American Water Works Co. (NYSE:AWK) released its second-quarter 2018 earnings results earlier this month. The country’s largest publicly traded water utility posted revenue growth of 1.1% year over year, while earnings per share (EPS) adjusted for one-time factors jumped 13.7%.
Adjusted EPS of $0.83 beat Wall Street’s expectation of $0.81, while revenue of $853 million came in lighter than the $867 million analysts were projecting.
Earnings releases only tell part of the story. Here are three key things management shared on the earnings call that investors should know.
1. The company is increasing efficiency by using technology such as AI and drones
From COO Walter Lynch’s remarks:
Let me give you two examples of how our employees are driving [increased efficiency]. Starting in 2017, we expanded the use of drones to perform visual inspections of our above-ground water tanks. This is a safer and faster way to visually inspect tanks while providing more detailed information. … We’ve also developed software that uses artificial intelligence to analyze thousands of images and millions of data points per day to detect deteriorating tank coating. This allows us to manage our tank maintenance program more proactively and efficiently, and again, it’s a much safer way to conduct this work.
Lynch said the company “can now perform about 150 visual inspections of above-ground water tanks in six months” using drones, “when it once took us four years to complete this work.” He’s talked about drones in previous earnings calls, but this is the first time I’ve heard him provide some quantification. Moreover, I believe this call marks the first time he’s mentioned artificial intelligence (AI); at the very least, it’s the first time I’ve mentioned AI in an article about this company.
American Water’s status as the largest water utility in the U.S. translates to it having more financial and other resources than others in the industry. Led by its technology and innovation group, the company is using some of these resources to explore how various emerging technologies can help it increase efficiency. Performing tasks more efficiently not only lowers direct costs, but also usually increases employee safety, which in turns helps lower healthcare and insurance costs.
2. The company has a big competitive advantage relative to acquisitions
From CEO Susan Story’s remarks:
We continue to grow our Regulated business. [To date this year,] we have welcomed 10,300 new customer connections through closed acquisitions [5,600] and organic growth [4,700]. … We have an additional 57,000 customer connections under agreement for acquisition. This includes two recently announced additions: one in New Jersey, where we will welcome 3,900 new water customers, and one in Pennsylvania, where we will add another 9,000 new wastewater customers.
Lynch expounded on the Pennsylvania acquisition:
In June, Pennsylvania American Water signed an agreement to acquire the wastewater assets of Exeter Township in Berks County, which serves approximately 9,000 wastewater customer connections. We provide water service to about 70% of the township’s residents, and we’re excited to be the future provider of wastewater service for the entire town. We expect to close this transaction by the end of the first quarter of 2019 pending regulatory approvals.
As indicated in Story’s comment, American Water’s growth in customer count so far this year has come somewhat more from acquisitions than by organic growth. Its success in growing by acquisitions is due to it being both the largest company in its industry as well as the most geographically diverse. Its size means in has greater financial resources than other industry players to use to scoop up attractive smaller water and wastewater utilities. Its geographic diversity provides it with a larger pool of potentially attractive acquisition candidates because it’s much more efficient for water utilities to acquire systems near where they already operate. (American Water has regulated operations in 16 states — twice the number of the country’s second largest and second most geographically diverse water utility, Aqua America.)
Lynch’s comment illustrates the company’s powerful competitive advantage. Investors can expect to see more of these types of acquisitions: ones that involve American Water acquiring the wastewater systems of a municipality where they already operate the water systems (or vice versa). This creates significant economies of scale.
3. Legislation favorable to public water utilities continues to be passed across the U.S.
From Lynch’s remarks:
On the legislative front, two bills were recently signed in Missouri that benefit communities and water and wastewater customers. … The second bill changes the public vote requirement for the sale of a municipal water or wastewater system to a simple majority for towns with populations of less than 3,000. Historically in Missouri, smaller communities need a two-third majority. This new legislation increases the options for small towns, and we stand ready to assist.
Lynch provided three examples — two in Missouri and one in Iowa — of recent legislation that should prove favorable to public water utilities, though I only included one for brevity’s sake. Missouri and Iowa are two of the 16 states in which American Water has regulated operations. (The other states are California, Georgia, Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, New York, Pennsylvania, Tennessee, Virginia, and West Virginia.) In Lynch’s example, American Water will now have a much easier time buying water and wastewater utilities in small communities in Missouri should it desire to do so.