WEBVTT 00:00:00.000 --> 00:00:02.220 Welcome back to the Deep Dive, the place where 00:00:02.220 --> 00:00:04.500 we sift through complex financial blueprints, 00:00:04.620 --> 00:00:08.140 massive infrastructure projects, and some pretty 00:00:08.140 --> 00:00:10.480 dense regulatory labyrinths to deliver the essential 00:00:10.480 --> 00:00:12.560 knowledge you need. And today we have a topic 00:00:12.560 --> 00:00:15.080 that's, well, it's about as fundamental as it 00:00:15.080 --> 00:00:17.660 gets. It really is. We're undertaking a deep 00:00:17.660 --> 00:00:19.820 dive into something utterly essential to modern 00:00:19.820 --> 00:00:22.399 life, yet it's often completely invisible until, 00:00:22.500 --> 00:00:25.789 you know, it stops working. Water. Exactly. Water. 00:00:26.050 --> 00:00:28.789 But we aren't just talking about your local water 00:00:28.789 --> 00:00:32.229 district. We are talking about the largest publicly 00:00:32.229 --> 00:00:35.810 traded U .S. water and wastewater utility. A 00:00:35.810 --> 00:00:38.609 company that is, and this is the key point, fundamentally 00:00:38.609 --> 00:00:40.869 reshaping how essential public resources are 00:00:40.869 --> 00:00:43.509 managed. And financed and delivered. Right. Our 00:00:43.509 --> 00:00:45.509 focus today is the American Water Works Company, 00:00:45.670 --> 00:00:48.350 Inc., or as it's known on the stock market, AWK. 00:00:48.729 --> 00:00:51.770 And our mission for you, the learner, is to really 00:00:51.770 --> 00:00:54.090 pull back the curtain on this behemoth. We're 00:00:54.090 --> 00:00:56.229 going to be dissecting the structure, the staggering 00:00:56.229 --> 00:00:58.530 scale, and maybe most importantly, the unique 00:00:58.530 --> 00:01:01.609 financial and regulatory strategy that lets a 00:01:01.609 --> 00:01:05.349 single company manage the water needs for, well, 00:01:05.430 --> 00:01:08.010 a population the size of many small nations. 00:01:08.189 --> 00:01:10.909 About 14 million people across the United States. 00:01:10.969 --> 00:01:13.170 It's just an incredible number. And, you know. 00:01:13.549 --> 00:01:15.890 When we talk about AWK, we really have to start 00:01:15.890 --> 00:01:18.390 by stressing its financial significance. This 00:01:18.390 --> 00:01:20.590 isn't just a plumber on a massive scale. No, 00:01:20.689 --> 00:01:23.730 not at all. American Water Works is a major infrastructure 00:01:23.730 --> 00:01:26.590 investment component. I mean, it's listed on 00:01:26.590 --> 00:01:28.870 the New York Stock Exchange. It's firmly positioned 00:01:28.870 --> 00:01:32.049 in the S &P 500. And critically, it's one of 00:01:32.049 --> 00:01:35.370 the few very select entities that make up the 00:01:35.370 --> 00:01:38.590 Dow Jones Utility Average. The DJUA. The DJUA, 00:01:38.810 --> 00:01:41.290 exactly. And being in the DJUA, that signals 00:01:41.290 --> 00:01:43.760 immense financial stability. and market importance. 00:01:43.980 --> 00:01:46.980 It's basically the barometer for the entire utility 00:01:46.980 --> 00:01:49.500 sector's health. And that significance is really 00:01:49.500 --> 00:01:51.079 the crux of the issue, isn't it? Because most 00:01:51.079 --> 00:01:53.739 people, myself included, before we dug into this, 00:01:53.799 --> 00:01:55.760 you just assume water services are a local thing. 00:01:55.859 --> 00:01:58.700 A municipal responsibility. Right. A city or 00:01:58.700 --> 00:02:01.459 county job. Right. The surprise here is the sheer 00:02:01.459 --> 00:02:04.519 velocity of consolidation. We're going to show 00:02:04.519 --> 00:02:07.920 how AWK's century -old history and their, what, 00:02:07.959 --> 00:02:11.159 almost $50 billion in projected capital investment 00:02:11.159 --> 00:02:15.240 are fueling this. dizzying pace of acquisitions. 00:02:15.379 --> 00:02:17.520 And it's a pace that's fundamentally shifting 00:02:17.520 --> 00:02:20.360 critical public services from that diffuse local 00:02:20.360 --> 00:02:23.340 control you mentioned to a consolidated, regulated, 00:02:23.400 --> 00:02:26.039 private ownership model. Which is a huge shift. 00:02:26.199 --> 00:02:28.599 It is. So our deepest dive today will be into 00:02:28.599 --> 00:02:31.280 that financial and regulatory framework. We really 00:02:31.280 --> 00:02:33.379 need to understand not just that they grow aggressively, 00:02:33.620 --> 00:02:36.500 but how they essentially guarantee that growth. 00:02:36.680 --> 00:02:38.620 How they use regulated spending to drive their 00:02:38.620 --> 00:02:40.719 bottom line. Precisely. We're decoding the mechanism 00:02:40.719 --> 00:02:43.330 that allows a utility to target a consumer. consistent, 00:02:43.330 --> 00:02:45.909 industry -leading, compounded annual growth rate. 00:02:46.129 --> 00:02:48.550 It's a fascinating model. Okay, let's unpack 00:02:48.550 --> 00:02:50.550 this. Let's start at the beginning, at the foundation. 00:02:51.150 --> 00:02:52.789 Whenever you see a company operating at this 00:02:52.789 --> 00:02:55.129 scale, it's, I mean, it's rarely a startup, right? 00:02:55.169 --> 00:02:57.969 It has to have deep historic roots. And AWK is 00:02:57.969 --> 00:02:59.990 absolutely no exception. That's right. This is 00:02:59.990 --> 00:03:01.969 a century -old utility. It was established way 00:03:01.969 --> 00:03:06.710 back in 1886. 1886. Wow. By James S. Kuhn and 00:03:06.710 --> 00:03:09.610 W .S. Kuhn. And it was initially named the American 00:03:09.610 --> 00:03:12.229 Water Works and Guarantee Company. Guarantee 00:03:12.229 --> 00:03:15.129 Company. That name itself says a lot. It's so 00:03:15.129 --> 00:03:18.250 revealing for the era, isn't it? It signaled 00:03:18.250 --> 00:03:21.069 to early investors that this was not some speculative 00:03:21.069 --> 00:03:24.210 venture. This was backed by tangible, essential, 00:03:24.430 --> 00:03:28.169 secured assets. The infrastructure itself, which 00:03:28.169 --> 00:03:30.889 guaranteed long -term revenue streams. It was 00:03:30.889 --> 00:03:33.449 as close to a sure bet as you could get in the 00:03:33.449 --> 00:03:36.610 19th century. So that early focus on stability 00:03:36.610 --> 00:03:39.830 and guaranteed returns is just. It's baked right 00:03:39.830 --> 00:03:42.409 into their DNA from the very start. It sounds 00:03:42.409 --> 00:03:44.110 like they recognize the investment potential 00:03:44.110 --> 00:03:46.650 of infrastructure long before most. They really 00:03:46.650 --> 00:03:50.219 did. The name then evolved a bit. In 1914, it 00:03:50.219 --> 00:03:52.020 became the American Water Works and Electric 00:03:52.020 --> 00:03:54.479 Company. Okay, so they branched out. For a time, 00:03:54.560 --> 00:03:56.919 yes. This was during the height of the utility 00:03:56.919 --> 00:03:59.180 holding company craze in the U .S., where these 00:03:59.180 --> 00:04:01.560 massive corporations tried to capture economies 00:04:01.560 --> 00:04:04.039 of scale by bundling water, electric, and sometimes 00:04:04.039 --> 00:04:06.979 even gas services, all under one huge entity. 00:04:07.259 --> 00:04:09.219 The consolidation wave was eventually curtailed 00:04:09.219 --> 00:04:11.400 by the government, I guess. It was, yeah. But 00:04:11.400 --> 00:04:13.800 it really solidified the blueprint for operating 00:04:13.800 --> 00:04:16.660 at a massive scale. And that experience ultimately 00:04:16.660 --> 00:04:20.420 led to their final reorganization in 1947. Which 00:04:20.420 --> 00:04:22.439 is when they streamlined the identity to the 00:04:22.439 --> 00:04:25.439 current name, American Water Works Company. And 00:04:25.439 --> 00:04:28.500 shifted the focus purely back to water and wastewater. 00:04:29.360 --> 00:04:32.120 And for anyone following the geography of major 00:04:32.120 --> 00:04:34.680 U .S. utility players, it's worth noting that 00:04:34.680 --> 00:04:37.220 their headquarters relocated to Camden, New Jersey, 00:04:37.279 --> 00:04:41.279 back in December 2018. Which puts them squarely 00:04:41.279 --> 00:04:44.240 in the middle of that highly active... very densely 00:04:44.240 --> 00:04:46.779 populated northeast regulatory environment, a 00:04:46.779 --> 00:04:49.139 very strategic location. Absolutely. Now let's 00:04:49.139 --> 00:04:50.980 move to the scale because the numbers here, I 00:04:50.980 --> 00:04:52.839 mean, they're almost impossible to grasp without 00:04:52.839 --> 00:04:55.600 some context. Let's try. This company isn't defined 00:04:55.600 --> 00:04:58.060 by one region. It's defined by the breadth of 00:04:58.060 --> 00:05:00.560 its reach. We're talking about serving approximately 00:05:00.560 --> 00:05:03.319 14 million people. Which translates to what, 00:05:03.360 --> 00:05:05.959 about 3 .4 million customer connections? Roughly, 00:05:05.959 --> 00:05:09.319 yes. And that spans over 1 ,700 distinct communities. 00:05:09.699 --> 00:05:12.120 It's not a monolith. It's a collection of hundreds 00:05:12.120 --> 00:05:14.790 and hundreds of local systems. And their core 00:05:14.790 --> 00:05:17.430 regulated operations, the systems they actually 00:05:17.430 --> 00:05:20.129 own and operate, subject to state rate review. 00:05:20.250 --> 00:05:23.889 That spans 14 different U .S. states. Which means 00:05:23.889 --> 00:05:26.550 they are managing everything from asset maintenance 00:05:26.550 --> 00:05:28.529 and engineering standards to customer relations 00:05:28.529 --> 00:05:31.410 across a huge chunk of the country. And that. 00:05:32.120 --> 00:05:34.480 That requires a significant organization. I'll 00:05:34.480 --> 00:05:37.079 say. To run an operation of this magnitude, AWK 00:05:37.079 --> 00:05:40.180 employs a professional workforce of about 6 ,700 00:05:40.180 --> 00:05:43.339 individuals. But the customer breakdown, that's 00:05:43.339 --> 00:05:45.360 where you see the real complexity of their business 00:05:45.360 --> 00:05:49.430 model. It's not just homes. No, it's residential, 00:05:49.689 --> 00:05:52.649 certainly, but also commercial high volume industrial 00:05:52.649 --> 00:05:55.509 users, various government facilities, fire service 00:05:55.509 --> 00:05:57.970 and even wholesale services to other smaller 00:05:57.970 --> 00:06:00.709 water and wastewater utilities. It's a very diversified 00:06:00.709 --> 00:06:03.149 portfolio. It minimizes their reliance on any 00:06:03.149 --> 00:06:05.629 single customer type. Exactly. OK, here's where 00:06:05.629 --> 00:06:07.990 it gets really interesting for me. Diving beyond 00:06:07.990 --> 00:06:10.410 the simple fact of being a public utility and 00:06:10.410 --> 00:06:12.250 into the specialized operational components. 00:06:12.569 --> 00:06:14.689 How on earth do they navigate that regulatory 00:06:14.689 --> 00:06:17.560 complexity you mentioned across? different states. 00:06:17.759 --> 00:06:20.379 This is their specialty. It's the biggest moat 00:06:20.379 --> 00:06:23.540 against any competition. The services are managed 00:06:23.540 --> 00:06:25.879 by local utility subsidiaries. You've probably 00:06:25.879 --> 00:06:28.220 heard of them like New Jersey American Water 00:06:28.220 --> 00:06:31.060 or California American Water. Right. They have 00:06:31.060 --> 00:06:33.120 state specific names. And those subsidiaries 00:06:33.120 --> 00:06:35.480 are regulated individually by the U .S. state 00:06:35.480 --> 00:06:37.160 commissions in the state where they operate. 00:06:37.540 --> 00:06:40.779 They have to master 14 different sets of rules. 00:06:41.000 --> 00:06:44.519 Rules about what specifically? Everything. investment 00:06:44.519 --> 00:06:47.579 recovery, water quality standards, operational 00:06:47.579 --> 00:06:50.339 efficiency metrics, and maybe most crucially, 00:06:50.480 --> 00:06:52.980 the whole process for setting customer rates. 00:06:53.180 --> 00:06:56.480 Wow. That immediately sounds like a massive administrative 00:06:56.480 --> 00:06:59.600 burden. I mean, one that a small municipal system 00:06:59.600 --> 00:07:01.639 or a competitor trying to enter the market just 00:07:01.639 --> 00:07:03.579 couldn't possibly handle. That's it. That's the 00:07:03.579 --> 00:07:06.269 cost of entry. Their regulatory expertise is 00:07:06.269 --> 00:07:09.029 a valuable asset in and of itself. And on top 00:07:09.029 --> 00:07:11.810 of that, they're diversified. AWK also manages 00:07:11.810 --> 00:07:14.250 municipal systems under contract. So the town 00:07:14.250 --> 00:07:17.430 still owns the system, but AWK runs it. Exactly. 00:07:17.610 --> 00:07:20.949 The town retains ownership, but AWK brings the 00:07:20.949 --> 00:07:23.639 operational know -how. And they also supply businesses 00:07:23.639 --> 00:07:25.740 and residential communities with specialized 00:07:25.740 --> 00:07:29.279 management products like bulk water supply or 00:07:29.279 --> 00:07:31.759 system efficiency tools. And then there's that 00:07:31.759 --> 00:07:33.519 really fascinating side of the business that 00:07:33.519 --> 00:07:36.560 deals with the highest level of stability, the 00:07:36.560 --> 00:07:39.439 government contracts. Yes. The Military Services 00:07:39.439 --> 00:07:43.240 Group, or AWMSG, that was established back in 00:07:43.240 --> 00:07:45.699 2003. Okay. This group was set up specifically 00:07:45.699 --> 00:07:47.860 to partner with the Department of Defense through 00:07:47.860 --> 00:07:51.620 the Utilities Privatization Program, or UP. This 00:07:51.620 --> 00:07:54.339 initiative lets the DoD hand over aging -based 00:07:54.339 --> 00:07:57.500 utility systems to private operators who can 00:07:57.500 --> 00:07:59.560 provide the necessary capital investment. And 00:07:59.560 --> 00:08:01.139 I imagine those are pretty long -term contracts. 00:08:01.480 --> 00:08:05.040 50 years. AWK holds 50 -year contracts to provide 00:08:05.040 --> 00:08:07.759 water and wastewater services at 18 military 00:08:07.759 --> 00:08:11.120 installations across the U .S. 50 years. That's 00:08:11.120 --> 00:08:13.100 the ultimate expression of infrastructure investment 00:08:13.100 --> 00:08:15.600 stability. It really is. These contracts are 00:08:15.600 --> 00:08:17.920 extremely stable, long -tail revenue streams, 00:08:18.139 --> 00:08:20.259 often backed by guaranteed government maintenance 00:08:20.259 --> 00:08:23.019 funding, which minimizes the financial risk for 00:08:23.019 --> 00:08:24.980 the company. Okay, now let's try to visualize 00:08:24.980 --> 00:08:28.199 the physical assets themselves. We keep talking 00:08:28.199 --> 00:08:32.259 about a $32 .83 billion asset base. What does 00:08:32.259 --> 00:08:34.580 that actually look like on the ground? Well, 00:08:34.600 --> 00:08:36.539 we can use some specific data points that really 00:08:36.539 --> 00:08:38.879 convey the physical extent of their responsibility. 00:08:39.279 --> 00:08:41.399 And I think you should think of this asset base 00:08:41.399 --> 00:08:44.200 as a constant, ongoing infrastructure crisis 00:08:44.200 --> 00:08:47.879 that AWK has positioned itself to solve. An infrastructure 00:08:47.879 --> 00:08:50.159 crisis. That's a strong way to put it. We'll 00:08:50.159 --> 00:08:53.419 start with the distribution network. 54 ,500 00:08:53.419 --> 00:08:57.720 miles of pipes. 54 ,000. Wait. 54 ,500 miles. 00:08:57.960 --> 00:09:01.669 54 ,500. To put that in perspective. That's enough 00:09:01.669 --> 00:09:03.429 piping to circle the Earth more than twice at 00:09:03.429 --> 00:09:05.450 the equator. This is their underground reality, 00:09:05.769 --> 00:09:07.529 and a lot of this pipeline infrastructure is 00:09:07.529 --> 00:09:09.549 decades and decades old. And that immediately 00:09:09.549 --> 00:09:12.070 raises the biggest problem in U .S. water management, 00:09:12.169 --> 00:09:14.889 right? Leakage and water loss. If you have that 00:09:14.889 --> 00:09:17.309 many miles of pipe, you have massive maintenance 00:09:17.309 --> 00:09:20.259 costs and unavoidable water waste. Precisely. 00:09:20.340 --> 00:09:23.179 The older the pipe, the higher the non -revenue 00:09:23.179 --> 00:09:25.600 water that leaks out before it ever reaches the 00:09:25.600 --> 00:09:28.200 customer. Managing those pipes means continuous 00:09:28.200 --> 00:09:30.539 surveying, repair, and replacement, which is 00:09:30.539 --> 00:09:33.200 phenomenally expensive. Okay, so that's the pipes. 00:09:33.240 --> 00:09:35.259 What about the plants? Now, consider the treatment 00:09:35.259 --> 00:09:38.320 facilities. They operate 80 surface water treatment 00:09:38.320 --> 00:09:41.340 plants, drawing from major rivers and reservoirs, 00:09:41.360 --> 00:09:44.919 and alongside those, 520 groundwater treatment 00:09:44.919 --> 00:09:48.600 plants. And on the back end? 190 wastewater treatment 00:09:48.600 --> 00:09:51.889 plants. which is crucial for environmental compliance 00:09:51.889 --> 00:09:54.769 and managing effluent discharge. So they're managing 00:09:54.769 --> 00:09:58.490 the complex chemical processes of purifying water 00:09:58.490 --> 00:10:01.029 for entry. and then treating what comes out for 00:10:01.029 --> 00:10:03.190 a safe return to the environment. That involves 00:10:03.190 --> 00:10:05.350 immense scientific and regulatory oversight. 00:10:05.710 --> 00:10:08.029 Absolutely. The logistics are just mind -boggling. 00:10:08.090 --> 00:10:10.710 They rely on 1 ,200 groundwater wells to pull 00:10:10.710 --> 00:10:13.629 water into the system. It's then moved by 1 ,800 00:10:13.629 --> 00:10:16.370 pumping stations. Wow. And for resilience and 00:10:16.370 --> 00:10:19.570 meeting peak demand, they manage 1 ,100 treated 00:10:19.570 --> 00:10:22.909 water storage facilities. Plus, and this is critical, 00:10:23.129 --> 00:10:27.909 they are responsible for 75 dams. 75 dams. Those 00:10:27.909 --> 00:10:31.210 are massive civil engineering projects that require 00:10:31.210 --> 00:10:34.370 specialized inspection, maintenance, liability 00:10:34.370 --> 00:10:38.429 management, the works. Yeah, full package. I 00:10:38.429 --> 00:10:39.850 want to circle back to that aging infrastructure 00:10:39.850 --> 00:10:42.389 challenge because you said it's a crisis. And 00:10:42.389 --> 00:10:44.029 this really feels like the fundamental driver 00:10:44.029 --> 00:10:46.669 of their whole business model. When we look at 00:10:46.669 --> 00:10:50.509 those 54 ,500 miles of pipes, how much of that 00:10:50.509 --> 00:10:53.529 is tied to specific expensive regulatory mandates 00:10:53.529 --> 00:10:56.419 right now? Oh, that's a great question. The biggest 00:10:56.419 --> 00:10:58.840 mandate driving capital spending today is the 00:10:58.840 --> 00:11:01.559 federal lead and copper rule revisions. I've 00:11:01.559 --> 00:11:03.980 heard about this. This rule requires utilities 00:11:03.980 --> 00:11:06.639 to identify and replace all lead service lines 00:11:06.639 --> 00:11:09.320 across their entire systems. And given AWK's 00:11:09.320 --> 00:11:10.980 age and the age of the systems they acquire, 00:11:11.240 --> 00:11:13.179 they inherit a significant amount of lead piping. 00:11:13.299 --> 00:11:14.980 And this is an optional maintenance. Not all. 00:11:15.100 --> 00:11:17.379 It's a non -negotiable federal requirement that 00:11:17.379 --> 00:11:19.519 costs billions of dollars to comply with. So 00:11:19.519 --> 00:11:22.220 the implication here is crystal clear. This immense 00:11:22.220 --> 00:11:25.480 aging asset base. It's not just a liability. 00:11:25.860 --> 00:11:28.480 It is the engine of future profit for a regulated 00:11:28.480 --> 00:11:31.399 utility. The deterioration of the infrastructure 00:11:31.399 --> 00:11:34.440 demands capital. The deployment of that capital 00:11:34.440 --> 00:11:37.480 is the mechanism through which AWK secures guaranteed 00:11:37.480 --> 00:11:40.379 returns. And that sets the entire stage for the 00:11:40.379 --> 00:11:43.679 financial discussion. So the state of decay is 00:11:43.679 --> 00:11:46.399 what justifies the massive investment. And that 00:11:46.399 --> 00:11:48.860 investment is the blueprint for their aggressive 00:11:48.860 --> 00:11:51.879 growth targets. How do they actually fund the 00:11:51.879 --> 00:11:54.299 replacement of all those pipes and meet the lead 00:11:54.299 --> 00:11:56.080 and copper rule? That's what we need to unpack 00:11:56.080 --> 00:11:58.980 next. That's the billion -dollar question, or 00:11:58.980 --> 00:12:00.840 in this case, the multi -billion -dollar question. 00:12:01.039 --> 00:12:03.240 So what does this all mean for the bottom line? 00:12:03.919 --> 00:12:05.980 You know, a traditional utility is supposed to 00:12:05.980 --> 00:12:10.250 be safe and slow, a boring stock. But AWK's numbers, 00:12:10.389 --> 00:12:12.350 particularly the guidance they put out, they 00:12:12.350 --> 00:12:14.169 suggest they've cracked the code for achieving 00:12:14.169 --> 00:12:16.409 both stability and aggressive momentum. Well, 00:12:16.490 --> 00:12:18.289 we can start with their recent performance to 00:12:18.289 --> 00:12:20.909 ground the discussion. In 2024, they reported 00:12:20.909 --> 00:12:26.169 total revenue of US $4 .68 billion. $4 .68 billion. 00:12:26.539 --> 00:12:29.360 Okay. Operating income was a very strong U .S. 00:12:29.360 --> 00:12:32.659 $1 .72 billion, which translated to a net income 00:12:32.659 --> 00:12:36.519 of U .S. $1 .05 billion. And the total assets, 00:12:36.700 --> 00:12:39.100 as we've noted, stand at a significant U .S. 00:12:39.100 --> 00:12:42.480 $32 .83 billion. And for the shareholders, the 00:12:42.480 --> 00:12:45.440 metrics were compelling. 2024 earnings hit $5 00:12:45.440 --> 00:12:48.320 .39 per share, which was a good jump from $4 00:12:48.320 --> 00:12:51.299 .90 in 2023. And critically, they announced an 00:12:51.299 --> 00:12:54.299 8 .1 % dividend growth. Which is a very robust 00:12:54.299 --> 00:12:56.360 return for a regulated utility. You don't often 00:12:56.360 --> 00:12:58.259 see that kind of dividend growth. Not at all. 00:12:58.320 --> 00:13:00.580 And that momentum didn't slow down. If you look 00:13:00.580 --> 00:13:03.340 at the first half of 2025, their Q1 earnings 00:13:03.340 --> 00:13:06.500 per share was $1 .05 up from $95 the year prior. 00:13:07.159 --> 00:13:11.480 By Q2 2025, net income reached $289 million or 00:13:11.480 --> 00:13:14.559 $1 .48 billion. And the revenue growth in that 00:13:14.559 --> 00:13:16.460 second quarter was especially noteworthy. It 00:13:16.460 --> 00:13:19.620 was up to $1 .28 billion from $1 .15 billion. 00:13:19.919 --> 00:13:22.059 The company pointed directly to the regulated 00:13:22.059 --> 00:13:24.379 businesses division as a primary driver. Which 00:13:24.379 --> 00:13:26.840 confirms that their core state regulated operations 00:13:26.840 --> 00:13:28.960 and all those recent acquisitions are performing 00:13:28.960 --> 00:13:30.879 exactly as they planned. So the model is working. 00:13:31.120 --> 00:13:33.519 The model is working. And to fuel this planned 00:13:33.519 --> 00:13:35.559 growth and the acquisition strategy, they're 00:13:35.559 --> 00:13:37.870 actively raising. capital. We saw them issue 00:13:37.870 --> 00:13:42.210 $800 million in 5 .250 percent senior notes back 00:13:42.210 --> 00:13:46.129 in February 2025, maturing in 2035. That long 00:13:46.129 --> 00:13:48.450 term debt is just the cost of doing business 00:13:48.450 --> 00:13:50.590 in a capital intensive sector like this. It is. 00:13:50.669 --> 00:13:53.029 They use this debt to fund immediate infrastructure 00:13:53.029 --> 00:13:55.549 projects, which, and this sounds counterintuitive, 00:13:55.669 --> 00:13:58.210 is the very foundation for their guaranteed future 00:13:58.210 --> 00:14:00.389 profit. OK, if we connect this to the bigger 00:14:00.389 --> 00:14:02.629 picture. Yeah. This is where we need to stop 00:14:02.629 --> 00:14:05.129 thinking of AWK as a normal company and start 00:14:05.129 --> 00:14:06.970 understanding. it as a highly sophisticated, 00:14:07.330 --> 00:14:10.289 regulated financial instrument. How do they maintain 00:14:10.289 --> 00:14:12.690 and guarantee that exceptionally aggressive long 00:14:12.690 --> 00:14:15.509 -term growth rate, that 7 % to 9 % target? This 00:14:15.509 --> 00:14:17.389 is the crucial concept for you, the listener, 00:14:17.529 --> 00:14:20.169 and it explains why AWK is such a valuable stock. 00:14:20.350 --> 00:14:23.350 The 7 % to 9 % CAGR, their compounded annual 00:14:23.350 --> 00:14:25.370 growth rate, is achieved through the rate -based 00:14:25.370 --> 00:14:27.470 mechanism. Rate -based, okay, define that for 00:14:27.470 --> 00:14:30.269 us. A regulated utility is essentially guaranteed 00:14:30.269 --> 00:14:32.649 the opportunity to earn a profit on its investment. 00:14:33.100 --> 00:14:35.700 This investment is called the rate base. It's 00:14:35.700 --> 00:14:38.360 the cumulative state approved value of all the 00:14:38.360 --> 00:14:42.480 physical assets, the pipes, plants, dams, pumps, 00:14:42.740 --> 00:14:46.500 everything the utility owns and operates. So 00:14:46.500 --> 00:14:50.070 just to be clear, if AWK spends. say, $1 billion 00:14:50.070 --> 00:14:53.590 to replace old pipes, that $1 billion gets added 00:14:53.590 --> 00:14:56.269 to their rate base. Exactly. And once that investment 00:14:56.269 --> 00:14:58.529 is added, the State Utility Commission allows 00:14:58.529 --> 00:15:01.409 AWK to earn an allowed rate of return on that 00:15:01.409 --> 00:15:04.190 rate base. An ROE. Right, an ROE. And this is 00:15:04.190 --> 00:15:06.809 usually said somewhere between 8 % and 10%. It's 00:15:06.809 --> 00:15:10.080 a fixed regulated profit margin. The more money 00:15:10.080 --> 00:15:12.039 they spend, the bigger their rate base and the 00:15:12.039 --> 00:15:14.320 bigger their guaranteed pool of earned profit 00:15:14.320 --> 00:15:16.720 becomes. Correct. The goal is constant capital 00:15:16.720 --> 00:15:19.559 deployment. That $46 to $48 billion capital plan 00:15:19.559 --> 00:15:21.559 they announced for the next decade isn't just 00:15:21.559 --> 00:15:23.740 a list of needed repairs. It's a guaranteed growth 00:15:23.740 --> 00:15:26.039 roadmap. It is. Every single dollar they spend 00:15:26.039 --> 00:15:28.220 and can prove was necessary is a dollar that 00:15:28.220 --> 00:15:30.259 gets added to the rate base, which subsequently 00:15:30.259 --> 00:15:32.820 triggers the need for a rate case. OK, another 00:15:32.820 --> 00:15:35.639 key term. What is a rate case and how does that 00:15:35.639 --> 00:15:38.360 affect the consumer, the person paying the water 00:15:38.360 --> 00:15:41.299 bill? A rate case is the formal legal and financial 00:15:41.299 --> 00:15:43.159 proceeding where the utility goes before the 00:15:43.159 --> 00:15:45.679 state commission and proves that it has deployed 00:15:45.679 --> 00:15:48.759 capital for necessary upgrades like replacing 00:15:48.759 --> 00:15:51.679 lead lines or fixing leaks. And therefore, they 00:15:51.679 --> 00:15:54.240 argue, they need to increase customer rates to 00:15:54.240 --> 00:15:56.379 recover that investment. Plus, they're allowed 00:15:56.379 --> 00:15:59.929 rate of return. I see. AWK's genius is twofold 00:15:59.929 --> 00:16:03.009 here. First, they aggressively find systems that 00:16:03.009 --> 00:16:05.330 desperately need capital. That's the acquisitions. 00:16:05.470 --> 00:16:07.809 And second, they aggressively deploy capital 00:16:07.809 --> 00:16:10.110 in their existing systems. That's the $48 billion 00:16:10.110 --> 00:16:13.450 plan. They are constantly filing rate cases across 00:16:13.450 --> 00:16:16.289 their 14 states, which ensures their rate base 00:16:16.289 --> 00:16:20.070 grows, which thereby guarantees that 7 -9 % EPS 00:16:20.070 --> 00:16:22.389 EVO charge. It's a self -sustaining financial 00:16:22.389 --> 00:16:24.629 cycle that's powered by infrastructure decay. 00:16:24.870 --> 00:16:26.820 That's a perfect way to put it. That makes the 00:16:26.820 --> 00:16:30.059 $48 billion figure the most salient data point 00:16:30.059 --> 00:16:32.440 of this whole discussion. It's what drives their 00:16:32.440 --> 00:16:36.039 value. But this leads directly to a crucial question 00:16:36.039 --> 00:16:38.580 from the perspective of the customer, of you, 00:16:38.700 --> 00:16:42.299 the listener. If AWK is acquiring struggling 00:16:42.299 --> 00:16:44.620 municipal systems, does that mean the consumer 00:16:44.620 --> 00:16:47.879 ends up paying twice? How so? Well, once through 00:16:47.879 --> 00:16:50.559 their taxes that often failed to fix the infrastructure 00:16:50.559 --> 00:16:53.000 in the first place, and now again through rate 00:16:53.000 --> 00:16:55.519 hikes that fund the $48 billion capital plan, 00:16:56.640 --> 00:16:59.480 securing AWK's guaranteed profit. That is the 00:16:59.480 --> 00:17:02.000 central policy debate in utility privatization. 00:17:02.299 --> 00:17:04.500 From the utilities perspective, they argue that 00:17:04.500 --> 00:17:07.519 local governments simply cannot access or manage 00:17:07.519 --> 00:17:10.019 the multi -billion dollar bond issues required 00:17:10.019 --> 00:17:12.160 to fix these problems. They just don't have the 00:17:12.160 --> 00:17:13.900 scale. They don't have the scale or the expertise. 00:17:14.119 --> 00:17:16.779 When AWK takes over, they bring the scale, the 00:17:16.779 --> 00:17:19.240 regulatory know -how, and the long -term capital 00:17:19.240 --> 00:17:22.000 capacity. But yes, that capital investment must 00:17:22.000 --> 00:17:24.160 be recovered through customer rates. Which have 00:17:24.160 --> 00:17:26.160 to be approved by the state commission. That's 00:17:26.160 --> 00:17:28.200 the check and balance. The commission's job is 00:17:28.200 --> 00:17:30.099 to ensure the rate hike is just and reasonable, 00:17:30.319 --> 00:17:33.359 balancing the utility's need for a return with 00:17:33.359 --> 00:17:35.960 the consumer's ability to pay. So it's a guaranteed 00:17:35.960 --> 00:17:39.319 profit for AWK, but one that is achieved under 00:17:39.319 --> 00:17:42.099 heavy state supervision. And in return, the consumer 00:17:42.099 --> 00:17:44.519 gets functioning, modernized infrastructure. 00:17:44.819 --> 00:17:47.599 That's the tradeoff. That is the tradeoff. And 00:17:47.599 --> 00:17:49.700 their continuous forward guidance reflects their 00:17:49.700 --> 00:17:52.519 confidence in this model. Their 2025 guidance 00:17:52.519 --> 00:17:55.430 was narrowed to an EPS range of $5. and seventy 00:17:55.430 --> 00:17:57.650 cents to five dollars and seventy five per share. 00:17:58.009 --> 00:18:00.630 And they've already initiated their 2026 guidance, 00:18:00.789 --> 00:18:03.109 projecting six dollars or two to six dollars 00:18:03.109 --> 00:18:05.650 and twelve cents per share. Reflecting that targeted 00:18:05.650 --> 00:18:07.569 eight percent growth, they're telling the market 00:18:07.569 --> 00:18:09.390 exactly what they will deliver. And they can 00:18:09.390 --> 00:18:11.970 do that because all based on preplanned capital 00:18:11.970 --> 00:18:14.230 deployment. Precisely. OK, moving beyond the 00:18:14.230 --> 00:18:16.809 raw financials for a moment, let's consider corporate 00:18:16.809 --> 00:18:18.849 responsibility and governance, what we often 00:18:18.849 --> 00:18:21.960 call ESG. For utility, this isn't just good optics, 00:18:22.079 --> 00:18:23.980 right? It's essential for minimizing regulatory 00:18:23.980 --> 00:18:26.619 and political risk. Oh, absolutely. When you 00:18:26.619 --> 00:18:29.039 manage water, you manage environmental, social, 00:18:29.299 --> 00:18:32.799 and governance issues every single day. AWK's 00:18:32.799 --> 00:18:35.420 2023 sustainability report really emphasizes 00:18:35.420 --> 00:18:37.740 their leadership in these principles. As the 00:18:37.740 --> 00:18:40.019 largest private water company, environmental 00:18:40.019 --> 00:18:42.680 stewardship, water conservation, leak reduction, 00:18:43.019 --> 00:18:45.960 adherence to quality standards, it's all paramount 00:18:45.960 --> 00:18:47.819 to maintaining their operating license. Their 00:18:47.819 --> 00:18:50.220 social license to operate. Yes. And their commitment 00:18:50.220 --> 00:18:52.740 seems to be recognized by external auditors and 00:18:52.740 --> 00:18:55.019 publications. They have several high profile 00:18:55.019 --> 00:18:58.180 awards and rankings from 2023 and 2024. Like 00:18:58.180 --> 00:19:00.680 what? Well, Forbes ranked them number one in 00:19:00.680 --> 00:19:03.079 the utilities industry on its America's best 00:19:03.079 --> 00:19:06.200 large employers for 2024. They were recognized 00:19:06.200 --> 00:19:08.880 in the top 10 percent of America's most Jesse's 00:19:08.880 --> 00:19:11.420 companies. These rankings demonstrate that their 00:19:11.420 --> 00:19:13.960 focus on operational ethics and workforce management 00:19:13.960 --> 00:19:16.140 is robust. That's important for regulators to 00:19:16.140 --> 00:19:18.180 see. Very important. Furthermore, they received 00:19:18.180 --> 00:19:20.680 the 20. 2023 WaterSense Excellence Award from 00:19:20.680 --> 00:19:22.960 the EPA, acknowledging their water efficiency 00:19:22.960 --> 00:19:25.400 and conservation efforts. And they were highly 00:19:25.400 --> 00:19:28.019 ranked on Barron's 100 Most Sustainable U .S. 00:19:28.039 --> 00:19:30.759 Companies list, coming in at number 18 in 2023. 00:19:31.529 --> 00:19:33.789 These aren't just vanity metrics. They signal 00:19:33.789 --> 00:19:36.890 to state regulators that AWK is a responsible 00:19:36.890 --> 00:19:39.329 partner capable of managing critical resources. 00:19:39.690 --> 00:19:42.349 Exactly. And their focus on the S component of 00:19:42.349 --> 00:19:45.230 ESG, the social and workforce side, is also quite 00:19:45.230 --> 00:19:47.609 strong, especially regarding military and disability 00:19:47.609 --> 00:19:50.390 inclusion. I saw that. They were recognized as 00:19:50.390 --> 00:19:53.369 a military -friendly employer for 2024, which 00:19:53.369 --> 00:19:55.710 probably links back to their extensive military 00:19:55.710 --> 00:19:58.630 services group contracts. And for the fifth year 00:19:58.630 --> 00:20:00.940 in a row, they were a top -scoring company. on 00:20:00.940 --> 00:20:03.579 the Disability Equality Index in 2023. Which 00:20:03.579 --> 00:20:06.519 speaks to a stable, diversified, and well -managed 00:20:06.519 --> 00:20:09.680 workforce of those 6 ,700 professionals we mentioned. 00:20:09.880 --> 00:20:12.380 It does. And finally, before we transition to 00:20:12.380 --> 00:20:14.380 the M &A activity, we should note the leadership 00:20:14.380 --> 00:20:17.380 transition. M. Susan Hardwick retired in May 00:20:17.380 --> 00:20:20.680 2025, with John Griffiths succeeding her as CEO. 00:20:20.960 --> 00:20:23.380 And in a company so reliant on long -term regulatory 00:20:23.380 --> 00:20:25.619 relationships and massive capital commitments, 00:20:25.980 --> 00:20:28.670 stability at the top is crucial. especially during 00:20:28.670 --> 00:20:31.529 a period of monumental mergers. You can't overstate 00:20:31.529 --> 00:20:33.369 the importance of a smooth transition there. 00:20:33.609 --> 00:20:36.029 So what's so fascinating here is that while we've 00:20:36.029 --> 00:20:39.549 detailed how AWK can increase its rate base internally 00:20:39.549 --> 00:20:42.190 through all that capital deployment, they also 00:20:42.190 --> 00:20:45.349 accelerate the process externally through acquisitions. 00:20:45.410 --> 00:20:47.710 This is the inorganic growth. And it's how they 00:20:47.710 --> 00:20:52.230 bridge the gap to that ambitious 7 % to 9 % CAGR. 00:20:52.529 --> 00:20:54.789 The strategy is simple but highly effective. 00:20:55.170 --> 00:20:57.309 Acquire systems that are currently undervalued. 00:20:57.349 --> 00:20:59.690 because they require a massive capital infusion 00:20:59.690 --> 00:21:02.730 and then apply AWK's financial model, the rate 00:21:02.730 --> 00:21:04.849 -based model to them. They're targeting fixer 00:21:04.849 --> 00:21:07.109 -uppers. They are. They rely heavily on acquiring 00:21:07.109 --> 00:21:10.690 smaller, often neglected systems, municipal districts, 00:21:10.930 --> 00:21:12.950 utility authorities, or smaller family -owned 00:21:12.950 --> 00:21:15.930 companies. And the data proves the success of 00:21:15.930 --> 00:21:18.730 this mechanism. It was a show. In 2024 alone, 00:21:19.049 --> 00:21:21.869 AWK added nearly 90 ,000 customer connections. 00:21:22.009 --> 00:21:25.650 And out of that total, 69 ,500 connections came 00:21:25.650 --> 00:21:28.849 specifically. through acquisitions. $69 ,500. 00:21:29.130 --> 00:21:31.549 So acquisitions were responsible for over three 00:21:31.549 --> 00:21:33.170 quarters of their customer growth that year. 00:21:33.250 --> 00:21:35.130 It is the primary engine of their expansion, 00:21:35.309 --> 00:21:38.410 no question. And this trend is accelerating at 00:21:38.410 --> 00:21:40.869 the highest levels. We have to talk about the 00:21:40.869 --> 00:21:42.890 biggest news here, the thing that is fundamentally 00:21:42.890 --> 00:21:46.789 reshaping the entire U .S. water landscape, the 00:21:46.789 --> 00:21:50.990 mega merger. In October 2025, AWK agreed to acquire 00:21:50.990 --> 00:21:53.549 essential utilities in an all -stock merger. 00:21:53.849 --> 00:21:56.390 This is not the acquisition of a small -town 00:21:56.390 --> 00:21:58.589 sewer system. No, this is a combination of two 00:21:58.589 --> 00:22:01.390 of the largest regulated utility entities in 00:22:01.390 --> 00:22:04.089 the country. It's a monster deal. To give you 00:22:04.089 --> 00:22:06.309 a sense of scale, the combined entity is valued 00:22:06.309 --> 00:22:10.170 at $63 billion, including assumed debt. This 00:22:10.170 --> 00:22:12.869 merger represents a massive step towards consolidating 00:22:12.869 --> 00:22:15.809 a historically fragmented market. $63 billion. 00:22:16.170 --> 00:22:18.549 The deal, which is targeted for completion in 00:22:18.549 --> 00:22:21.529 early 2027, will see AWK shareholders owning 00:22:21.529 --> 00:22:25.069 about 69 % of the combined entity. And the regulatory 00:22:25.069 --> 00:22:27.089 hurdle here is just monumental. I can't even 00:22:27.089 --> 00:22:28.970 imagine. It requires approval not just from the 00:22:28.970 --> 00:22:30.509 Securities and Exchange Commission, but from 00:22:30.509 --> 00:22:32.690 numerous state commissions where both companies 00:22:32.690 --> 00:22:35.569 operate. The complexity of merging two companies 00:22:35.569 --> 00:22:38.349 whose primary value lies in their state -by -state 00:22:38.349 --> 00:22:41.049 regulated rate base, it cannot be overstated. 00:22:41.150 --> 00:22:43.410 This is five -dimensional chess of regulatory 00:22:43.410 --> 00:22:46.769 approvals. And beyond that headline -making essential 00:22:46.769 --> 00:22:49.890 merger, we need to focus on the relentless stream 00:22:49.890 --> 00:22:52.430 of smaller agreements because they demonstrate 00:22:52.430 --> 00:22:55.369 the day -to -day execution of the strategy. For 00:22:55.369 --> 00:22:58.910 instance, the July 2025 agreement to acquire 00:22:58.910 --> 00:23:02.609 Nexus Water Group. Nexus alone represents significant 00:23:02.609 --> 00:23:06.029 growth, 87 ,000 customer connections across eight 00:23:06.029 --> 00:23:09.009 states. That single agreement is nearly the size 00:23:09.009 --> 00:23:11.509 of their entire acquisition haul from all of 00:23:11.509 --> 00:23:14.880 2024. Wow. So the pace is picking up dramatically. 00:23:14.880 --> 00:23:16.880 It really is. They're targeting these regional 00:23:16.880 --> 00:23:19.279 groups that offer immediate access to a new rate 00:23:19.279 --> 00:23:21.539 base and immediate opportunities for capital 00:23:21.539 --> 00:23:24.019 deployment. OK, let's drill down into the strategic 00:23:24.019 --> 00:23:26.299 growth state by state, because this really shows 00:23:26.299 --> 00:23:28.619 the granularity. We can start with New Jersey, 00:23:28.680 --> 00:23:30.660 where their subsidiary, New Jersey American Water, 00:23:30.759 --> 00:23:33.740 is consistently busy. New Jersey is a high -volume, 00:23:33.740 --> 00:23:35.660 high -density market. It's a perfect environment 00:23:35.660 --> 00:23:38.140 for AWK, and they frequently acquire municipal 00:23:38.140 --> 00:23:40.980 wastewater systems there. Why wastewater specifically? 00:23:41.500 --> 00:23:43.480 These systems often have significant maintenance 00:23:43.480 --> 00:23:45.859 backlogs because wastewater treatment is extremely 00:23:45.859 --> 00:23:48.819 expensive and, frankly, politically unpopular 00:23:48.819 --> 00:23:51.359 to fund locally with tax hikes. The examples 00:23:51.359 --> 00:23:54.140 are compelling. Back in 2022, they grabbed the 00:23:54.140 --> 00:23:57.289 Bound Brook sewer system for $5 million. Then 00:23:57.289 --> 00:24:01.109 in June 2023, the Egg Harbor City water and wastewater 00:24:01.109 --> 00:24:04.390 systems for $21 .8 million. And a year later, 00:24:04.490 --> 00:24:07.630 the Salem City systems for $18 million. They 00:24:07.630 --> 00:24:10.109 are strategically targeting both water and wastewater 00:24:10.109 --> 00:24:12.470 infrastructure all across the state. And that 00:24:12.470 --> 00:24:15.029 consistency continues right into 2025. It does. 00:24:15.210 --> 00:24:17.029 There's the agreement to buy the South Orange 00:24:17.029 --> 00:24:20.609 Village water system for $19 .7 million. And 00:24:20.609 --> 00:24:22.950 the acquisition of the privately owned Gordon's 00:24:22.950 --> 00:24:26.069 Corner water coney, which serves 15 ,000 customers. 00:24:26.089 --> 00:24:29.109 in those highly desirable suburban areas of Monmouth 00:24:29.109 --> 00:24:31.430 County. New Jersey is clearly a blueprint for 00:24:31.430 --> 00:24:34.250 how they approach dense capital starved regional 00:24:34.250 --> 00:24:36.890 consolidation. It is. Now, if New Jersey is high 00:24:36.890 --> 00:24:38.869 volume, let's look at Pennsylvania, where the 00:24:38.869 --> 00:24:41.470 Pennsylvania American Water subsidiary is focused 00:24:41.470 --> 00:24:44.430 on mega municipal wastewater acquisitions. These 00:24:44.430 --> 00:24:46.730 are the blockbuster deals. Big money. Pennsylvania 00:24:46.730 --> 00:24:48.529 has seen some of the highest dollar transactions. 00:24:48.710 --> 00:24:52.109 In May 2022, they acquired the city of York wastewater 00:24:52.109 --> 00:24:56.950 system for a massive $235 .3 million. $235 million. 00:24:57.309 --> 00:25:00.390 And just recently, in October 2024, they completed 00:25:00.390 --> 00:25:02.869 the purchase of the Butler Area Syrup Authority 00:25:02.869 --> 00:25:07.470 system for $230 million. What's so significant 00:25:07.470 --> 00:25:10.009 about these multi -hundred million dollar wastewater 00:25:10.009 --> 00:25:12.829 deals is that they instantly add a huge chunk 00:25:12.829 --> 00:25:15.769 of assets to the rate base, often requiring immediate 00:25:15.769 --> 00:25:17.970 high -cost upgrades that justify substantial 00:25:17.970 --> 00:25:21.130 future rate cases. That's the playbook. And 2025 00:25:21.130 --> 00:25:24.250 shows this relentless pursuit is ongoing. They 00:25:24.250 --> 00:25:26.529 completed the acquisition of Manuala Mink Water. 00:25:26.599 --> 00:25:28.680 and sewer, and they signed agreements for the 00:25:28.680 --> 00:25:30.799 city of Pittston's wastewater collection system 00:25:30.799 --> 00:25:34.559 for $26 .4 million. And there were more. A multi 00:25:34.559 --> 00:25:36.759 -system deal for the Indian Creek Valley Water 00:25:36.759 --> 00:25:39.720 Authority and the Suitorsville Sewically Municipal 00:25:39.720 --> 00:25:42.019 Sewage Authority. These deals are calculated 00:25:42.019 --> 00:25:44.180 to ensure the continuous pipeline of capital 00:25:44.180 --> 00:25:46.680 deployment is always full. Okay, moving west, 00:25:47.019 --> 00:25:48.940 California American Water presents a slightly 00:25:48.940 --> 00:25:51.420 different acquisition strategy. They seem to 00:25:51.420 --> 00:25:54.180 be focusing more on consolidating smaller, private 00:25:54.180 --> 00:25:56.440 systems that are already regulated. but just 00:25:56.440 --> 00:25:58.599 lack the scale to handle major infrastructure 00:25:58.599 --> 00:26:01.079 investment. That's right. The California environment 00:26:01.079 --> 00:26:03.859 requires constant capital investment due to things 00:26:03.859 --> 00:26:07.700 like drought and seismic risk. AWK provides the 00:26:07.700 --> 00:26:10.839 stability, so we see a very steady pattern. Oxbow 00:26:10.839 --> 00:26:13.859 Marina Mutual Water Company in 2017. Fruit Ridge 00:26:13.859 --> 00:26:17.140 Vista Water Company in 2020. And East Pasadena 00:26:17.140 --> 00:26:20.980 Water Cum in 2021. It's incremental, but it's 00:26:20.980 --> 00:26:23.220 consistent customer growth in a very important 00:26:23.220 --> 00:26:26.589 state. And the 2025 activity follows that same 00:26:26.589 --> 00:26:29.029 pattern. The acquisition of the West End Martin 00:26:29.029 --> 00:26:32.809 Water Works system for $1 .6 million, a smaller, 00:26:32.910 --> 00:26:35.490 focused deal. Followed by the acquisition of 00:26:35.490 --> 00:26:38.049 the Mesa del Sol water system and the Bass Lake 00:26:38.049 --> 00:26:40.210 Water Company system. They are systematically 00:26:40.210 --> 00:26:43.190 cleaning up the fragmented, non -municipal side 00:26:43.190 --> 00:26:45.069 of the market out there. Then we have Illinois. 00:26:45.599 --> 00:26:47.519 where Illinois American Water has been active 00:26:47.519 --> 00:26:50.200 in both water and wastewater. What are noteworthy 00:26:50.200 --> 00:26:51.740 there is that in some of these acquisitions, 00:26:51.740 --> 00:26:54.299 like the Piazza Township Sanitary District, AWK 00:26:54.299 --> 00:26:57.079 managed to structure the deal in a way that integration 00:26:57.079 --> 00:26:59.059 actually resulted in customer bill reductions 00:26:59.059 --> 00:27:01.720 initially. Which serves as a powerful political 00:27:01.720 --> 00:27:03.920 selling point for other municipalities that might 00:27:03.920 --> 00:27:06.240 be considering privatization. A reduction in 00:27:06.240 --> 00:27:08.579 bills is certainly a strong counterargument to 00:27:08.579 --> 00:27:11.200 that standard privatization fear of immediate 00:27:11.200 --> 00:27:14.380 rate hikes. It's very savvy. The major acquisition 00:27:14.380 --> 00:27:17.079 in Illinois was the 2020 deal for the city of 00:27:17.079 --> 00:27:19.900 Jerseyville's entire water and wastewater systems 00:27:19.900 --> 00:27:24.720 for $43 .25 million, which shows their appetite 00:27:24.720 --> 00:27:27.380 for taking on comprehensive municipal control. 00:27:27.640 --> 00:27:29.980 Rounding out the geography, Virginia provides 00:27:29.980 --> 00:27:32.319 a good example of a straightforward municipal 00:27:32.319 --> 00:27:36.039 acquisition. The 2024 purchase of the town of 00:27:36.039 --> 00:27:38.319 Cape Charles drinking water and wastewater systems 00:27:38.319 --> 00:27:41.380 for $15 million. It just reiterates that the 00:27:41.380 --> 00:27:43.819 strategy is universal across their 14 states. 00:27:43.980 --> 00:27:46.140 They seek out systems where the municipal capital 00:27:46.140 --> 00:27:48.519 funding gap is just too large for the local government 00:27:48.519 --> 00:27:50.970 to close on its own. So to summarize this staggering 00:27:50.970 --> 00:27:54.950 pace, AWK noted in late 2024 that they had agreements 00:27:54.950 --> 00:27:57.670 in place for 22 acquisitions across eight states, 00:27:57.710 --> 00:28:00.150 from California to West Virginia, expected to 00:28:00.150 --> 00:28:03.549 add about 43 ,400 customer connections. And that 00:28:03.549 --> 00:28:05.890 volume, layered on top of a Nexus deal and the 00:28:05.890 --> 00:28:08.430 massive essential utilities merger, it demonstrates 00:28:08.430 --> 00:28:10.990 that consolidation is not a side project. It 00:28:10.990 --> 00:28:13.569 is the fundamental core business strategy driving 00:28:13.569 --> 00:28:16.069 their entire financial model. They are essentially 00:28:16.069 --> 00:28:19.230 becoming the national private solution to America's 00:28:19.230 --> 00:28:22.009 aging water infrastructure problem. And they're 00:28:22.009 --> 00:28:24.589 using the regulatory framework to guarantee a 00:28:24.589 --> 00:28:26.950 profitable return on every single dollar they 00:28:26.950 --> 00:28:29.130 spend to fix it. It's an incredible machine. 00:28:29.349 --> 00:28:31.190 So to synthesize what we've discussed today, 00:28:31.289 --> 00:28:33.710 the story of American Water Works really operates 00:28:33.710 --> 00:28:36.930 along three interconnected dimensions. And each 00:28:36.930 --> 00:28:39.329 one justifies the company's massive financial 00:28:39.329 --> 00:28:41.559 valuation. OK, let's break them down. First, 00:28:41.680 --> 00:28:43.680 there's the extreme infrastructural scale. We're 00:28:43.680 --> 00:28:48.099 talking 14 million customers serviced by 54 ,500 00:28:48.099 --> 00:28:52.140 miles of pipes and 75 dams. This sheer scale 00:28:52.140 --> 00:28:54.220 is what makes the company capable of managing 00:28:54.220 --> 00:28:56.640 the inherent volatility and cost of infrastructure. 00:28:56.960 --> 00:28:58.720 No small town could handle that. Not a chance. 00:28:59.279 --> 00:29:01.579 Second, there's the steady financial commitment 00:29:01.579 --> 00:29:04.519 and really the decoding of that regulatory moat 00:29:04.519 --> 00:29:07.599 we talked about. AWK is committed to that 7 % 00:29:07.599 --> 00:29:11.970 to 9 % EPS CAGR. remarkable target driven entirely 00:29:11.970 --> 00:29:14.690 by their ability to deploy capital. That $48 00:29:14.690 --> 00:29:17.819 billion capital plan. Exactly. And then subsequently 00:29:17.819 --> 00:29:20.119 apply to state commissions for rate increases 00:29:20.119 --> 00:29:22.640 based on their expanding rate base. They are 00:29:22.640 --> 00:29:24.759 experts at turning necessary maintenance into 00:29:24.759 --> 00:29:27.759 predictable profit. And third. And third, the 00:29:27.759 --> 00:29:30.140 accelerating strategy of utility consolidation, 00:29:30.539 --> 00:29:33.079 which is the fuel for that rate base expansion. 00:29:33.460 --> 00:29:36.279 This consolidation spans the entire spectrum 00:29:36.279 --> 00:29:39.720 from acquiring small, specialized systems like 00:29:39.720 --> 00:29:42.000 West San Martin Waterworks. All the way up through 00:29:42.000 --> 00:29:45.160 large municipal acquisitions like the $230 million 00:29:45.160 --> 00:29:49.599 bus. And culminating in the industry redefining 00:29:49.599 --> 00:29:52.759 $63 billion merger with essential utilities. 00:29:53.039 --> 00:29:55.420 The relevance to you, the listener, is paramount 00:29:55.420 --> 00:29:58.259 here. The narrative of American waterworks illustrates 00:29:58.259 --> 00:30:01.559 a fundamental economic shift. Critical infrastructure 00:30:01.559 --> 00:30:04.660 water is moving rapidly from diffuse local municipal 00:30:04.660 --> 00:30:08.119 control to consolidated regulated private ownership. 00:30:08.640 --> 00:30:10.579 And the shift is occurring because local governments 00:30:10.579 --> 00:30:12.960 facing decades of deferred maintenance and constrained 00:30:12.960 --> 00:30:15.900 budgets simply cannot afford the massive capital 00:30:15.900 --> 00:30:18.539 necessary to replace these systems and meet modern 00:30:18.539 --> 00:30:20.500 regulatory standards like the lead and copper 00:30:20.500 --> 00:30:24.119 rule. AWK has positioned itself as the necessary 00:30:24.119 --> 00:30:27.099 financial vehicle to solve this crisis. It is 00:30:27.099 --> 00:30:29.660 a brilliant, if you might say controversial, 00:30:29.960 --> 00:30:32.619 economic model built on necessity. It really 00:30:32.619 --> 00:30:35.299 is. So here's the provocative question we want 00:30:35.299 --> 00:30:37.299 to leave with you, the learner, to consider. 00:30:38.329 --> 00:30:41.190 Given the company's staggering $46 to $48 billion 00:30:41.190 --> 00:30:44.410 capital plan over the next decade, intended to 00:30:44.410 --> 00:30:47.269 provide resilient, modern water infrastructure, 00:30:47.690 --> 00:30:51.009 how might this rapid consolidation and the resulting 00:30:51.009 --> 00:30:53.369 dependency on state -level regulation to protect 00:30:53.369 --> 00:30:55.910 consumer interest ultimately change the relationship 00:30:55.910 --> 00:30:57.710 between your community and its most essential 00:30:57.710 --> 00:31:00.130 resource? Is large -scale private consolidation, 00:31:00.549 --> 00:31:03.250 managed under regulatory control, the only viable 00:31:03.250 --> 00:31:05.529 way to fund the modernization of America's water 00:31:05.529 --> 00:31:07.690 systems? Something to think about. Thanks for 00:31:07.690 --> 00:31:09.150 diving deep with us. See you next time.