American Water Works Co. (AWK 0.28%) released first-quarter 2018 financial results last week. The country's largest publicly traded water and wastewater utility posted revenue growth of nearly 1% year over year, while earnings per share (EPS) jumped 13.5% to $0.59.
The bottom-line results flowed by Wall Street's expectation of $0.55 per share, or by 7.3%. This was a solid earnings beat for a regulated water utility.
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American Water Works' key quarterly numbers
| Metric | Q1 2018 | Q1 2017 | Change (YOY) |
|---|---|---|---|
| Revenue | $761 million | $756 million | 0.7% |
| Net income | $106 million | $93 million | 14% |
| Earnings per share (EPS) | $0.59 | $0.52 | 13.5% |
Data source: American Water Works. YOY = year over year.
Here's how the segments performed.
| Segment |
Q1 2018 EPS |
Q1 2017 EPS | Change (YOY) |
|---|---|---|---|
| Regulated business | $0.58 | $0.53 | 9.4% |
| Market-based business | $0.07 | $0.04 | 75% |
| Parent | ($0.06) | ($0.05) | (20%) |
| Total EPS | $0.59 | $0.52 | 13.5% |
Data source: American Water Works.
In its core regulated business, American Water's revenue increased by $7 million from the year-ago period. This was driven by approved rate increases to support infrastructure investments, acquisitions, and organic growth. Net income came in at $104 million, from $94 million. The market-based business' net income increased to $12 million, up from $7 million in the year-ago quarter. The increase was primarily driven by growth in the homeowner services group through a rise in the number of customers, cost management, and the impact of the lower federal income tax rate.
New customers via acquisitions and organic growth
American Water CEO Susan Story said on the earnings call that the company's regulated business closed on several acquisitions during the quarter for a total of 3,700 new customer connections. It also added about 1,500 more customers through organic growth.
Moreover, the company has an additional 47,000 customer connections under agreement, including about 23,000 that it will add when it acquires the Alton, Illinois, wastewater system. American Water has owned, operated, and maintained the water system in this city for more than 140 years, management said on the call. The company expects to realize efficiencies by providing both water and wastewater services. The recently announced deal is expected to close in the first quarter of 2019.
The company's market-based business recently got in on the acquisition activity. Soon after the first quarter ended, in mid-April, it announced it was acquiring Pivotal Home Solutions, which is the home warranty business owned by a Southern Company subsidiary. With this acquisition, American Water's homeowner services business will be the second-largest provider of utility home warranty products in the United States. Management expects this acquisition to have a neutral effect on earnings this year, and be accretive beginning in 2019, CFO Linda Sullivan said on the earnings call. The company expects the acquisition to close in the second quarter.
Efficiency continues to improve
American Water's key operation and maintenance (O&M) efficiency ratio for the one-year period through the first quarter was 35.6%, which is an improvement over the 36.6% from the year-ago period. (The lower the ratio, the better.) This ratio reflects how well the company is controlling costs in its regulated business.
The water utility giant has been steadily improving this ratio, which was higher than 44% in 2010. Its goal is to achieve 32% by 2022.
Dividend hike
Story commented on the dividend hike in the press release:
Reflecting the company's strong performance, the Board of Directors approved a 9.6 percent increase in our quarterly dividend to 45.5 cents per share, marking the sixth year in a row that the dividend increases at or above the top of the long-term EPS compound annual growth range [target, which is 7% to 10%].
Looking ahead
American Water turned in a solid quarter. It reaffirmed its previously released earnings guidance for 2018: It expects adjusted EPS to be in the range of $3.22 to $3.32, representing growth of 6.3% to 9.6%. Management said on the earnings call that, thanks to its good start to the year, it now expects earnings to be in the "upper half" of its guidance range. So investors can probably expect 2018 earnings growth in the range of about 8% to 9.6%.
Moreover, given the Pivotal acquisition and the effects of tax reform, management now anticipates the company's long-term growth will be in the top half of the 7% to 10% target EPS compound annual growth rate, Story said on the call.
