American Water Shows How Utilities Can Grow in a Low-Flow World

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By David Schultz

It’s simple, really: when people use more of your product, you tend to make more money. That’s a truism in business, but it doesn’t necessarily apply to American Water Works Inc., the largest for-profit water utility in the U.S.

The CEO of the nearly $15 billion company, Susan Story, spoke to Bloomberg Environment at its Voorhees, N.J., headquarters about how it has had to get creative to maintain its growth in a low-flow world.

Low Flow

American Water Works, essentially, sells water. It owns or manages water utilities in more than a dozen states across the country, primarily concentrated in the Northeast.

Based on a look at recent trends in water data, you’d think the company operates in a dying industry. Per capita, Americans use less water than they have in years. The total amount of water withdrawn by utilities across the country is roughly the same as it was in 1995, according to the most recent U.S. Geological Survey data from 2015. This is despite the fact that the U.S. has more than 50 million additional residents than it did back then.

Yet, American Water has been steadily growing. Its market capitalization is around 50 percent higher than at the end of 2014. Its earnings-per-share ratio is up more than 25 percent over that time. During this time, American Water made deals to acquire 42 other companies, in transactions worth a total disclosed value of nearly $1 billion.

“We are working in many of our states to try to separate the volume sold from what the price is paid,” Story said. “There’s a fixed amount of investment that has to go into having safe, clean, reliable water. And we need to do that regardless of how much volume we sell.”

Acquisition Driven

Story said one of the main ways her company achieved this has been by growing its customer base. Those 42 acquisitions, many of which were of municipal-owned utilities, are a big part of that.

“The municipalities that we tend to acquire tend to be financially distressed,” she said.

Story cited the example of Ransom, a town in central Illinois with a population of fewer than 1,000. She said the town’s water was undrinkable due to extreme levels of radium contamination. Story said within months, the company was able to address these problems and return potable water to the town’s residents—while also lowering their bills.

What allowed American Water to do what Ransom’s local government couldn’t? Story said it’s another basic business concept: economies of scale.

The company has leverage when negotiating with its suppliers because it is the largest water provider in the country. Also, in many states, it is allowed to spread its costs around throughout all of its systems in a state, allowing it to avoid rate shock when it takes over a struggling utility.

“If you look at these municipal water systems they’re buying, all of these systems have been non-compliant with EPA water quality regulations,” Angie Storozynski, a managing director with Macquarie Capital who analyzes the utility industry, told Bloomberg Environment. “When they buy it, it’s a large company with access to low-cost financing. They can finance this high level of investment that this asset requires.”

Rate Shock

Of course, not everyone would agree that American Water’s utilities successfully avoid this rate shock phenomenon all the time. Some of its attempts to raise bills have been met with local protests and, in a few instances, lawsuits.

Story said the ability to spread out across a state helps avoid these types of problems. But she also said ratepayers—all ratepayers, not just American Water’s—need to be educated about why their local water system, often viewed as out of sight and out of mind, needs so much investment.

“Our company is replacing pipe at twice the rate of the industry average, but that’s still about every 120 years,” she said. “Obviously, pipes weren’t meant to last that long.”

Whenever one of American Water’s utilities wants to raise its customers’ rates, it needs to go before a local public utility commission to get a sign off. Richard Verdi, a financial analyst with Atwater Thornton who specializes in water issues, said the company has had good luck with these commissions, despite the commissions’ potential to be susceptible to ratepayer anger.

“Regulators are really on board,” he told Bloomberg Environment. “They get it, they want the utilities to [invest in infrastructure and] recoup rates. Sometimes you get agitators, but that’s not a deciding factor.”

Diversifying

Another way the company has managed to overcome declining water usage is by expanding into other, related businesses.

It has long term contracts with the military to supply water on bases. It works with some homeowners associations on maintaining the pipes that run from the public water main to their subdivision.

But perhaps the most novel market American Water has entered into recently is one that has generated many, many headlines: hydraulic fracturing.

With its purchase of the company Keystone Clearwater Solutions three years ago, Story’s company is now in the business of hydraulic fracturing to drill for oil and gas. American Water provides these drillers with the water they inject deep into the earth to fracture rocks that contain fossil fuels.

But more importantly, from Story’s perspective, American Water also helps these drillers recycle the water that comes back up after being injected. She said this helps solve a big problem for the drillers and for the environment: how to dispose of this wastewater.

“We want to help make sure it’s done right,” Story said.

She also said American Water wants to help fracking companies move away from injecting this returned wastewater back into the ground. Doing this has been shown to cause earthquakes and can also contaminate groundwater supplies, the very groundwater that American Water’s utilities rely on to supply tap water.

“We will not be involved in anything like that because we’re about water sustainability,” Story said. “At the end of the day, our business is water.”

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