American Water Works (NYSE:AWK) released fourth-quarter and full-year 2018 results after the market closed on Tuesday. The country's largest publicly traded water and wastewater utility posted revenue growth of 3.5% year over year, while earnings per share (EPS) adjusted for one-time items were flat with the year-ago period.
The bottom-line results met Wall Street's expectation of $0.69 per share on target, though revenue of $850 million fell short of the consensus estimate of $862.8 million.
The market shrugged off the results, with shares of American Water essentially unchanged on Wednesday -- down 0.04%, to be exact. Shares have returned 25% over the one-year period through Wednesday, outpacing the S&P 500's 4% return.
American Water Works' key quarterly numbers
|Metric||Q4 2018||Q4 2017||Change (YOY)|
|Revenue||$850 million||$821 million||3.5%|
|Net income||$112 million||($3 million)||N/A|
For full-year 2018, revenue edged up 2.5% year over year to $3.44 billion, EPS soared 32.4% to $3.15, and adjusted EPS jumped 8.9% to $3.30.
Here's how the segments performed in the quarter.
Q4 2018 EPS
|Q4 2017 EPS||Change (YOY)|
|Total adjusted EPS||$0.69||$0.69||--|
|Remeasurement from tax reform||($0.07)||($0.70)||N/A|
American Water's core regulated business was responsible for all profit growth in the quarter, though its market-based business contributed to profit growth over the full year. In the quarter, revenue in the regulated business increased by $7 million from the year-ago period, driven by "additional authorized revenue to support infrastructure investments, acquisitions, and organic growth," the company said in the earnings release.
New customers via acquisitions and organic growth
In 2018, American Water's regulated business added 25,000 new customers through closed acquisitions (14,000) and organic growth (11,000). Moreover, it has an additional 61,000 customer connections in 10 states under agreement, pending regulatory approval.
Additionally, the company's $365 million acquisition of Pivotal Home Solutions, a home warranty business that was previously owned by a Southern Company, brought it 650,000 new customers in its market-based business.
Efficiency slightly declined
American Water's key operation and maintenance (O&M) efficiency ratio for 2018 was 35.6%, which is slightly worse that the 35.3% in 2017. (The lower the ratio, the better.) This ratio reflects how well the company is controlling costs in its regulated business.
The company said the slight deterioration in this ratio was "primarily due to additional expense from a settlement of litigation in our New York subsidiary and higher expenses incurred from colder weather experienced during the first quarter of 2018." At this point, the slide in the efficiency ratio appears to be just a blip, as it's been improving for some time. This ratio was higher than 44% in 2010. American Water's goal is to achieve 31.5% by 2023.
What management had to say
In the earnings release, American Water CEO Susan Story commented on the year:
This past year was one of strong growth for American Water and outstanding execution by our employees. Our 2018 adjusted EPS increased 8.9% over adjusted 2017. To meet the nationally recognized need to improve water infrastructure, we invested $1.5 billion in capital into investment in our water and wastewater systems. We also completed the $365 million acquisition of Pivotal Home Solutions welcoming 650,000 new warranty customers, and we added 25,000 new customers through closed acquisitions and organic growth. We also look forward to welcoming an additional 61,000 customers through signed acquisitions following regulatory approval.
While American Water's fourth quarter was uninspiring, its full-year 2018 results were really solid.
Story said in the earnings release that the company plans to invest between $8.0 billion to $8.6 billion over the next five years. She also noted that "we are affirming our 2019 EPS guidance of $3.54 to $3.64, and remain confident in our ability to achieve growth in the top half of our long-term EPS range of 7 to 10%." Average EPS growth in the range of about 8.5% to 10% is very strong for a water utility.