American Water Works (AWK 1.95%) released solid second-quarter 2020 results last week.

The quarter was the first quarter the water utility giant operated under its new CEO, Walter Lynch, who was its longtime chief operating officer before succeeding Susan Story, who retired on April 1.

American Water stock was essentially unchanged the day after earnings were released. In 2020, the stock has returned 22.4% through Aug. 10, outpacing the S&P 500's 5.2% return over this period. 

Two glasses of ice water sitting on a blue surface with a blue background.

Image source: Getty Images.

American Water's key numbers 

Metric Q2 2020 Q2 2019 Change
Revenue $931 million $882 million 5.6%
Net income $176 million $170 million 3.5%
GAAP earnings per share (EPS)  $0.97 $0.94 3.2%
Adjusted EPS $1 $0.94 6.4%

Data source: American Water Works. GAAP = generally accepted accounting principles.

The COVID-19 pandemic hurt the regulated utility business's revenue by about $10 million. Residential demand for water has risen during the crisis because more people are at home, though this increase has been more than offset by the decline in demand from commercial and industrial customers, many of which have been temporarily closed.

The quarter's GAAP EPS includes an estimated $0.05 net cost associated with the pandemic and a $0.02 favorable impact related to depreciation not recorded as required by assets held for sale accounting. Adjusted EPS excludes these one-time items.

Wall Street was looking for EPS of $0.96 on revenue of $917 million, so American Water beat both estimates.

Here's how the segments performed in the quarter: 

Segment Q2 2020 EPS Q2 2019 EPS Change 
Regulated business $0.97 $0.87 11.5%
Market-based business $0.13 $0.12 8.3%
Parent and other ($0.13) ($0.05) Loss widened 160%
GAAP EPS $0.97 $0.94 3.2%
COVID-19 costs $0.05 -- --
Depreciation not recorded as required by assets held for sale accounting ($0.02) -- --
Adjusted EPS $1 $0.94 6.4%

Data source: American Water Works. 

As to the pandemic-associated costs, approximately $0.04 is from the regulated business and $0.01 is from the market-based business.

American Water's regulated business EPS growth was driven by infrastructure investment, acquisitions, and organic growth.

The market-based business growth was driven primarily by continued growth in the homeowner services business, which benefited from price increases.

Efficiency continues to improve 

American Water's key adjusted operation and maintenance (O&M) efficiency ratio was 34.3% in the one-year period through the second quarter, an improvement from 35.2% in the year-ago period. This ratio reflects how well the company is controlling costs in its regulated utility business. The lower the ratio, the better.

The company's goal is to achieve a 31.5% O&M efficiency ratio by 2023. 

What management had to say 

Here's what Lynch had to say in the earnings release:

With safety as our top priority, American Water continues to provide essential services in every community we serve. We adjusted how we work, we developed and implemented new safety measures, we took proactive steps by discontinuing service shut-offs and collection of late fees, and we increased communications with our customers and public officials.

All of these efforts are in addition to the continued execution of our strategies, investing a total of $930 million in our systems [this year] through June 30, 2020. In addition, we have added more than 17,700 customers to date [in 2020] through closed acquisitions and organic growth and are now fully operational on two new military bases. We also look forward to welcoming an additional 43,600 customer connections through pending acquisitions.

American Water employees delivered another solid quarter of results in the midst of the pandemic and we are committed to delivering 2020 earnings in the range of $3.79 to $3.89 per share.

As to the two new military bases that Lynch mentioned, these are Joint Base San Antonio and U.S. Military Academy at West Point. The company was awarded these contracts last year and became fully operational on these bases on June 1.  

Guidance

For full-year 2020, management expects GAAP EPS to be in the range of $3.79 to $3.89. This outlook includes an estimated $0.06 positive impact for depreciation not recorded as required by the accounting for assets held for sale and an estimated $0.05 to $0.08 in costs associated with the pandemic.

So, adjusted EPS is expected to be in the range of $3.78 to $3.91.

In 2019, GAAP and adjusted EPS were $3.43 and $3.61, respectively. So American Water's 2020 guidance represents these expectations:

  • 2020 GAAP EPS growth of 10.5% to 13.4% year over year
  • 2020 adjusted EPS growth of 4.7% to 8.3% year over year