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American Water Works' Q4 Adjusted Earnings Rise Nearly 6%

American Water Works (NYSE: AWK) released its fourth-quarter and full-year 2019 results after the market close on Tuesday, Feb. 18. The largest publicly traded water and wastewater utility in the United States capped off a strong year with a solid quarter.

Shares were essentially unchanged on Wednesday. American Water stock has started 2020 on a strong note: It's returned 13.3% through Wednesday, easily outpacing the S&P 500's return over this period.

Image source: Getty Images.

American Water's key quarterly numbers

Metric Q4 2019 Q4 2018 Change (Decline)
Revenue $902 million $850 million 6.1%
Net income $98 million $112 million (13%)
GAAP EPS $0.54 $0.62 (13%)
Adjusted EPS $0.73 $0.69 5.8%

Data source: American Water Works. GAAP = generally accepted accounting principles; EPS = earnings per share.

The adjusted EPS result excludes a $0.19 after-tax loss from the sale of Keystone Clearwater Solutions' operations. That market-based business, which American Water acquired in 2015, provides water and related services to natural gas exploration and production companies working in the Appalachian Basin. (These energy companies use the water for hydraulic fracturing, or "fracking.")

Wall Street was looking for adjusted earnings per share of $0.73 on revenue of $923.9 million, so American Water hit the profit expectation on the bull's-eye, while revenue came in somewhat lighter than analysts had projected.

For full-year 2019, American Water's GAAP net income was $621 million, or $3.43 per share, up from $567 million, or $3.15 per share, in 2018. On an adjusted basis (which excludes the loss from the sale of the Keystone operations and a gain related to an insurance settlement in the first quarter), 2019 net income came in at $653 million, or $3.61 per share, up 9.4% from $3.30 per share in 2018.

Here's how the segments performed in the quarter.

Segment Q4 2019 EPS Q4 2018 EPS Change
Regulated business $0.84 $0.71 18%
Market-based business $0.10 $0.07 43%
Parent and other ($0.21) ($0.09) Loss increased 133%
Total adjusted EPS $0.73 $0.69 5.8%
Remeasurement from tax reform -- ($0.07) --
After-tax loss on sale of the Keystone operations ($0.19) -- --
GAAP EPS $0.54 $0.62 (13%)

Data source: American Water Works.

Regulated and market-based business growth

In 2019, American Water's regulated business growth was driven by infrastructure investment, acquisitions, and organic growth. During the year, the company closed on acquisitions that have added 53,100 new customer connections. (It has an additional 44,200 customer connections under agreement, pending regulatory approval, as of Feb. 19.) And it tacked on about 14,000 new customer connections from organic growth.

In 2019, the company's market-based business growth was driven by the continued strong performance of the homeowner services business. Its military services group also contributed to growth, as it was awarded long-term contracts for two new bases: Joint Base San Antonio and the U.S. Military Academy at West Point.

Efficiency continued to improve

American Water's key adjusted operation and maintenance efficiency ratio was 34.5% in 2019, an improvement from 35.6% in 2018. This ratio, which is for the trailing one-year period, 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 31.5% by 2023. This ratio was more than 44% in 2010, so America Water has made great progress on this front.

What management had to say

Here's most of what CEO Susan Story had to say in the earnings release:

We continued our strong growth in 2019 through outstanding execution and performance by our employees. Our 2019 adjusted EPS increased 9.4% over 2018. We invested $1.7 billion in our water and wastewater systems to ensure safe, clean and reliable water and water services for our customers. And we added 67,000 new customers through closed acquisitions and organic growth, and look forward to welcoming an additional 44,200 customers through signed acquisitions following regulatory approval.

We are also affirming our 2020 [adjusted] EPS guidance of $3.79 to $3.89, and remain confident in our ability to achieve 7% to 10% growth in our long-term [adjusted] EPS. We plan to make $8.8 billion to $9.4 billion of needed investment over the next five years, and between $20 billion to $22 billion over the next ten years.

Additionally, we are proud to have been named to the Global 100 Index, an announcement made in Davos, Switzerland, last month by Corporate Knights, Inc., as one of the world's 100 most sustainable corporations. American Water was ranked No. 16 overall, joining only 16 other U.S. companies and [was] the only U.S. utility named to the list.

Guidance

As Story noted, management reiterated its 2020 adjusted EPS outlook. The company initially announced this guidance ahead of its annual investor day in mid-December.

Metric Guidance Projected Growth (YOY)
Adjusted EPS $3.79 to $3.89 5% to 7.8%

Data source: American Water. YOY = year over year.

American Water has a solid record of raising its initial annual guidance, so investors can probably expect earnings growth at the high end of (or above) the range noted above.

CEO transition

Lastly, Story is retiring effective April 1. The CEO transition should be as smooth as possible considering that longtime COO Walter Lynch will be succeeding Story.

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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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