American Water Works Company, Inc. (NYSE:AWK) - A Utility Giant Delivering Consistent Growth

Published on September 24, 2024 | Ticker: AWK

American Water Works Company, Inc. (NYSE:AWK) is the largest and most geographically diverse publicly traded water and wastewater utility company in the United States. The company's primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service, and sale for resale customers.

Financials

In the fiscal year 2023, American Water reported annual net income of $944 million and annual revenue of $4.23 billion. The company's annual operating cash flow was $1.87 billion, while its annual free cash flow was -$860 million. These strong financial results demonstrate the company's ability to generate consistent earnings and cash flows, despite the capital-intensive nature of its business.

For the first quarter of 2024, American Water reported earnings of $0.95 per share, up from $0.91 per share in the same period last year. The increase was primarily driven by the implementation of new rates in the Regulated Businesses from its capital and acquisition investments, offset somewhat by increased production and employee-related costs, higher financing costs to fund the capital investment plan, and $0.05 per share of net unfavorable one-time items year-over-year. The company also reported $0.02 per share of additional interest income from the February 2024 amendment of the secured seller note related to the sale of its Homeowner Services Group.

Business Overview

American Water's strong financial performance is underpinned by its focus on regulated utility operations, which account for nearly 100% of its net income. The company's strategy is centered on growing its regulated business through continued capital investment in infrastructure and regulated acquisitions. In the first three months of 2024, the company invested $720 million, primarily in its Regulated Businesses, including $634 million in capital investments for infrastructure improvements and replacements, and $86 million to fund the acquisition of a wastewater treatment plant and related assets in Illinois.

The company's growth and optimization efforts are further evidenced by its pending acquisitions, with 26 agreements in place as of March 31, 2024, representing a total aggregate purchase price of $517 million and adding approximately 66,800 additional customers. Four of these 26 agreements, representing an aggregate purchase price of $251 million and serving approximately 18,800 customers, have already received regulatory approval.

American Water's geographic footprint is diverse, with operations spanning 14 states, including California, Pennsylvania, New Jersey, and West Virginia, among others. The company's revenue is primarily generated from its Regulated Businesses, which include water services and wastewater services. In the first quarter of 2024, water services accounted for $832 million, or 90%, of the Regulated Businesses' operating revenues, while wastewater services contributed $85 million, or 9%.

The company's focus on infrastructure investment and regulated acquisitions has driven consistent revenue growth across its service territories. In the first quarter of 2024, the Regulated Businesses' operating revenues increased by $68 million, or 7.9%, compared to the same period in the prior year. This increase was primarily due to a $53 million increase from authorized rate increases, including infrastructure surcharges, and an $8 million increase from water and wastewater acquisitions, as well as organic growth in existing systems.

American Water's commitment to operational excellence and customer affordability is also evident in its regulatory execution. In the first quarter of 2024, the company received $98 million in annualized new revenues, including $43 million from general rate cases and step increases, and $55 million from infrastructure surcharges. The company currently has $636 million of total annualized revenue requests pending across its various state jurisdictions.

The company's focus on affordability is particularly noteworthy, as it seeks to balance the need for significant infrastructure investments with the impact on customer bills. American Water's system-wide average residential water customer bill is $55 to $65 per month, and the company's investment plan is designed to keep residential water bills within its target of 1% or less of median household income.

Liquidity

American Water's strong financial position is further bolstered by its successful long-term debt financing completed in February 2024. The company issued $1.4 billion in senior notes, including $700 million of 10-year notes at 5.15% and $700 million of 30-year notes at 5.45%. These proceeds will fund the company's regulated businesses' growth and were used to pay off a maturing senior note and outstanding commercial paper.

The company's financial strength is also reflected in its credit ratings, with S&P and Moody's both affirming their investment-grade ratings and stable outlooks in 2024. As of March 31, 2024, American Water's total debt-to-capital ratio, net of its $584 million in cash on hand, was 56%, well within the company's long-term target of less than 60%.

Outlook

Looking ahead, American Water remains focused on executing its growth strategy and delivering on its long-term targets for both earnings and dividend growth of 7% to 9% per year. The company's strong regulatory execution, capital investment plan, and disciplined approach to acquisitions position it well to continue its industry-leading performance.

Risks and Challenges

One potential risk factor for the company is the ongoing regulatory and legislative changes in its key markets, such as Pennsylvania, where the company is navigating a complex rate case and potential revisions to the state's fair market value law. However, American Water remains confident in its ability to navigate these challenges and continue delivering value to its customers and shareholders.

Conclusion

Overall, American Water's consistent financial performance, industry-leading growth, and commitment to operational excellence and customer affordability make it a compelling investment opportunity in the water utility sector. The company's diversified geographic footprint, robust capital investment plan, and strong regulatory execution provide a solid foundation for continued growth and value creation.

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