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American Water Works Management Talks Acquisitions, Drones, and Desalination

By Beth McKenna - May 23, 2018 at 11:54AM

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Here are three key subjects from the water utility giant's Q1 earnings call that investors should know about.

American Water Works Co. (AWK 2.60%) released first-quarter 2018 earnings results earlier this month. 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%.

Earnings releases usually don't provide much color about a company's performance or prospects. A wealth of information, however, is shared during the analyst conference calls following these releases. Here are three key issues that you should know about from American Water's Q1 earnings call.

Three droplets of water falling into a body of water and creating ripples.

Image source: Getty Images.

1. American Water's competitive edge in acquisitions at work

From COO Walter Lynch's remarks: 

In April, we announced an agreement to acquire Alton's regional wastewater system, which will add 23,000 new customers. Illinois American Water has owned, operated, and maintained the water system serving Alton for the past 140 years. This is another example like Scranton and McKeesport where we will deliver efficiencies by providing wastewater services where we already provide water services.

American Water has a significant competitive advantage over other water utilities stemming from its industry-leading size and geographic diversity. The fact that it already owns more water and wastewater systems than its competitors provides it with more opportunities to make efficient acquisitions. These include cases like Alton, which provide the company with the opportunity to acquire the wastewater system of a municipality where it already operates the water system, as well as situations that provide it with the opportunity to acquire a water and/or wastewater system in a municipality near another one where it operates.

Another such example popped up in early May. American Water announced an agreement to acquire the wastewater assets of Sadsbury Township, Pennsylvania, which serve approximately 1,000 customers. The company has long provided water for this community.

2. The California desalination project is moving along

From Lynch's remarks:

[I]n California, the Monterey Bay National Marine Sanctuary and the California Public Utilities Commission released a favorable final Environmental Impact Report, or EIR, in March related to our desal project. This is the final plan for the project that meets both the National Environmental Policy Act and California Environmental Quality Act standards. ... The commission will accept final comments and may consider approving the final EIR likely in the third quarter of this year.

American Water's California American Water subsidiary has a $322 million desalination project in the works in Monterey. The plant will have the capacity to remove salt from 6.4 million gallons per day of Pacific Ocean seawater to convert it into drinking water. For some context, the highest-capacity desal plant in the U.S., which is in Carlsbad, California, has a processing capacity of 50 million gallons per day. The company expects construction of the facility to start next year, and the plant to begin operating sometime in late 2020 through mid-2021. 

This is American Water's first desalination plant in California, but not its first foray into the technology. The company operates under a joint venture, but does not own, a desal plant in Tampa, Florida, that can process 25 million gallons of water per day.

3. Using technology to increase efficiency and safety

From CEO Susan Story's remarks:

[A] lot of the work that our folks on the front line have to do is very manual, very physical. We're investing in technology [to assist them], [such as] putting devices on trucks that will open up some of the valves, that will open up and lift some of the meters that weigh 50, 60 pounds. ...[I]t is an up-front investment, but it is an investment that's paying off from a people standpoint. And it's also, we're finding, paying off from a financial standpoint.

Lynch added the following:

We're using drones to do things that before we used to do with people ... [W]e're using drones to inspect water tanks. Also above-ground water lines ... we're using drones to inspect those.

American Water seems to be at the forefront of the industry in using technology to increase efficiency and improve employee safety -- not surprising given its size provides it with greater resources than smaller water utilities. With an aging field workforce, improving safety is particularly important not only for employee morale, but for controlling healthcare and insurance costs. One of company's advantages is that it can deploy technology in one subsidiary, take what it learns, and apply it across the company to realize significant value.

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