American Water Earnings Continue to Move Steadily Upward

American Water Works (AWK 0.03%) released second-quarter 2022 results after the market close on Wednesday, July 27. The largest U.S. water and wastewater utility's earnings came in higher than Wall Street had expected.

This article covers the data provided in the company's earnings release. Investors will get some color on the quarter's performance when management holds its analyst conference call on Thursday at 9 a.m. ET. 

Image source: Getty Images.

American Water's key numbers 

Data sources: American Water Works and Yahoo! Finance.

Investors should not be concerned that revenue declined from the year-ago period. As I wrote in my earning preview, there were two main reasons revenue was almost surely going to decrease:

First, in the year-ago quarter, revenue got a boost from average weather in the company's operating area being hotter and drier than usual. Second, since the year-ago period, the company has divested its homeowner services business (Q4 2021) and its regulated utility businesses in two states, New York and Michigan (both Q1 2022). The company now has regulated operations in 14 states.

Earnings per share (EPS) of $1.20 came in better than the $1.16 Wall Street had projected going into the release. Earnings growth was primarily driven by higher rates in the regulated businesses stemming from infrastructure investments, partly offset by input cost inflation. 

Acquisition activity

American Water is maintaining its solid momentum of acquiring regulated utilities. In the first half of 2022, along with organic growth of about 8,200 customer connections, it added approximately 51,000 customer connections through nine closed acquisitions across four states.

Moreover, it had 30 acquisitions across eight states under agreement, as of the end of the second quarter. These acquisitions will add about 29,200 customer connections.

Here are two data points that will provide context: The company will have a total of about 1.3 million customer connections after the close of the deals in its pipeline. And last year, it completed 23 regulated acquisitions. 

What the CEO had to say 

Here is what CEO Susan Hardwick had to say in the earnings release: 

The company delivered solid results in the first half of the year, keeping us on track to achieve our 2022 earnings expectations. 

In the first six months of 2022, we invested $1.25 billion with the majority dedicated to needed infrastructure improvements to better serve our customers. We are also proud that our Military Services Group was awarded our first U.S. Navy contract at Naval Station Mayport in Jacksonville, Florida, where we'll provide wastewater services for the service members, their families and civilians at that installation.

While American Water's first contract with the U.S. Navy was effective on July 1, its contribution to the company's earnings won't begin in earnest until 2023. This approximately $341-million, 50-year contract -- which is subject to annual price adjustments -- is for the ownership, operation, maintenance, and replacement of the wastewater utility system at Naval Station Mayport.

With this contract, American Water now has long-term contracts at 18 U.S. military installations across the country.

Efficiency continues to improve 

American Water's key adjusted operation and maintenance (O&M) efficiency ratio was 33.7% for the one-year period through the second quarter, an improvement from 33.9% 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.

Guidance

American Water Works reaffirmed its 2022 earnings guidance and long-term earnings growth target.

For full-year 2022, it continues to expect earnings in the range of $4.39 to $4.49 per share. For the five-year period through 2026, it continues to project an EPS compound annual growth rate of 7% to 9%.