US Water Board Talks Takeovers, Drones and Desalination

American Water Works Co. (NYSE: AWK) earlier this month, it released its financial results for the first quarter of 2018. The country’s largest publicly traded water and wastewater company saw revenues grow by almost 1% year over year, while earnings per share (EPS) increased by 13.5%.

Earnings releases typically do not provide much information about a company’s performance and prospects. However, a wealth of information is shared on analyst conference calls following these releases. Here are three key things you should know from American Water’s first quarter earnings call.

Three water droplets falling into a body of water and creating ripples.

Image source: Getty Images.

1. American Water’s competitive advantage in acquisitions in practice

From COO Walter Lynch’s comments:

In April, we announced an agreement to acquire the Alton regional wastewater treatment system, thanks to which we will add 23,000 new customers. Illinois American Water has owned, operated and maintained the water system serving Alton for the past 140 years. This is another example, like Scranton and McKeesport, where we will create efficiencies by providing water and wastewater services where we already provide water services.

American Water has significant competitive advantages over other water utilities due to its industry-leading size and geographic diversity. The fact that it already has more water and wastewater systems than its competitors gives it greater opportunities to make effective acquisitions. These include cases such as Alton, which give a company the opportunity to acquire the sewer system of a municipality in which it already operates a water system, as well as situations that give it the opportunity to acquire the water and sewage system of a municipality close to another one in which it operates.

Another such example appeared in early May. American Water announced an agreement to acquire Sadsbury Township, Pennsylvania, wastewater assets that serve approximately 1,000 customers. The company has long provided water to this community.

2. California’s desalination project is moving forward

From Lynch’s comments:

(I) In California, the Monterey Bay National Marine Sanctuary and the California Public Utilities Commission released a favorable final Environmental Impact Report (EIR) for our desalination project in March. This is the final project plan that meets the standards of both the National Environmental Policy Act and the California Environmental Quality Act. …The Commission will adopt the final comments and may consider approving the final version of the EIR, probably in the third quarter of this year.

American Water’s California subsidiary, American Water, is pursuing a $322 million desalination project at its Monterey facilities. The plant will be able to remove salt from 6.4 million gallons of Pacific seawater per day and convert it into drinking water. For some context, the largest-capacity desalination plant in the U.S., located in Carlsbad, California, has a processing capacity of 50 million gallons per day. The company expects construction of the facility to begin next year, with the plant operational in late 2020 to mid-2021.

This is American Water’s first desalination plant in California, but not its first foray into the technology. The company operates a joint venture but does not own a desalination plant in Tampa, Florida, which can process 25 million gallons of water a day.

3. Using technology to increase efficiency and safety

From CEO Susan Story’s comments:

(A) much of the work that our people on the front lines do is physical and manual labor. We’re investing in technology (to help them), (e.g.) installing devices in the trucks that will open certain valves, that will open and lift certain 50, 60-pound meters. …(I)t is an initial investment, but it is an investment that pays off from the people’s point of view. We find that it is also profitable from a financial point of view.

Lynch added the following:

We use drones to do things that we used to do with humans… (We) use drones to inspect water tanks. Also above ground water lines… we use drones to check them.

American Water appears to be leading the industry in using technology to increase efficiency and improve worker safety – not surprising given that its size gives it greater resources than smaller water companies. With an aging field workforce, improving safety is especially important not only for employee morale, but also for controlling health care and insurance costs. One of the advantages of a company is that it can implement technology in one subsidiary, leverage what it learns, and apply it across the company to achieve significant value.

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