Earlier this month, water utility giant American Water Works (NYSE:AWK) released solid third-quarter 2020 results. Revenue increased 6.5% year over year to $1.08 billion and earnings per share (EPS) rose 9.8% to $1.46, easily beating the $1.38 Wall Street had been expecting.
Earnings releases only tell part of the story. Management's comments during analyst earnings calls often reveal key insights about a company's business performance, prospects, and strategy. Below are three key things American Water's management shared on the Q3 call that investors should know. [Transcript via Seeking Alpha.]
For context, in 2020, shares of American Water have returned 27.1% through Nov. 27. That's nearly double the S&P 500 index's 14.5% return over this period.
Global warming is benefiting the company
From CEO Walter Lynch's remarks:
Also included in the [Q3] results is an estimated $0.06 per share favorable impact in 2020 from hotter, drier weather across some of our regulated states. [...] We're increasing our 2020 earnings [guidance] range to $3.87 to $3.93 per share up from $3.79 to $3.89 per share. This reflects the favorable weather in the quarter.
Residential water consumption increases when weather is hotter and dryer than usual. People drink more water to stay hydrated and they use more water on their lawns and gardens. Moreover, such weather also results in a rise in agricultural water use.
The world is in a warming trend, which isn't likely to stop or significantly slow down for some time. Policies implemented to address climate change will take time to make a meaningful impact. For the foreseeable future, it seems likely that American Water will often benefit from hotter and dryer than usual weather in at least some of its service territory.
The company has regulated water and wastewater businesses in 16 states, though it's in the process of selling its New York State business.
American Water's military services business is on a winning streak
From Lynch's remarks:
Moving to our market-based businesses, we were very proud to announce that our military services group was awarded a contract for the operation and maintenance of the water and wastewater utility systems at Joint Base Lewis-McChord in Washington State. We're now honored to provide water and wastewater services to more than 425,000 military men, women, and their families at 17 installations across the United States.
The total contract revenue for Joint Base Lewis-McCord is approximately $771 million over a 50-year period, subject to an annual economic price adjustment.
Lynch said that the company is currently in the bidding process for four different military bases, and expects to hear back from two of them in the "near term." American Water's military services business has been on a winning streak. It's been awarded contracts from the U.S. Department of Defense for the last three major bases in which it's bid.
Last year, the company won contracts for Joint Base San Antonio and U.S. Military Academy at West Point. In June, American Water's military services operation became fully operational on these two new bases, which provided a boost to third-quarter results.
The pandemic is expected to hurt 2020 EPS by $0.03 to $0.06
From Lynch's remarks:
[In Q3] residential demand continued higher and we saw some rebound [from Q2] in commercial demand as businesses started to reopen. [...] We'll continue to assess the situation across our service territory. Recognizing that it's difficult to predict the impact, we currently anticipate a full-year unfavorable [impact of] $0.03 to $0.06 per share from the COVID-19 pandemic.
As previously noted, management increased its full-year 2020 EPS guidance to between $3.87 and $3.93. So the expected negative impact from the pandemic of $0.03 to $0.06 is relatively small. As CFO Susan Hardwick said, the pandemic-driven "increased demand in the residential customer class has largely offset decreases in revenue from the commercial and industrial classes to date."