U.S. Water Revenue Continues Steady Rise
American hydraulic works (NYSE:AWK) released fourth quarter and full year 2021 results after market close on Wednesday, February 16.
Shares of the U.S. water and sewer services giant rose 1.2% on above-average volume on Thursday. This gain is small but it was a nice bump for a utility stock a day when the S&P500 the index fell 2.1%. The poor performance of the market is explained by the worsening of Russian-Ukrainian tensions.
It seems likely that American Water’s weak stock gain was partly a positive reaction to the company’s earnings release and partly due to market momentum. Market dynamics involved a flight to safety, which is a relatively common reaction when geopolitical tensions erupt.
In 2022, American Water stock is down 21.2% (including dividends) through Feb. 18, while the S&P 500 is down nearly 9%. As I wrote in my earnings overview, the market struggled on expectations that the Federal Reserve will raise interest rates several times this year. Interest rate sensitive stocks, which include utilities, have generally suffered the most.
American Water Quarterly Key Figures
|Metric||Q4 2021||Q4 2020||Change|
|Income||$951 million||$923 million||3%|
|Net revenue||$645 million||$145 million||345%|
|Earnings per share (EPS) GAAP||$3.55||$0.80||344%|
|Operating (or adjusted) EPS||$0.85||$0.80||6.3%|
Fourth-quarter GAAP EPS includes a $2.70 per share gain from the company’s sale of its Homeowner Services (HOS) business in December, reduced by a $0.19 per share contribution to the ‘American Water Charitable Foundation from the proceeds of the sale. The adjusted EPS result excludes this net gain.
Wall Street was looking for adjusted EPS of $0.85 on revenue of $937.3 million. Thus, the company exceeded the consensus estimate and hit profit expectations on target.
For context, in the third quarter of 2021, revenue edged up 1.2% year-over-year to $1.09 billion. EPS rose 4.8% to $1.53. On a weather-normalized basis, EPS jumped 10% year-over-year.
Here’s how the segments fared during the quarter:
|Segment||Q4 2021 EPS||Q4 2020 EPS||Change|
|parent and other||($0.14)||($0.18)||N/A. Loss decreased by 22%.|
|Operating (or adjusted) EPS||$0.85||$0.80||6.3%|
|Gain on sale of HOS||$2.70||—||—|
Lower earnings in the market-based business reflect the fact that the company only held the HOS business for just over two months during the quarter. He sold this business on December 9, 2021.
This sale was a good move, in my opinion, because I think many utility investors like the pure play of water and wastewater utilities. American Water is now pure play. The only market-based business it now owns is its military services group, which provides water and sanitation services to US military bases under very long-term contracts.
What the CEO had to say
Here’s the gist of what CEO Susan Hardwick had to say in the earnings release:
American Water fully executed the strategy in 2021, continuing our record of significant earnings growth and delivering on our plan, including completing the sale of HOS in 2021 and selling our regulated subsidiaries in New York and Michigan early in 2022.
We invested $1.9 billion in our regulated businesses, improved the efficiency of our operations and successfully completed 23 regulated acquisitions during the year. We are also proud that 2021 marked one of our best years of safety performance and continued recognition of our work to embed our core values of diversity, inclusion, equity and environmental leadership in everything we do. that we do at American Water.
Efficiency continues to improve
American Water’s adjusted key operations and maintenance (O&M) efficiency ratio was 34.1% for the one-year period through the fourth quarter (in other words, for the year 2021 ), an improvement from 34.3% in 2020. This ratio reflects how well the company controls the costs of its regulated utilities business. The lower the ratio, the better.
Major events after the end of the quarter
The company completed the sale of its regulated subsidiaries in New York and Michigan in early January 2022 and early February 2022, respectively. It now has regulated utility operations in 14 states.
The purchase prices for these businesses were $608 million (New York) and $6 million (Michigan) in cash.
American Water Works has confirmed its earnings guidance for 2022 and its long-term financial goals through 2026.
For the full year 2022, he expects earnings of between $4.39 and $4.49 per share. For the five-year period to 2026, he projects a compound annual EPS growth rate of 7% to 9%. And it expects its dividend growth through 2026 to average in the high end of the 7% to 10% range.
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