Company Overview
American Water Works Company, Inc. (AWK) is the largest and most geographically diverse publicly traded water and wastewater utility company in the United States. Serving approximately 3.3 million customer connections across 14 states, American Water operates through two primary business segments: the Regulated Businesses and Other. The Regulated Businesses segment is the core of the company, providing water and wastewater services to residential, commercial, industrial, public authority, fire service, and sale for resale customers. The Other segment includes the company's Military Services Group, which provides water and wastewater services to the U.S. government on military installations, as well as select municipal and commercial customers.
History and Development
Founded in 1886, American Water has a long and storied history of providing essential water and wastewater services to the communities it serves. The company's origins trace back to the establishment of the American Water Works & Guarantee Company in 1886, which was formed to acquire and operate water systems in various cities across the United States. Over the decades, American Water has grown through strategic acquisitions and organic expansion, solidifying its position as the industry leader. In 1940, the company underwent a significant restructuring, recapitalizing and reorganizing as the American Water Works Company, Inc. This change allowed the company to better serve its growing customer base across the country.
During the 1960s and 1970s, American Water faced challenges due to a wave of municipalization, where many local governments opted to take over privately owned water utilities. In response, the company shifted its focus to contract operations and services for municipally-owned water and wastewater systems, allowing it to maintain a strong presence in the industry. In the 1990s and 2000s, American Water resumed its growth through acquisitions, expanding its regulated water and wastewater utility footprint across the country. The company also diversified by launching its Market-Based Operations segment, which provided various water-related services to military installations, municipalities, and industrial and commercial customers. However, this segment was later sold in 2021 as the company refocused on its core regulated water and wastewater utility business.
Financials
In terms of financial performance, American Water has demonstrated consistent growth and stability. For the fiscal year 2023, the company reported annual revenue of $4.23 billion, net income of $944 million, operating cash flow of $1.87 billion, and free cash flow of -$860 million. In the most recent quarter, the company reported revenue of $1.32 billion, net income of $350 million, operating cash flow of $679 million, and free cash flow of -$43 million. Revenues increased $124 million or 10.6% year-over-year, driven by rate increases and acquisitions. Net income increased $27 million or 8.4% year-over-year, primarily due to the higher revenues, partially offset by increased operating expenses and financing costs.
Looking at the first nine months of 2024, the Regulated Businesses segment reported operating revenues of $3.20 billion, up from $2.96 billion in the same period in 2023. The increase was primarily driven by authorized rate increases, including infrastructure surcharges, to recover infrastructure investments. Operation and maintenance expenses for this segment were $1.11 billion, up from $1.04 billion in the same period in 2023, due to increased production costs, employee-related costs, and other operating expenses. Net income for the Regulated Businesses segment reached $815 million, up from $783 million in the same period in 2023.
The Other segment reported operating revenues of $279 million for the first nine months of 2024, up from $242 million in the same period in 2023, primarily due to timing of capital projects in the Military Services Group (MSG) and the Contract Services Group businesses. Operation and maintenance expenses for this segment were $230 million, up from $205 million in the same period in 2023, mainly due to costs associated with the increased capital projects in MSG. The Other segment reported a net loss of $3 million for the first nine months of 2024, compared to a net loss of $10 million in the same period in 2023.
The company's strong financial position is further evidenced by its investment-grade credit ratings from Moody's (Baa1) and S&P Global (A).
Capital Allocation and Investment Strategy
One of the key drivers of American Water's success has been its focus on prudent capital allocation and disciplined financial management. The company has a track record of making strategic investments in its infrastructure to ensure the continued reliability and resilience of its water and wastewater systems. In 2024, American Water expects to invest approximately $3.3 billion in capital expenditures, with a focus on replacing aging pipes, upgrading treatment facilities, and enhancing system resiliency.
Sustainability Initiatives
The company's commitment to sustainability and environmental stewardship is also a core part of its value proposition. American Water has set ambitious goals to reduce greenhouse gas emissions, improve water use efficiency, and expand its renewable energy portfolio. These initiatives not only contribute to the company's environmental impact but also demonstrate its dedication to being a responsible corporate citizen.
Growth Prospects
Looking ahead, American Water remains well-positioned for continued growth and success. The company's geographic diversity, strong regulatory relationships, and focus on operational excellence position it to capitalize on the significant infrastructure investment needs within the water and wastewater industry. Additionally, the company's robust acquisition pipeline and strategic focus on expanding its service footprint through regulated acquisitions further support its long-term growth strategy.
American Water has affirmed its 2024 EPS guidance of $5.25 to $5.30 per share, which represents the top half of their previous guidance range. The company has also initiated 2025 EPS guidance of $5.65 to $5.75 per share, representing 8% EPS growth compared to their weather-normalized 2024 EPS guidance. American Water is affirming their long-term targets, including 7% to 9% EPS and dividend compounded annual growth rates. The company expects to achieve 8% to 9% regulated rate base growth over the next decade, driven by their accelerated capital investment plan.
The U.S. water and wastewater utility industry is expected to see steady growth, driven by the need for infrastructure investment, acquisitions, and regulatory requirements around water quality and environmental compliance. Industry analysts estimate the sector could see a compound annual growth rate (CAGR) of 5-7% over the next 5-10 years.
Liquidity and Resilience
Despite the challenges posed by the COVID-19 pandemic, American Water has demonstrated its resilience and ability to adapt to changing market conditions. The company's essential service model, diversified customer base, and prudent financial management have enabled it to navigate the pandemic effectively and maintain its strong financial performance.
As of September 30, 2024, American Water had a debt-to-equity ratio of 1.29, cash of $127 million, and available credit of $2.46 billion under a $2.75 billion revolving credit facility that matures in October 2029. The company's current ratio stood at 0.58, with a quick ratio of 0.53.
On October 3, 2024, the company identified unauthorized activity within its computer networks and systems, which was determined to be a cybersecurity incident. The company promptly responded, and none of the water/wastewater facilities were impacted. American Water does not expect a material financial impact from this incident.
Conclusion
In conclusion, American Water Works Company is a well-established and highly respected utility that is poised to continue delivering essential water and wastewater services to its customers while generating sustainable value for its shareholders. The company's focus on infrastructure investment, operational excellence, and environmental stewardship make it a compelling investment opportunity within the regulated utility sector. With its strong financial performance, clear growth strategy, and commitment to sustainability, American Water is well-positioned to navigate the challenges and opportunities in the water and wastewater industry for years to come.