How American Water Grows Earnings

AMERICAN WATER How O&M Efficiency Translates to Investment Growth Saving $1 in OpEx vs investing $8 in capital at allowed ROE, Keeps customer rates neutral and can create $0.39 in sustainable earnings a) Revenue Requirement Expenses O&M Depreciation Interest Expense Property & General Taxes b) Total Expenses c) Operating Income (=a-b) $1 Expense Savings $ 1.00 $ -$8 Invested Capital 1.00 0.96 d) Federal & State Income Taxes e) Net Income to Shareholder (=c-d) $ Assumes 4% taxes on revenue (gross receipts e.g.) 2 Assumes 2.5% depreciation expense 3 Assumes debt financing at 4.9% 4 Assumes property taxes on invested capital of 0.5% and revenue taxes of 4% 5 Assumes effective income tax rate of 26.1%, based on federal tax rate of 21% Assumes authorized weighted average ROE of 9.8% 1 0.04 1.00 SSSSSSSSA 0.20 2 3 0.19 $ 0.08 4 $ 0.47 0.53 5 0.14 6 0.39 39

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