stockrowWhat it does
American Water Works Company is a holding company whose main business is owning regulated water and wastewater utilities. Its utility subsidiaries store, pump, treat and deliver drinking water; collect wastewater through sewer networks; treat it to required standards; and return treated water to the environment. The company sells these services to homes, businesses, industrial facilities, public authorities, fire-service customers, and other utilities or community systems through bulk contracts.
Most of the business sits in its Regulated Businesses segment. Those utilities operate under franchises, charters, certificates of public convenience and necessity, or comparable authorizations, and their customer rates and many operating and investment decisions are overseen by state utility commissions. Water customers are generally metered and billed monthly based on use, while wastewater customers are billed a flat amount or based on water consumption.
The company also has Other businesses. Its Military Services Group, or MSG, operates water and wastewater systems at military installations under long-term U.S. government contracts. Other also includes a municipal contract to operate and manage water and wastewater facilities. American Water Works is headquartered in Camden, and John C. Griffith is President and Chief Executive Officer.
How it makes money
The regulated utilities generate most of American Water’s revenue by charging approved rates for water and wastewater service. State utility commissions generally review and approve customer rates, operating costs, capital spending, financing applications, and allowed returns on invested capital. Utilities periodically file rate cases to update the revenue they are authorized to collect, principally to recover infrastructure investment, operating costs, taxes, and financing costs.
Several regulatory tools can affect the timing of recovery. Infrastructure replacement surcharges can permit periodic rate changes outside a general rate case for qualifying replacement investment. Future or hybrid test years can incorporate projected or more recent costs and capital investment in rate setting. Revenue-stability mechanisms in California and Illinois can reduce the effect of volume changes on authorized revenue. These tools can reduce, but do not eliminate, the time between spending money and recovering it in rates.
The Regulated Businesses are the principal segment. The company’s Other businesses include MSG’s long-term military-installation contracts, municipal operations services, corporate costs, and certain other items. MSG’s contracts generally cover operations, maintenance, and asset replacement, with some separate government-funded construction modifications.
For 2025, Regulated Businesses operating revenue was $4,723 million and Other operating revenue was $417 million; management said on the call that consolidated second-quarter 2026 earnings were $1.61 per share. The company expects investment recovery and regulated acquisitions to remain its main growth sources.
Customers and how it sells
American Water’s regulated utilities serve residential, commercial, industrial, public-authority, fire-service, and wholesale customers. Residential customers make up a substantial part of the customer base in every state where the company operates. Commercial customers include food and beverage providers, property developers and proprietors, and energy suppliers; industrial customers include manufacturers, mining businesses, and production operations. Public customers include government buildings, schools, and universities.
The regulated network operates in 14 states, while the company provides drinking water, wastewater, and related services to people in 24 states. Pennsylvania, New Jersey, Missouri, Illinois, and California are the company’s top five regulated states by operating revenue. The company also has regulated operations in Georgia, Hawaii, Indiana, Iowa, Kentucky, Maryland, Tennessee, Virginia, and West Virginia.
A customer can be a person, business, municipality, or other entity buying water or wastewater service; one account can serve multiple people or businesses. Bulk contracts are recorded as single customers even where they support multiple end users. The company’s regulated water customers are predominantly metered. California American Water provides water and wastewater services to approximately 720,000 people.
Suppliers and costs
American Water generally does not own the water it treats and delivers. It obtains supply from reservoirs, lakes, rivers, streams, wells, aquifers, and purchases from third-party water suppliers. Water is held in public trust and allocated through contracts, permits, allocation rights, or water rights under local law. In California, the company uses wells across multiple aquifers and long-term purchased-water agreements with regional suppliers.
Its infrastructure includes treatment plants, storage, pumps, pipes, distribution systems, sewer networks, and wastewater treatment facilities. Operating costs include purchased water, treatment chemicals, fuel, power and other commodities, labor and employee-related expenses, depreciation, taxes, and financing costs. The company also incurs costs to comply with environmental, health, safety, water-quality, and cybersecurity requirements.
Management said on the call that revenue rose with authorized rate increases, while depreciation, financing costs, and general taxes also increased. Management said operations and maintenance costs were flat year over year in the second quarter. The company has an exclusive nine-year contract with a third-party vendor for granular activated carbon, equipment, and reactivation services at more than 50 treatment sites across 10 states through 2033.
- Revenue$5.1B
- Selling, general and administrative−$2.4B
- Other operating costs−$894.0M
- Operating income$1.9B
Competitive position
American Water’s regulated utilities generally do not face direct competition in their existing service areas because they operate under government-granted service authorizations and because building a duplicate water or wastewater network is costly. They nevertheless compete for acquisitions with governmental agencies, investor-owned utilities, industrial customers that can provide their own water supply or treatment, strategic buyers, infrastructure funds, and multi-utility companies.
The company identifies Essential, American States Water Company, and California Water Service Group as its largest investor-owned competitors when pursuing acquisitions. It also identifies Algonquin Power and Utilities Corp. and Nexus Water Group among the other competitors it can encounter in strategic acquisitions and new markets. In MSG, American States Water Company is the primary named competitor for military-installation water and wastewater contracts.
Our reading: Government-granted operating rights and the cost of duplicating buried water and wastewater networks are a strong barrier in established service territories, though they do not prevent competition for acquisitions. [item1]
Our reading: Regulatory oversight is a qualified moat because approved rates, investment recovery, and operating authorizations underpin the regulated model, but commissions can alter recovery timing and outcomes. [item1; item1a]
Our reading: Scale across multiple states supports integration and operating efficiencies, but named utilities, funds, and government buyers remain relevant bidders for systems. [item1]
| Competitor | Where they compete | Threat (our reading) |
|---|---|---|
| Essential | regulated water and wastewater system acquisitions | High |
| American States Water Company | utility acquisitions and military-installation contracts | High |
| California Water Service Group | regulated water and wastewater system acquisitions | High |
| Algonquin Power and Utilities Corp. | strategic acquisitions and new markets | Medium |
| Nexus Water Group | strategic acquisitions and new markets | Medium |
Growth opportunities
American Water’s stated growth plan combines regulated infrastructure investment, acquisitions of water and wastewater systems, and organic customer additions in existing service territories. The company plans to invest between $19 billion to $20 billion over the next five years, including infrastructure replacement and improvements as well as acquisitions. It expects its longer-term capital program to address pipe renewal, treatment plants, storage tanks, resiliency, water quality, operational efficiency, technology, innovation, and system expansion.
The company pursues systems near its existing operations, where it seeks to use shared expertise, prioritize investment, and integrate acquired networks. It also evaluates potential new states based on regulatory, legislative, and business conditions, as well as the ability to build enough scale for operating efficiencies and customer affordability. It identifies fragmented municipal ownership, infrastructure investment needs, environmental requirements, and financial pressures on local systems as factors that may lead municipalities to consider asset sales.
Management said on the call that the Nexus Water Group systems acquisition closed on June 1 and added 47,000 customer connections. Management also said on the call that approximately 57,000 customer connections were under agreement across six states as of June 30, with a total value of $236 million. Management is targeting 2.00% customer growth in 2026.
The proposed Essential transaction is another potential expansion. Management expects it to close by the end of the first quarter of 2027, subject to required approvals and other closing conditions.
- $3.9BFY2021
- $3.8BFY2022
- $4.2BFY2023
- $4.7BFY2024
- $5.1BFY2025
Structural risks
- State utility commissions and other regulators can affect rates, cost recovery, financing, acquisitions, capital spending, and allowed returns. Regulatory mechanisms can reduce, but do not eliminate, the time between investment and recovery in customer rates.
- Water availability and water quality can be affected by drought, restrictions, contamination, overuse, habitat protections, flooding, storms, and other weather events. These conditions can disrupt service, constrain supply, or require additional resiliency spending.
- Environmental, health, safety, and water-quality requirements can become more stringent. The company expects compliance needs to raise capital and operating costs, including costs related to PFAS monitoring and treatment.
- The business is capital intensive and the company expects capital investment to exceed operating cash flow over the next few years. It relies on operating cash flow, debt, commercial paper, and equity issuance, so access to financing and financing costs matter.
- Acquisitions can bring integration challenges, unexpected spending, debt, contingent liabilities, environmental obligations, or regulatory outcomes that limit recovery of acquisition costs. Government entities can also seek to acquire utility assets through condemnation or eminent domain.
- The proposed merger with Essential remains subject to governmental, regulatory, third-party, and other closing conditions. Failure to obtain approvals, delay, or conditions imposed on approval could prevent completion or affect the combined company.
Bottom line
Our reading
Our reading: American Water is predominantly a regulated infrastructure operator: it runs local water and wastewater networks, invests in their upkeep and expansion, and seeks recovery through state-set rates. [item1; item7]
Our reading: Its operating rights, high replacement cost of networks, and regulatory recovery mechanisms support the established utility model, while acquisition competition, regulatory lag, water availability, environmental compliance, and external financing needs shape its exposure. [item1; item1a; item7]
Our reading: The stated capital plan, municipal-system acquisitions, Nexus acquisition, and pending Essential transaction place investment execution and regulatory approvals at the center of the company’s growth path. [item7; call_prepared]