Executive Summary / Key Takeaways

• American Water Works ($AWK) stands as the preeminent regulated water and wastewater utility in the U.S., poised for consistent growth driven by a multi-decade infrastructure investment cycle and strategic acquisitions.
• The company delivered strong financial results in the first nine months of 2025, with diluted EPS of $4.47, up from $4.17 in 2024, primarily due to authorized rate increases and strategic investments.
• AWK is affirming its long-term targets of 7-9% EPS and dividend growth, underpinned by an 8-9% rate base growth, fueled by a $40-42 billion capital plan over the next decade, including significant investments in PFAS and lead service line remediation.
• The recently announced merger agreement with Essential Utilities, Inc. (WTRG) and the acquisition of Nexus Water Group systems are set to further solidify AWK's market leadership and geographic diversity, creating a combined entity with a pro forma market capitalization of approximately $40 billion.
• Despite a complex regulatory and litigation landscape, AWK's proactive capital recovery mechanisms, operational excellence, and commitment to customer affordability mitigate risks and reinforce its position as a premium utility investment.

The Unfolding Narrative of Water Infrastructure Leadership

American Water Works Company, Inc. ($AWK), established in 1886, has evolved into the largest and most geographically diverse publicly traded water and wastewater utility in the United States, serving approximately 3.5 million active customers across 14 states. The company's enduring strategy centers on addressing the critical and escalating need for modern, resilient water infrastructure through continuous capital investment, strategic acquisitions, and organic customer growth. This foundational approach has cemented AWK's position as a leader in a sector vital to public health and economic stability.

The broader U.S. water and wastewater industry faces immense challenges, as highlighted by the American Society of Civil Engineers, which recently assigned the nation's drinking water systems a C- grade and wastewater systems a D+ grade. The Environmental Protection Agency (EPA) estimates a staggering $625 billion investment is needed over the next two decades for water infrastructure, an figure AWK believes is significantly understated. This backdrop of aging infrastructure, coupled with new environmental regulations like the EPA's final National Primary Drinking Water Regulation (NPDWR) for PFAS and the Lead and Copper Rule Improvements (LCRI), creates a compelling, multi-decade investment runway for companies like AWK. The company's strategic responses to these imperatives are not merely reactive but are integral to its long-term growth and competitive differentiation.

Operational Excellence and Technological Advancement

AWK's operational model is built on a commitment to providing safe, clean, reliable, and affordable water and wastewater services. This is achieved through continuous investment in its extensive network, which includes approximately 80 surface water treatment plants, 520 groundwater treatment plants, 190 wastewater treatment plants, and 54,500 miles of mains and pipes. The company's "technology" is less about proprietary hardware and more about the sophisticated application of engineering, data analytics, and advanced treatment processes to manage this vast infrastructure efficiently and ensure water quality.

A significant area of technological focus and investment is in water quality compliance. AWK estimates it will invest approximately $2 billion in capital expenditures to install additional treatment facilities to comply with the proposed NPDWR for PFAS. Similarly, the company expects to spend about $1 billion over the next five years on LCRI-related projects, doubling its recent annual spending rate to replace lead service lines by the end of 2037. These investments are not just regulatory requirements; they represent a tangible commitment to public health and a strategic advantage in a fragmented industry where many smaller utilities lack the resources or expertise for such complex upgrades. For instance, the acquisition of the East Dunkard Water System in Pennsylvania, which was out of EPA compliance since 2014, showcased AWK's ability to rectify numerous violations and restore safe drinking water, demonstrating a critical operational capability.

Furthermore, AWK leverages technology for operational efficiency and customer service. This includes the installation of modern metering systems to enhance billing accuracy and support water efficiency goals, as seen in California American Water's $1.4 million meter installation project. The company also invests in resilient infrastructure, such as new battery backup systems in high-risk regions to maintain water service during emergencies, as implemented in California's Madera County. These ongoing technological enhancements and operational improvements contribute directly to AWK's ability to provide reliable service, manage costs, and secure favorable regulatory outcomes.

Financial Performance and Strategic Growth Drivers

American Water Works delivered robust financial performance through the first nine months of 2025. Diluted earnings per share (EPS) reached $4.47, a notable increase from $4.17 in the same period of 2024. This growth was primarily fueled by the implementation of new rates in its Regulated Businesses, reflecting the recovery of substantial capital and acquisition investments. For the three months ended September 30, 2025, diluted EPS was $1.94, up from $1.80 in the prior year period.

Operating revenues for the Regulated Businesses segment increased by $366 million for the nine months ended September 30, 2025, compared to the same period in 2024, reaching $3,570 million. This was largely driven by $316 million from authorized rate increases and infrastructure surcharges, alongside $37 million from water and wastewater acquisitions and organic customer growth. While operating and maintenance (O&M) expenses increased by $125 million for the nine months ended September 30, 2025, due to higher employee-related costs, technology investments, and production expenses, these were largely offset by revenue growth. Depreciation and amortization also rose by $85 million, reflecting the continuous placement of new utility plant into service. The company's effective income tax rate saw a slight increase, primarily due to a decrease in the amortization of Excess Accumulated Deferred Income Taxes (EADIT).

AWK's growth strategy is deeply rooted in capital investment and strategic acquisitions. The company plans to invest approximately $3.20 billion in 2025, with $2.10 billion already deployed in infrastructure improvements and replacements during the first nine months of the year. This aggressive capital program is expected to drive regulated rate base growth at a long-term rate of 8% to 9%, which in turn supports the company's 7% to 9% EPS and dividend growth targets.

Acquisitions remain a critical component of AWK's expansion. In the first nine months of 2025, the company invested $30 million in acquisitions, adding approximately 11,000 customers. A significant development occurred on May 19, 2025, when AWK agreed to acquire multiple water and wastewater systems from Nexus Regulated Utilities, LLC for approximately $315 million. This transaction is expected to add nearly 47,000 customer connections and an estimated $200 million to the rate base across eight existing regulated states by August 2026. Further bolstering its market position, AWK entered into a definitive agreement on October 26, 2025, to merge with Essential Utilities, Inc. (WTRG) in an all-stock transaction, creating a combined entity with a pro forma market capitalization of approximately $40 billion. This merger, expected to close by the end of the first quarter of 2027, will significantly enhance AWK's scale and geographic diversity.

A Robust Financial Position and Prudent Capital Management

American Water maintains a strong balance sheet and robust liquidity, crucial for funding its extensive capital program. As of September 30, 2025, the company's total debt-to-capital ratio stood at 0.58 to 1, well within its covenant limit of 0.70 to 1. This financial discipline is recognized by credit rating agencies, with Moody's (MCO) affirming a Baa1 rating and S&P Global Ratings (SPGI) an A rating, both with stable outlooks as of October 29, 2025. These strong investment-grade ratings are vital for accessing capital markets on favorable terms.

The company's financing plan for 2025 includes $1.5 billion to $2 billion of long-term debt financing, with no equity planned for the year. However, to support its long-term growth, AWK anticipates external equity issuances of $1 billion in 2026 and $1.5 billion in 2029. In August 2025, AWK entered into forward sale agreements for 8.10 million shares of common stock, expecting to receive approximately $1.131 billion in net proceeds by December 31, 2026, for general corporate purposes. This proactive approach to financing ensures the company has the necessary capital to execute its ambitious investment plans while maintaining financial flexibility.

Competitive Landscape and Strategic Differentiation

American Water operates in a highly regulated and capital-intensive industry, competing with other publicly traded water utilities such as American States Water Company (AWR), California Water Service Group (CWT), SJW Group (SJW), and Essential Utilities, Inc. (WTRG). AWK's sheer scale and unparalleled geographic diversity across 14 states (soon to be expanded with the Essential merger) provide a significant competitive advantage. This broad footprint offers resilience against regional economic downturns or localized environmental challenges, a differentiation from more regionally concentrated players like AWR and CWT.

AWK's integrated water and wastewater service offerings, combined with its extensive infrastructure network, allow for greater operational efficiencies and a more comprehensive solution compared to water-centric rivals like CWT and SJW. The company's strategic focus on regulated acquisitions, including municipal systems and privately-owned utilities like Nexus Water Group, further expands its customer base and rate base, leveraging economies of scale. This aggressive acquisition strategy, coupled with a strong track record of regulatory execution, allows AWK to effectively integrate new systems and achieve full cost recovery.

While competitors like WTRG also pursue growth through acquisitions and offer diversified services (including natural gas), AWK's pure-play focus on water and wastewater, combined with its deep expertise in complex environmental compliance (PFAS, LCRI), positions it as a specialized leader. The company's ability to address critical infrastructure needs, often in communities struggling with compliance or deferred maintenance, provides a unique value proposition that differentiates it in the market.

Risks and Challenges

Despite its strong position, AWK faces several risks. The proposed merger with Essential Utilities, Inc. carries inherent integration risks, including potential disruptions to ongoing businesses, challenges in harmonizing corporate cultures, and the possibility that anticipated synergies may not fully materialize. Regulatory approvals for the merger are also a key condition, and any imposed terms or conditions could impact the combined entity.

Operational and environmental risks are constant. The company is routinely involved in litigation, including class action lawsuits related to past service disruptions (e.g., Chattanooga, TN, and the West Virginia main break) and condemnation actions, such as the ongoing effort by the Monterey Peninsula Water Management District to acquire Cal Am's assets. Environmental compliance, particularly with new PFAS regulations and LCRI, requires substantial capital investment, and while AWK has a clear plan, the execution and cost recovery are subject to regulatory processes. The estimated $2 billion for PFAS compliance and $1 billion for LCRI over five years represent significant outlays.

Furthermore, the company's forward sale agreements, while providing capital flexibility, introduce risks related to potential dilution if physical settlement occurs when the stock price is above the forward sale price, or if certain events trigger mandatory settlement. Changes in interest rates and access to capital markets also remain ongoing considerations for a capital-intensive utility.

Outlook and Guidance

American Water Works is well-positioned for sustained growth, affirming its long-term targets of 7% to 9% EPS and dividend compounded annual growth rates, driven by 8% to 9% rate base growth. The company has narrowed its 2025 EPS guidance to the top half of its initial range, now expecting $5.70 to $5.75 per share, reflecting strong performance and consistent execution. This guidance implies an 8.6% EPS growth in 2025 at the midpoint of the narrowed range, based on weather-normalized 2024 EPS.

The capital investment plan remains robust, with AWK expecting to invest $3.3 billion in 2025. Over the five-year period from 2025 to 2029, the company projects investments of $17 billion to $18 billion, an increase of approximately $1 billion over its previous five-year plan. Looking out over the next decade, total investments in regulated systems and acquisitions are expected to reach $40 billion to $42 billion, a $5 billion increase from the prior 10-year plan. These investments are crucial for infrastructure renewal, resiliency, and environmental compliance.

Regulatory outcomes continue to be supportive, with new rates effective in several states in 2025, including significant increases in Illinois ($105 million), Missouri ($63 million), and New Jersey ($80 million). Key legislative wins, such as the future test year legislation in Missouri and expanded infrastructure cost recovery mechanisms in Indiana and Virginia, are expected to enhance regulatory predictability and improve earned returns. The company's commitment to customer affordability, with average residential water bills projected to remain below 1% of median household income, helps maintain constructive regulatory relationships.

Conclusion

American Water Works stands as a compelling investment opportunity, uniquely positioned to capitalize on the profound and enduring need for water and wastewater infrastructure investment across the United States. Its century-long history of operational excellence, coupled with a proactive strategy of organic growth, strategic acquisitions, and robust capital deployment, underpins a clear path to consistent shareholder returns. The company's leadership in addressing critical challenges like PFAS and lead service line replacement, supported by substantial planned investments and a favorable regulatory environment, reinforces its competitive moat.

The impending merger with Essential Utilities, Inc. and ongoing acquisition momentum are set to further amplify AWK's scale, geographic diversification, and earnings power. While the company operates within a complex landscape of regulatory scrutiny and litigation, its disciplined financial management, strong balance sheet, and commitment to customer affordability provide a resilient foundation. For discerning investors, AWK represents a stable, growing utility with a vital mission, offering a top-tier combination of EPS and dividend growth driven by an indispensable service and a deep pipeline of infrastructure imperatives.