastewater services. And it is an important piece of our growth strategy.

We've executed multiple successful wastewater acquisitions adjacent to and within states with existing water operations, for example, in Scranton and Exeter, Pennsylvania, we added 31,000 and 9,000 wastewater customer connections, respectively. And in Illinois, we had 23,000 wastewater customer connections.

Let's now move to the next slide and see how regulatory and legislative policy also helps drive water and wastewater solutions. We continue to engage with state legislators and regulators on policies, which we believe benefit existing and future customers. Let's talk about three examples, fair market value legislation, consolidated tariffs and legislation around water quality, accountability. Fair market value legislation enables communities to receive a fair value for their systems, in turn the water or wastewater purchaser earns on the appraised value of the system, rather than the book value as was historically the case.

The appraised value is then included in rate base as long as the commission is deemed reasonable. The latest states within our footprint to enact fair market value legislation include West Virginia and Iowa. 10 out of the 15 states we serve now have some form of fair market legislation. Next is consolidated tariffs, we have that legislation now in 12 states. This legislation allows us to purchase systems, integrate them into our operations and share those costs across a bigger customer base, minimizing customer bill impact.

The last example is the water quality accountability legislation, which directly benefits customers and communities, as it holds all water providers to the same standards. The first state to enact this was New Jersey with the Water Quality Accountability Act. This act requires cybersecurity programs, capital asset management programs, and responding to notices of violations in the same way across all systems. Additionally, it requires all systems to establish a maximum 150 year pipe replacement program to help ensure infrastructure reliability. At American Water, our pipe replacement rate is slightly over 100 years. Because of our asset management program we remain well positioned in New Jersey and across our footprint to meet these requirements. We have seen other states adopt similar legislations, such as Indiana and Missouri.

Let's now shift our attention to updating you on our acquisition activities. Since 2015, we've completed 106 acquisitions and have added over 211,000 customer connections. Of the 106 acquisitions, 62 were water acquisitions, totaling 52,000 connections. 44 were wastewater adding 159,000 customers. In 2020, we completed 23 acquisitions in 10 states, totaling approximately 38,000 customer connections. Regarding our focus to increase our wastewater acquisitions of the 38,000 customer connections added over 24,000 were wastewater.

This total does not include over 14,500 customer connections attributed to organic growth. We're off to a good start in 2021 with a total of 27 acquisitions under agreement in six states, representing approximately 30,000 customer connections. As you can see, we've increased our five-year opportunity pipeline by 50% over the past year, from 800,000 customer connections to over 1.2 million. When developing our pipeline, we first look to our optimal target range of 5,000 to 50,000 customer connections. Then we conduct the evaluation. This evaluation is not just focused on financial needs, but also looking to provide solutions for potential water quality, operational and wastewater compliance needs, challenges that are increasingly burdensome to communities.

Other criteria that we use to evaluate opportunities include enhancing the quality of life for residents and local businesses, whether it be economic development for growth, social programs, or overall community services to name a few. Once systems have been identified, we proactively engage with the communities to see where and how we can provide solutions. You can see on the right here are some of the targets we're working on over the next five years.

This list clearly shows that our growth is not contingent on any one deal, but multiple deals across our footprint. And as you can also see the size of these potential deals is also increasing. Let's take a moment to discuss the process and the timeline of acquisition from opportunity assessment, development of agreements to the final close and inclusion in rate base. This process can take a minimum of 18 months to several years to complete, usually starts with a robust bid and procurement process, community approval, regulatory approval and then the final inclusion in rate base as part of a general rate case.

Our increased pipeline, our proactive approach to engage in communities and our competitive advantages position as well to achieve our EPS growth target related to acquisitions. Regarding New York, Pennsylvania, in January of this year, Pennsylvania American Water was a successful bidder to quiet the wastewater treatment collection system for the city of New York. We are currently working through the process, but this potential agreement were in an equivalent of 45,000 customer connections, it also shows how American Water plays a role in providing solutions for communities and enhancing the lives of the customers we serve.

Let's move to the last slide. In summary, as we've added more capital to our plan, our regulated acquisition target has been raised from 1% to 2% to 1.5% to 2.5%. We tend to achieve this by executing on fundamentals, which are a continued focus on water system acquisitions in our target range of 5,000 to 50,000 customers and consideration for larger acquisitions where appropriate, a focus on wastewater acquisitions in or near a water footprint, continuing engagement on legislative and regulatory policy to benefit customers and an increased development of our opportunity pipeline through a proactive approach. By executing on our fundamentals, we firmly believe are well positioned to meet our increased growth targets.

Now I'll turn it over to Cheryl to talk about ESG.

[Cheryl Norton, Chief Environmental Officer]

Thank you, Bill; and good morning, everyone. I'm Cheryl Norton, Chief Environmental Officer of American Water and President of New Jersey American Water. As Walter said earlier, I'm a great example of the value that American Water places on the development of its employees. My career began at American Water 34 years ago, when I was hired as a temporary employee at our central lab in Belleville, Illinois.

And on March 1, I will become the Chief Operating Officer. The path that I've taken to get here today has given me a broad base of experience across multiple states and multiple areas of the business. My start with American Water as a microbiology research technician gave me a unique perspective on water quality, which I continued to build on throughout the years. It's been fun to reconnect with those roots in the Chief Environmental Officer role. I've worked in Illinois, Kentucky, Missouri and New Jersey, and I even spent a few months in West Virginia.

My leadership roles in these States allowed me to become familiar with operational challenges across the business. I've also experienced a wide range of regulatory and legislative environments and can directly relate to the efforts that Walter and Bill mentioned, and the importance to the business and our customers. My success is a direct result of the amazing people that I've worked with over the years, who've been willing to teach me the business and allow me to bring my whole self to work. I'm honored and grateful to have the opportunity to give back by mentoring and helping others find their path here at American Water.

In the future, I'll be here to talk to you about the industry leading operations across American Water, but today, I'm excited to talk to you about our ESG efforts. 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. ESG is a constantly evolving journey for us.

The information that we gather for various reports is used internally to guide our strategy, as well as externally for investors. We categorize our reporting topics into five key areas, which includes stakeholder engagement, workforce, customers, infrastructure and environmental stewardship. We confirm those topics with various internal and external stakeholders. We know that each stakeholder group brings a valuable perspective that helps inform our priorities. ESG is not simply environmental, social or governance, it's the sum of all three areas coming together and overlapping with our corporate values and strategy. The culture at American Water is what makes us who we are and our employees throughout our business understand that how we do things matters just as much as what we do.

Let's talk about some of the data that represents the social pillar and the progress that we've been making. Our focus on inclusion and diversity continues at American Water with improvements in areas such as talent attraction, retention and development. During 2020, 84% of job requisitions had a diverse candidate pool with approximately 59% of transfers and/or promotions filled by minority, female, veteran or disabled individuals. In 2020, we named a Chief Inclusion Officer and a Director of Inclusion and Diversity. These roles will work with leaders all across our business to help ensure our progress continues.

We are also very proud of our nationally recognized supplier diversity program. In 2021, our goal is to achieve a diverse supplier and small business spend of 27.6%, an increase of approximately 10% over 2020 results. We recognized the importance of these efforts to our company and the communities we serve. Regarding safety, if we don't get safety, right, nothing else matters. We have a long-term target of zero injuries and our employees work tirelessly to keep each other safe. Our 2020 safety performance was the best in the company's recorded history, despite this great improvement that performance represents 63 injuries and that's 63, too many.

Our focus on safety has driven a 67% reduction in workplace injuries over the past five years, which is 81% better than the industry average. But being an industry leader isn't good enough, and so we get to zero injuries, we still have work to do, and our focus will continue. We understand the importance of developing our teams and we've increased our target for annual training for all employees from 20 hours to 25 hours for 2021. During 2020, our employees completed more than 100,000 hours of safety training, in addition to other important training. This is a significant statistic considering that due to COVID-19 almost all of that training was done virtually.

Turning to our environmental goals. After completing a thorough goal benchmarking process, we identified three opportunities to build on our previous work. We're excited to share with you a measurement clarification to our existing energy and emissions goal, and two new goals regarding water efficiency and water resiliency. We're clarifying our existing energy and emissions goal to include specifics around measurement. The goal has been adjusted to reduce absolute scope 1 and scope 2 greenhouse gas emissions by more than 40% by 2025 from our 2007 baseline.

As a reminder, the vast majority of energy consumed by water utilities is used to pump water. In fact, roughly 4% of all the electricity in the U.S. is used for the treatment and transport of water, around 90% of our total electricity consumption and over 80% of our greenhouse gas emissions are related to the pumping of water. Our path to reduce energy consumption and emissions is driven by using water more efficiently. Through year end 2019, we had reduced greenhouse gas emissions by over 32%, which puts us at 80% of our 2025 goal. By continuing to improve energy and water efficiency, increasing procurement of renewable energy and modifying our fleet, we're on track to meet this target by 2025.

Our two new long-term goals are focused on water efficiency and resiliency. By 2035, we will reduce the amount of water delivered per customer by 15% compared to a 2015 baseline. And by 2030, we will improve our water system resiliency by increasing our utility resilience index or URI weighted average by 10% from a 2020 baseline. These goals are the right thing to do for the communities we serve and they will enhance our leadership position in ESG.

Let me talk about our two new goals in more detail. As a water company, we have a responsibility to our customers and the environment to be as efficient as possible. That's why we're committed to meeting our customer's water needs, while simultaneously saving 15% in water delivered per customer compared to a 2015 baseline. Over the past five years, we've already accomplished a 4.3% reduction in water delivered per customer, and in the future, we'll expand best practices from our existing conservation programs, utilize innovative technologies like AMI and leak detection and leverage the transparency that we gained through these programs to identify and eliminate sources of water loss faster.

By investing capital to improve system performance, we can reduce water loss and non-revenue water, while minimizing customer rate impacts. In addition, we'll continue to benefit from the ongoing national trends of declining residential water use related to fixtures and appliances. Our third environmental goal is to increase our water system resiliency to prepare for and respond to more extreme events. We'll do that by improving the weighted average of our utility resilience index or URI from our 2020 baseline. Our target is a 10% improvement by 2030. Recent history shows that the frequency and severity of weather events, as well as the stress on water supplies related to scarcity, flooding and contamination events, makes the resiliency of our systems more important than ever.

We spend approximately 8% of our total capital investment on resiliency projects each year to address these risks and maintain continuous service to our customers. Another key factor in resiliency is the preparedness of our employees. We continue to strengthen our workforce through incident management training and emergency preparedness. We often go beyond our workforce and include contractors and community partners in our emergency response planning and drills. This approach not only makes our response plans stronger, it builds trust and valuable relationships with the communities we serve.

Let's take a minute to look at what the URI is in a bit more detail. It's a part of the American Water Works associations, risk and resilience management of water and wastewater standard, also known as the J-100 standard. It's made up of three categories, our people, our assets and the communities we serve. It calculates a utility's ability to respond to and recover from extreme events, including severe weather, environmental incidents, cyber attacks, supply chain disruptions and more. A higher average index percentage indicates that we're able to return to normal operations more quickly, there will always be some element of risk, so this assessment doesn't offer the potential for a perfect score.

Best-in-class scores range from 60% to 70%. Our 2020 baseline of approximately 66% weighted average across our footprint is well within that range. Our goal to improve by 10% will further help us be prepared for whatever extreme event may arise. To be frank, measuring our performance in this way sets us apart from others in the sector, to our knowledge, we are the only company holding ourselves to this high standard.

In closing American Water is a proven leader in ESG and our new long-term goals are designed to solidify our leadership role. We will continue to reduce our greenhouse gas emissions, improve water efficiency and ensure that our systems are leading the industry in resiliency. It is what we do.

Now, I'd like to turn it over to Susan.

[Susan Hardwick, Chief Financial Officer]

Thank you, Cheryl. Good morning, it's good to be with you virtually this morning. And we certainly look forward to doing this in person, hopefully very soon. I'm Susan Hardwick, Executive Vice President and Chief Financial Officer of American Water. You have just heard from my colleagues, the various elements of our strategy. Let me now translate what that means to our financial plan. But before we get into our longer-term financial outlook, let me take you through the highlights of our strong 2020 results.

In the fourth quarter of 2020, earnings were $0.80 per share, compared to $0.54 per share in the same period of 2019, an increase of $0.26 per share. Results for the regulated business increased $0.01 per share and results from the market-based business increased $0.22 per share. Parent company results improved $0.03 per share in the fourth quarter of 2020, as compared to the same period in 2019. Consolidated results reflect a two set per share benefit from depreciation not recorded as required by assets held for sale accounting in 2020 related to the pending New York sale, and the loss of $0.19 per share on the disposal of Keystone Clearwater Solutions in the fourth quarter of 2019.

For the 12 months ended December 31, 2020 earnings were $3.91 per share compared to $3.43 cents per share in the same period of 2019, an increase of $0.48 per share. Earnings in the regulated business increased $0.33 per share, while the market-based business results improved $0.24 per share compared to 2019. Parent company results were $0.09 per share lower in 2020 as compared to 2019, due primarily to higher interest expense. Regulated results reflect an estimated $0.10 per share, favorable impact year-over-year due to warmer and drier than normal weather across several of the company's subsidiaries in 2020 and unusually wet weather conditions in 2019.

Regulated results also include the impact of increased revenues from new rates in effect, as well as earnings from acquisitions offset somewhat by higher wages and related costs and other maintenance costs. Operation and maintenance costs and depreciation also increased in support of growth in the business. And finally, regulated results reflect $0.06 per share benefit from depreciation not recorded as required by the assets held for sale accounting in 2020.

Market-based business results improved compared to 2019 from the addition of installations for the Military Group and new partnerships and price increases in the Homeowner Services Group. As a reminder, results in 2019 reflect a $0.19 per share loss on the disposal of Keystone Clearwater Solutions in the fourth quarter of 2019. Additionally, results for the full year 2020 included an estimated $0.02 per share unfavorable impact from the COVID-19 pandemic, primarily in the homeowner services group from increased claims that likely have resulted from more work from home activity.

For the regulated business, as we have mentioned throughout much of 2020, we have been working with regulators to secure the opportunity to defer for future recovery, many of the impacts of the pandemic. And we did see as expected that an increase in residential demand largely offset the lower demand in the commercial sector. Our solid performance in 2020 is the basis for our long-term outlook. And as Walter highlighted for you, that outlook is quite strong.

Referring to Slide 31, we are establishing the EPS guidance for 2021 of $4.18 to $4.28 per share, compared to our weather normalized results of $3.84 per share for 2020. Our expectation for 2020 run reflects a year-over-year growth rate of over 10%, which is what we indicated would occur at our Analyst Day last year. In longer-term, we are maintaining our growth outlook of 7% to 10% over the next five years anchored off of 2020 results. The foundation of our growth as both Bill and Walter mentioned is our investment in rate base through acquisition and upgrades to our existing systems. As you've heard today, we are stepping up our expected investment in both of these areas.

And I think the important thing here is to continue to emphasize that there are multiple decades of capital investment opportunity in the regulated business. I should also add that the market-based businesses do not require a lot of capital, but do incrementally add to our earnings growth expectation, as we have continued to show on our growth triangle. As you can see now though, that expected contribution is slightly lower at about 1% as the expected growth through acquisitions has grown to a larger slice of the triangle.

As shown on Slide 33, for 2021, we expect to invest $1.9 billion in our regulated operations. You can see the breakdown between the investment in the existing system, which feeds the bottom part of our growth triangle and the expected regulated acquisition spend, which feeds the mid part of our growth triangle. Over the next five years, we expect to spend between $10.3 billion and $10.5 billion, a $1.3 billion increase in capital investment compared to last year's five year plan. Of that increased amount, the split is roughly even between acquisitions and infrastructure investment in our existing systems.

And our expected 10 year capital investment plan now stands at the $22 billion to $25 billion range, an increase of $2 billion to $3 billion from last year's 10 year outlook. Our rate-based growth expectation remains a very strong 7% to 8%. In absolute terms you can see on Slide 34, that we have grown rate-base by 50% since 2010 to an estimated $15 billion at the end of 2020.

Let's transition to how we intend to finance operations and the capital plan that we have just announced over the next five years, turning to Slide 35. As expected we will rely primarily on our operating cash flows to finance the business. We expect operating cash flows to be roughly $8.5 billion over the next five years, we're planning to raise a total of $3.6 billion of long-term debt, net of maturity repayments over the next five years, coupled with about $700 million of equity needs, which is up slightly from the $500 million we discussed as part of last year's plan. That combined with the proceeds from our New York American sale of roughly $500 million will finance this five year plan.

If you are thinking back to the same discussion last year, this current plan represents an increased investment of about $1.3 billion as we've said. That increment will be financed with increased cash flow from operations, as we roll the plan forward a year, additional expected cash proceeds from the New York sale as we have refined our estimated tax obligation upon the sale and additional public equity and debt financing. The incremental need will be financed with about 54% equity sources and 46% debt, which is supportive of our focus on the balance sheet strength and our overall debt to total capital goal.

As I mentioned, a key source of financing is cash flow from operations. As a regulated business, it is important that we timely earn and collect a return on the investment. To that end, we continue to be very active on the regulatory front. Recall our discussion with you last year that several of our larger States were expected to be conducting general rate cases throughout much of 2020. As those and other proceedings have progressed, the regulated businesses have received $151 million of annualized new revenue since the start of 2020. And this includes $56 million from rate cases and $95 million from infrastructure surcharges.

We are awaiting final orders on four rate cases and two infrastructure surcharge proceedings for a total annualized revenue request of $208 million. The continued successful execution of our regulatory strategy is a key element of our ability to consistently deliver results. Let me take a minute to provide an update on the developments in the rate case proceeding of Pennsylvania American. As was mentioned on the third quarter earnings call in October of 2020 Pennsylvania, American Water and the Pennsylvania Public Utility Commission Bureau of Investigation and Enforcement entered into a settlement agreement, providing for a total annualized revenue increase of $71 million over a two year period.

In November 2020, the company’s Pennsylvania subsidiary and the remaining active parties in the case presented their positions and briefs to the administrative law judge, who issued to the Pennsylvania public utility commission a recommended decision approving the settlement. The procedural schedule in this case was extended to March 15, 2021. The company expects the Pennsylvania PUC to issue a final order by the end of the first quarter, and once approved by the PUC, the new rates will be retroactive to January 28, 2021.

Now turning back to the big picture on Slide 37. As we execute on this plan over the next five years, it is very important for us to maintain a healthy balance sheet. As you know, we have maintained an A credit rating at S&P and a Baa1 at Moody’s. We believe this plan, both the level of investment and how we intend to finance it, is supportive of those current credit ratings. We are proud of our strong credit profile and we continue to work hard and maintaining it for the benefit ultimately of our customers.

The upper right of Slide 37 is our debt to total capital metric. You can see that this new plan will position us at approximately a 59% to 60% debt to total cap ratio, where we indicated last year, we would be – and notably down from the 62% at the end of 2020. The bottom left of the slide shows our debt maturity profile for the next five years. This is a very manageable refinancing profile, which we worked very hard to achieve. We have had very favorable debt capital market transactions over the past several years that have allowed us to effectively build this financing structure.

Also on this slide, you can see a glimpse at our liquidity, both now and what we expect at the terminal year of this five year plan. Our current cash balance of $547 million includes the proceeds of the $500 million term loan we entered into in March, 2020 to ensure adequate funds to meet our liquidity needs amid the disruption of short-term commercial paper markets at the outset of the COVID-19 pandemic. The term loan comes due in March of this year. Even without the term loan our $2.25 billion line of credit affords us plenty of capacity to the extent we need it.

And finally, on Slide 38, let me just reiterate the compelling story of American Water. We remain confident that we can grow earnings in the 7% to 10% range over the next five year period. American Water remains one of the fastest growing utilities in the entire utility sector. We have also delivered top quartile utility dividend growth while maintaining a payout ratio target of 50% to 60% and remain committed to continuing that as we expect to grow our dividend at the high end of the 7% to 10% range.

We commit to maintaining our predominantly regulated risk profile with the regulated businesses providing 89% of our 2025 projected EPS. The foundation of this business is regulated operations, and we currently expect to invest between $22 billion and $25 billion over the next decade on water quality and the safety and security of our water infrastructure. The combination of our EPS and dividend growth continues to be a top performer in the utility sector on total shareholder return.

As you can see on the right side of this slide, we have delivered an annualized total shareholder return of 182% over the past five years. This is a business that is fundamentally very strong and we continue to deliver excellent outcomes to all of our stakeholders. We are very proud to be able to do that.

And with that, I'll turn the call back over to Walter for some closing remarks.

[Walter Lynch, Chief Executive Officer]

Thank you, Susan. Proven and predictable financial performance is an outcome of the successful execution of our strategies. I think you've clearly heard today that we're confident in our long-term success. This confidence is rooted in our strengths, it starts and ends with our unwavering commitment to safety. To us, safety is more than just the right thing to do. The health and safety of our team is a leading indicator of our company's health. Simply put, if we can get safety, right, we can get everything else right.

To excel we must get the fundamentals, right. Operational excellence helps us define better and more efficient ways to do business and it enables us to provide safe, clean and affordable water services for our customers. As the largest water and wastewater company in United States, we assume the responsibility to go beyond minimum requirements and be an industry leader in operational and environmental excellence. This can only be achieved by collaborative high-performing teams.

Maintaining an environment, where our people feel valued, included and empowered it’s critical to our ability to serve customers every day. We're working together to create an environment where employees can live up to their fullest potential and feel confident that they can directly contribute to our company's ability to stay strong, grow and make a difference in our customer's lives. And making a difference for our customers and for the communities we serve is centered on providing solutions to water and wastewater challenges.

When we grow, we're able to leverage our scale, we can invest more, we can create stable jobs and we can improve infrastructure and make communities stronger, and for some ESG is a relatively recent development. For American Water, it's an affirmation of the values we've upheld for decades, it's much broader than just three words, it includes environmental leadership and sustainability, operational excellence, employee engagement, safety and equality, active community engagement, civic and charitable involvement and transparency and good governance. All are foundational to our corporate strategy.

Turning to Slide 41. American Water has been recognized for our leadership and ongoing commitment to integrating ESG principles throughout our business. From sustainability to supplier diversity, to our commitment, to an inclusive culture, we're incredibly proud of these achievements. But we know we have got much more work to do. In all these categories, we’re never finished. I personally want to thank our employees. They are so engaged in every aspect of ESG, it matters to them. Like our investors who expect us to live up to ESG principles, so do our employees.

In conclusion, here is what you can expect from us. Our fundamental investment strategy remains, we're affirming our long-term EPS CAGR of 7% to 10%. We plan to invest about $10.4 billion in the next five years, an increase of $1.3 billion over last year's plan, we expect an increase of potential regulated acquisitions, now in the range of 1.5% to 2.5% EPS CAGR, we plan for dividend growth at the high end of the 7% to 10% growth range, and we'll continue to champion or high-performing culture, focused on safety and inclusion and diversity.

We're confident in our ability to continue as a top leader in the utility sector. And we hope today's presentation has provided you with a transparent strategic path to our long-term success. Before we take your questions, I'd offer you this thought, financially successful companies are frequently recognized nationally and internationally for strong performance and that's important. But for us, success is about enabling our employees to perform at their best. It’s about leading a team of extraordinary people doing critical work. It's about investing in people, communities, and helping our country solve its water and wastewater challenges.

We're excited about our future and we thank you for being on this journey with us. Before we take a quick break, I would like to turn it back to Ed Vallejo for information about participating in our question-and-answer session.

[Ed Vallejo, Vice President of Investor Relations]

Thank you, Walter. At this time for members of the investment community that wish to ask a question, please dial in using the instructions we provided in a previous e-mail. We’ll now take a five minute break.

[Operator]

Ladies and gentlemen, welcome back to American Water's 2021 virtual Investor Day. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Angie Storozynski with Seaport Global. Please go ahead.

[Angie Storozynski, Seaport Global]

Thank you. Susan, so my first question is about equity needs. You guys do not have an ATM plan, so talk to me please about how you see that $700 million in equity exactly – roughly which years and again, would you consider an ATM?

[Susan Hardwick, Chief Financial Officer]

Hey, good morning, Angie. Thanks for the question. Yes, so little bit of an update to this year's plan on the equity requirements as I indicated it’s about $700 million, we were at $500. And recall in our last plan, we had talked about that $500 million being sort of in the middle of the five year so roughly in the 2022, 2023 timeframe. I would say that's generally where we have this $700 million still scheduled, and my philosophy on this is we sort of line up the need or the issue with the need and the capital plan. So that's when it sort of comes into the plan in terms of expected requirements.

We haven't really decided, and I know I keep saying this, but we haven't really decided on methodology yet, whether we do sort of a block issue or we do it using some other tool, we certainly are considering an ATM like program and you're right, we don't have one in place today, it may fit the profile a little better to use a program like that. We just haven't made any decisions on it, I would just tell you again, sort of generally speaking, it's in the middle of the five years and we'll continue to look at best method to get it to market.

[Angie Storozynski, Seaport Global]

Good. And the second question, so you increased the growth contributions – earnings growth contributions coming from regulated utility acquisitions. And forgive me if you guys have addressed that already. But is it assumption of acquisitions that have already been secured? Or is it just that the pipeline backlog of deals has improved to such an extent that even the larger base, you feel like the pace of growth associated with this portion of your business is going to accelerate?

[Walter Lynch, Chief Executive Officer]

Angie, Walter here, how are you? I'm going to take that question. So let me start by just apologizing for the issues with the webcast, if you missed any of the 30 to 60 seconds, let me tell you in my section, it was fabulous. So I would ask you to go back and look at it again. So the 1.5% to 2.5%, that's a reflection of the growing pipeline that we have, Bill Varley working with the State teams have been hard at it to truly identify opportunities and then work them through our pipeline. And right now, we believe that we're confident that the pipeline supports that increase up to 1.5% to 2.5%, so that's really the reason for the growing part of that growth triangle.

[Angie Storozynski, Seaport Global]

Okay. And lastly, any more color on what's going on in New York? I mean, you haven't really changed your expectations as to when the transaction should close. Also it seems like the financing plan includes proceeds from this asset sales, so if he could just comment on that.

[Walter Lynch, Chief Executive Officer]

Yes. Let me start with what's going on there and then Susan can talk about that. Yes, we still – we're working structurally with the public service commission as we work towards the sale of the system there. We still believe it's in the best interest of New York American Water customers to sell the Liberty. As you know on February 3, the governor directed a special council to complete a study on the feasibility of a public takeover, and that study is to be completed by April 1. So while we remain confident in the sale the date of that work and the outcome of that work may impact our timing to some degree.

[Susan Hardwick, Chief Financial Officer]

And Angie on the proceed side, I'd just add quickly here. We have increased the expectation for proceeds, sort of after tax proceeds from the sale compared to our prior plan. We increased it about $250 million and obviously that's a source of equity if you will in this plan to help finance the growth here. And that really is just driven by – as we continue to kind of refine our estimates around tax position on the transaction, we feel like there is more proceeds coming after tax. So we did an increase at about $250 million from the prior plan.

[Angie Storozynski, Seaport Global]

And the last question I promise, New Jersey still hasn't ruled on the acquisition adjustments, right, I mean, it doesn't seem like [indiscernible] posted on the website.

[Walter Lynch, Chief Executive Officer]

Yes, Angie, they have not ruled on it yet.

[Angie Storozynski, Seaport Global]

Thank you.

[Operator]

And our next question today comes from Durgesh Chopra with Evercore ISI. Please go ahead.

[Durgesh Chopra, Evercore ISI]

Hey, good morning, Walter and I promise to go back and listen to the 30 to 60 seconds.

[Walter Lynch, Chief Executive Officer]

Thanks, Durgesh.

[Durgesh Chopra, Evercore ISI]

Just going back to – just the 1.5% to 2.5%, I just want to sort of understand that a little bit better. So, obviously that's sort of a large increase versus the base, right, a 1% base – that 1% to 2% base that you were targeting earlier. What gives you confidence? I mean, I know sort of Bill is in charge of that team and he has a proven track record of completing successful acquisitions. But, is there something that you're seeing in the pipeline here today, or recently that gives you confidence in the higher growth rate there.

[Walter Lynch, Chief Executive Officer]

Yes, thanks Durgesh. Well, as you know we increased our pipeline and almost doubled it over the last year and it's really focusing in the States where we want to grow and focusing on both water and wastewater. We're still pursuing wastewater opportunities in areas where we serve water customers and also adjacent to where we serve water customers. And I think if you look at the city of New York wastewater, that's a perfect example of that. But it's really a combination of the States doing a tremendous job in identifying opportunities and working them through the pipeline. But also the team here led by Bill, working with the States to look at best practices and things that we can take advantage of across our scale of our business.

So that's why really the increase is there, but it's really back to the pipeline, it's all about a pipeline, you have to have a pipeline to deliver on those acquisitions. Bill, if there is anything you want to add.

[Bill Varley, Chief Growth Officer]

Yes. Hi, Durgesh, how are you doing?

[Durgesh Chopra, Evercore ISI]

Good Bill. Thanks.

[Bill Varley, Chief Growth Officer]

In part of the pipeline development, it's a discipline approach to evaluation Durgesh, and we're not just looking for financial conditions, we take a look at the water quality, looking at wastewater compliance and what are the community needs are too. So we're looking at solutions and it's a systematic process that we go through. And to the aspect of increasing the pipeline on the wastewater side, 93% of our business is the water side. But I think now the realization is that they actually – if communities is sitting on an asset that has value, which they didn't realize before by our proactive approach, and also the view is potential liability. So, you combine all the factors with a discipline approach, increasing the pipeline, I think that's what gives us our confidence

[Durgesh Chopra, Evercore ISI]

Understood. That's super helpful. And then maybe just Walter your thoughts on the market-based business, so that long-term growth rate has come down, can you just talk through that? Is that sort of intentional, or are you seeing less opportunities there going forward?

[Walter Lynch, Chief Executive Officer]

We moved it from 1% to 2% to 1%, and it's really a reflection of the regulated business growing at a faster clip and particularly the regulated acquisitions that we identified. So that's really what's driving that, we're still very confident in our market-based businesses, both in the military and homeowner services. In the military, as you know, we won the last three awards where there are five outstanding, we expect two to be awarded in the near-term and we're confident in our ability to continue to provide great service for the men and women in the military. So we're confident in both businesses and they contribute to the success of our organization.

So the very complimentary to what we do and they provide free cash flow and we're able to extend our core competencies, particularly on the military side and provide a great service for the 17 installations.

[Durgesh Chopra, Evercore ISI]

Got it. So essentially it's focusing more on the regulator side of the business. You have a higher regulated acquisitions growth now. And so, the end result of that is a lower market based business growth. Okay. Understood.

[Walter Lynch, Chief Executive Officer]

Exactly.

[Durgesh Chopra, Evercore ISI]

And then just one quick clarification, Susan, the 2021 EPS guidance range that does not include New York American, am I correct about that?

[Susan Hardwick, Chief Financial Officer]

Well, obviously we haven't filled it yet, as we plan to sell it sometime in 2021. So there'll be some results in 2021 related to it. We've not specifically identified it as an adjustment to or any sort of the impact to 2021’s guidance. So I would just say 2021’s guidance is what it is and it contemplates the sale of New York American Water sometime during the year.

[Durgesh Chopra, Evercore ISI]

Okay. Thanks guys, much appreciate the time.

[Susan Hardwick, Chief Financial Officer]

Thanks Durgesh.

[Walter Lynch, Chief Executive Officer]

Thanks, Durgesh.

[Operator]

And our next question today comes from Insoo Kim from Goldman Sachs. Please go ahead.

[Insoo Kim, Goldman Sachs]

Hi, can you guys hear me?

[Walter Lynch, Chief Executive Officer]

We can.

[Susan Hardwick, Chief Financial Officer]

We can Insoo.

[Insoo Kim, Goldman Sachs]

Got it. Thank you. Maybe starting off in Texas, I don't know if you mentioned this earlier, I'm sorry if I missed it. But I know you have a couple of the military bases down there, could you just describe a little bit about the experience you had with these winter storms and maybe related to that, currently you're not in your regular utilities, you're not in Texas, but given the water infrastructure issues that played out in that State, how do you see that State of a potential opportunity for expansion?

[Walter Lynch, Chief Executive Officer]

Yes, thanks Insoo. And you’re right, we don't have regulated operations in Texas. We do have two military bases where we provide water and wastewater service Joint Base San Antonio and then Fort Hood. And I've got to say, I'm so proud of our teams and the work they've done around the clock to continue to provide service. And while we experienced many more main breaks and other challenges within the systems, our folks kept the water running for our military folks on those bases, so we're really, really proud of them. As far as the Texas operations, I mean, there is a little bit different design and construction down in Texas because they're not really designed to withstand extended periods of cold weather, and that's been the challenge down there. And so when a storm like that hits, it really challenges the system from a number of perspectives.

The pipes are not buried very deep. Many of them are above ground and they tend to freeze at a much quicker pace. And a lot of the homes are not insulated like they are in the Northeast. So that's really what contributed to a lot of the issues down there. Our systems are resilient. We spend a lot of money, as Cheryl said, 8% of our capital spend is spent on resiliency in our systems to make sure that our systems can withstand extended periods of cold weather. And we do a great job at it.

And while we have at times many more main breaks, our teams are out repairing those main breaks and restoring service in the shortest amount of time. So I'm really proud again, of our operations in Texas as two military bases. And again, our systems are designed and constructed to withstand extended periods of cold weather.

[Insoo Kim, Goldman Sachs]

Got it. I guess, from that expansion opportunity, do you think that this could be an interesting opportunity as you look towards increasing your municipal growth rate?

[Walter Lynch, Chief Executive Officer]

We continually assess where we want to operate and for us – we've said many times for us to enter a state, we've got to have a good regulatory environment, a good business environment, and the ability to grow to at least 50,000 customers roughly over a five-year period. So we'll continue to assess entry points in the different states using that methodology. But we're again really proud of our efforts down there and we've responded and helped the communities down there by shipping a bottle of water. We're really proud of that as well, because that's who we are as a company coming to the aid of people in this country, even though they're not our customers.

[Insoo Kim, Goldman Sachs]

Understood. And then just one more, if I could, given Biden Administration focused on infrastructure spend and on the water side and water quality as well, how much of that do you think you've embedded in your five to 10 year plan and any sense initially, what type of upside opportunities exist?

[Walter Lynch, Chief Executive Officer]

Yes, I think we believe there's going to be an infrastructure bill. We don't believe there's going to be any free money going out to the municipalities. We think there'll be access to low interest loans for the state revolving funds, and we're working to get access to that. On the wastewater side, we do get access on the water side, but we're working to get access on the wastewater side. So we can – our customers can benefit like the other customers through a low interest loans. But our five-year plan is an increase of 1.3 billion over the last plan from last year. And we're going to continue to invest in the areas that we need to invest in and make sure our systems are resilient.

[Insoo Kim, Goldman Sachs]

Got it. Thank you so much.

[Walter Lynch, Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Today's next question comes from Ryan Greenwald with Bank of America. Please go ahead.

[Ryan Greenwald, Bank of America]

Good morning, everyone. Appreciate the time.

[Walter Lynch, Chief Executive Officer]

Good morning.

[Ryan Greenwald, Bank of America]

So on the rebasing to the weather adjusted 2020. It implies slightly lower earnings relative to the 2018 base. Is this predominantly driven by the additional equity or is there any other considerations there?

[Susan Hardwick, Chief Financial Officer]

Well, Ryan, we certainly don't view this as rebasing at all. I mean, we're simply growing off of 2020 actual results. And we had that available to us at the timing of our release for 2021 guidance. So growth of 2020, as we've talked about is very strong continues to focus on that long-term growth rate of 7% to 10% over the five years. So that is our focus and that's our continued reiteration of long-term guidance.

There is more equity in the plan, obviously with a couple of hundred million more. So there was some dilution obviously built in the plan last year, and then just incrementally more dilution as a result of additional equity.

[Ryan Greenwald, Bank of America]

Got it. Fair enough. And then as you guys continue to assess your focal points and you work through the sale of New York this year, any other states right now that you're considering maybe divesting operations for use of – to get some proceeds, to finance all the regulated acquisition opportunities.

[Walter Lynch, Chief Executive Officer]

Yes, thanks for that, Ryan we continually assess where we want to operate and where we can provide the best customer service, most efficient operations and continue to grow. And we'll just continue to do that. We're not in any position now to say that.

[Ryan Greenwald, Bank of America]

Got it. Thanks for the time.

[Walter Lynch, Chief Executive Officer]

Thank you.

[Susan Hardwick, Chief Financial Officer]

Thanks Ryan.

[Operator]

And our next question today comes from Verity Mitchell with HSBC London, please go ahead.

[Verity Mitchell, HSBC London]

Good morning, everyone. Thank you very much for the presentation. Really helpful, I've got a question on efficiency. Actually I noticed on Slide 26, you've only say 4.3% since 2015. So 15% is quite an ambitious target and scare me that consumers actually use less water, or what happens if they actually use more water than that time? Are you really confident that you can deliver that?

[Cheryl Norton, Chief Environmental Officer]

Thank you for the question. And yes, we're very confident that we can deliver that. We think it's a lot more than our customers actually using less water. We think it's water efficiency across the board. So for example, by improving our leak detection efforts out in our distribution system, we will be able to recover more of that non-revenue water or that unaccounted for water within our systems. And so we're looking at it from a holistic perspective. We do continue to pick up a decline in usage in the residential space based on fixtures and appliances, but we really think this is going to be driven more by the capital improvements that we make so that we can reduce the amount of leakage and water loss that we have in the system.

[Verity Mitchell, HSBC London]

Are you going to give us an update on an annual basis or is it going to be much more of a long-term target? How do we track or how you're managing?

[Cheryl Norton, Chief Environmental Officer]

Yes, it is a long-term target, but we do plan to provide annual updates on where we're at with it. And we probably in future calls may talk about some of the technology we're using just to help you have a clearer picture around our path to get there.

[Verity Mitchell, HSBC London]

Great, thank you.

[Walter Lynch, Chief Executive Officer]

Yes. And it's really about the targeted investment that Cheryl said in replacing pipe that's old and worn out and maybe more prone to main breaks and also leveraging technology to identify leaks there. Those are two key areas for us to continue to improve in that area, Verity.

[Verity Mitchell, HSBC London]

Thanks.

[Operator]

And our next question today comes from Jonathan Reeder with Wells Fargo. Please go ahead.

[Jonathan Reeder, Wells Fargo]

Hey, Walter and team most of mine have been asked and answered but I will just throw one more out there. Just kind of curious what cause the pushback in PaPUC’s final decision and your pending rate case, given the ALJ recommendation supporting the settlement.

[Walter Lynch, Chief Executive Officer]

Susan, you want to take that or I can jump in?

[Susan Hardwick, Chief Financial Officer]

Well, either one. I guess, maybe we could just start with a bit of news. We did just get word here that the commission just did approve the settlement agreement. So we actually have an order now in Pennsylvania just issued moments ago. And they did approve the settlement as it was submitted.

[Walter Lynch, Chief Executive Officer]

Any other question, Jonathan, it’s timely.

[Jonathan Reeder, Wells Fargo]

Yes, yes, great presentation and appreciate the update.

[Susan Hardwick, Chief Financial Officer]

Thanks Jonathan.

[Walter Lynch, Chief Executive Officer]

Thanks Jonathan

[Operator]

And our next question today comes from Becca Followill with U.S. Capital Advisors. Please go ahead.

[Becca Followill, U.S. Capital Advisors]

Good morning, guys. The Biden Administration is reviewing a host of different environmental regulations. Is there anything in the works on the water side that might provide more stringent regulations for munis, et cetera, that might help facilitate further M&A for you guys?

[Walter Lynch, Chief Executive Officer]

Yes, thanks for the question, Becca. I think one of the areas and it's been out there for some time is really the PFAS limits. And again, there's a health advisory limit of 70 parts per trillion. Many states have enacted more stringent standards, but I think the EPA maybe monitored or coming up with a limit on that would be one area of focus for the Biden Administration. I know it's going to take some time and the EPA likes to focus on science to make their MCLs, but I think that's going to be a key area as they establish that, they'll continue to look at other emerging contaminants. And that will play again into our acquisition strategy as we continue to provide solutions for communities. And we think there is going to be a keen focus here by the EPA. Cheryl, is there anything you want to add to that?

[Cheryl Norton, Chief Environmental Officer]

I think that covers it, Walter. I fully anticipate that we're going to see the regulatory environment ramp up.

[Becca Followill, U.S. Capital Advisors]

Thank you. And then the second question on from a state basis, is there any type of emerging legislation that would also help facilitate M&A, something that's in the works that has not yet been passed that looks like it's going to be introduced?

[Walter Lynch, Chief Executive Officer]

Well, let me start with Water Quality Accountability Act that started in New Jersey that two other states have adopted. I think that is being considered in other states within our footprint. So I would look out for that primarily in the Midwest and that again, establishes standards that are uniform across the sector, whether a municipally-owned or investor-owned, around cybersecurity, some of the challenges there, around pipe replacement rates, about long-term asset management plans. And that's been instrumental in many of the discussions we've had in the states where we operate that have that legislation. So I think it's a wake up call for many municipalities to say, maybe we should talk to American Water about selling assistance.

[Becca Followill, U.S. Capital Advisors]

Great. Thank you.

[Walter Lynch, Chief Executive Officer]

Thank you.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Walter Lynch for any closing remarks.

[Walter Lynch, Chief Executive Officer]

Okay. Thanks Racco. First, let me say thanks for joining us today, and we value your participation and the work you do on behalf of your clients. We hope our open and transparent discussions give you confidence in our company and the investment in our stock. If you have any additional questions, please call the IR team and they'll be happy to answer them. Thanks again for joining us and please stay safe. Thank you.

[Operator]

And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect.