American Water Works Co.(NYSE: AWK) releasedsolid fourth-quarter and strong full-year 2016 results after the market closed on Tuesday, Feb. 21.
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The country's largest publicly traded water and wastewater utility posted quarterly revenue and earnings-per-share growth of 2.6% and 3.6%, respectively. For the year, revenue rose 4.5% to $3.30 billion and adjusted EPS jumped a robust 7.6% to $2.84. More important, the company guided for EPS growth of 4.9% to 8.5% in 2017 and reaffirmed its 7% to 10% annual EPS growth rate target through 2021.
Earnings releases usually don't provide much color about a company's performance or future prospects. A wealth of information, however, is shared in the analyst conference calls following these releases. Here are three key things that you should know from American Water's Q4 earnings call.
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Keystone Clearwater Solutions' prospects are looking up for 2017
From CEO Susan Story's remarks about KeystoneClearwater Solutions, which American Water acquired in July 2015:
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For 2017, natural gas prices have rebounded and both drilling rig counts and well completion activity have increased significantly. Keystone continues to increase market share by offering total water management solutions at competitive pricing to Appalachian Basin [natural gas] E&P [exploration and production companies]. At the same time, they expanded their overall services outside the oil and gas industry to the municipal water services market.
As Story noted, Keystone supplies water and related services to natural gas exploration and production companies working in the Appalachian Basin. These companies use the water and related services for hydraulic fracturing, or fracking. This was a lucrative business before the plunge in the energy markets started in mid-2014. American Water's competitor Aqua America got into the fracking water business in the heady years preceding this plunge and it boosted the company's financial performance.
Based on Story's comments, investors can probably expect Keystone to contribute positively to American Water's 2017 earnings. In 2016, Keystone was earnings neutral, which actually was quite an accomplishment considering that the energy market rebound was quite nascent.
As for market share, Story said later in the call that the company has gone from 20% when it purchased Keystone in July of 2015 to 35% now. She also noted that the company believes there are opportunities for further growth.
American Water's drinking water quality is higher than the industry average
From Story's opening remarks:
Most importantly, we know our customers need to trust that the water we provide them is clean and it's safe. Once again, we met or surpassed EPA requirements in 2016. In fact, our systems were 21 times better than the industry in drinking water quality and compliance as measured by the EPA's drinking water database. This is absolutely foundational to our business.
As consumers, naturally we should all care about drinking water quality. This issue is also key from an investing standpoint for numerous reasons. For one, the Safe Drinking Water Act permits citizen suits against violators.For another, it will be easier for American Water to convince many potential acquisition targets, which are largely municipally owned, to sell their water systems if the company maintains a good record on drinking water quality. Sales of these systems are often contingent upon a public vote.
Using technology to improve efficiencies and save money
From Chief Operating Officer Walter Lynch's remarks:
One of the big advantages we have as a company is we're able to deploy technology in one area, take the learnings of that technology and then apply it across American Water to realize significant value.
So I would say ... the technologies I'd highlighted in the past around [such things as] finding leaks in West Virginia. Doing things like using technology to streamline our routes so that our people in the field are more efficient. Those are the things we're going to be doing across American Water to drive efficiencies, and a lot of the low-hanging fruit we've already gotten but the technology is going to be a key enabler.
Lynch's remarks about technology were made in response to an analyst who asked how American Water planned to further improve its operation and maintenance (O&M) efficiency ratio, which is a key metric that reflects how well the company is controlling costs in its core regulated business.
American Water's O&M ratio for 2016 improved to 34.9% from 35.9% in 2015. The company has made great progress in lowering this number over the past several years. So much so, in fact, that it just set a new and more challenging goal: to achieve 32.5% by 2021.
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