American Water Works Q3 2026: EPS flat at $1.94 as wet weather and lost note interest offset rate gains

American Water Works, the largest regulated water and wastewater utility in the US (about 14 million people in 14 states, plus 19 military bases), reported third-quarter 2026 revenue of $1,510 million, up 4.1% from $1,451 million. Net income rose 2.1% to $387 million, but diluted earnings per share were flat at $1.94 because the share count grew about 2% after the company sold new stock in June. The company's own adjusted EPS, which strips out weather and merger costs, rose 5.8% to $2.00, and management narrowed its 2026 guidance to the top half of the range.

The quarter in figures

Operating margin (the share of revenue left after running the business, before interest and tax) and the consolidated tax rate are computed from the 10-Q's line items; the company does not present them. Mgal = millions of gallons.

Where revenue came from, and what took it away

The regulated utility's revenue rose $60 million to $1,403 million. The 10-Q breaks that down:

A "rate increase" here means a state utility commission has approved higher customer bills, usually so the company can earn a return on money already spent on pipes and treatment plants. That revenue stays. Weather and demand do not, and this quarter they went the wrong way: residential billed volumes fell 2.3% and commercial 2.2%. Residential water revenue still rose 3.1% ($762M vs $739M) on fewer gallons, which is price.

Acquisitions contributed more than in any quarter this year. The Nexus systems bought on June 1 for $319 million (about 47,000 customers) were in for a full quarter, and Gordon's Corner Water Company joined on July 27, paid for with 350,652 shares. Year to date, acquisitions have added about 81,000 customers and organic growth another 14,100.

Costs at the regulated business were well controlled. Operation and maintenance expense rose 1.6% to $440 million: production costs rose $7 million on purchased water, power, chemicals and waste disposal, offset by $5 million less spent on operating supplies and services (mostly technology) and $8 million less on maintenance materials. The heavier growth was in the costs of the capital plan itself: depreciation rose $18 million (+8.0% at the segment) as new plant went into service, and consolidated interest expense rose $9 million to $167 million on new debt. Regulated net income rose 6.3% to $407 million.

What the headline numbers hide

Flat EPS hides three drags, one of them permanent.

• Weather. The company estimates weather cost $0.04 a share before tax this quarter, after helping by $0.04 a year ago. After tax that is a swing of about $0.06, which is most of the gap between flat GAAP EPS and +5.8% adjusted.
• Merger costs. Costs for the pending Essential Utilities merger were $6 million in Q3 (net $0.03 a share) against $0.01 a year ago. They end when the deal closes.
• The lost seller-note interest, which does not come back. The "Other" bucket went from a $4 million loss to a $20 million loss almost entirely because interest income fell $20 million. The company's adjusted EPS removes only the extra interest from a 2024 amendment that raised the note's rate from 7% to 10% (worth $0.03 net in Q3 2025). The base 7% interest is not adjusted, so adjusted EPS growth of 5.8% already absorbs that loss. On that score the adjusted figure is not flattering.

Share issuance is diluting, not boosting, EPS. Diluted shares rose 2.1% after the June settlement of 3.4 million shares under forward sale agreements ($476 million of cash). Another 4,694,836 shares remain to be settled by December 31, 2026, about 2.4% more. On last year's 195 million shares, this quarter's net income would have been about $1.98 a share. The company has bought back no stock this year.

A small tax tailwind. The consolidated tax rate fell to about 22.4% from 23.3%, worth roughly $0.02 a share. The regulated segment's rate moved only from 22.6% to 22.2%.

Cash flow looks better than it is. Nine-month operating cash flow was $1,635 million against net income of $898 million, up $239 million from last year. The company says the increase is mainly because 2025 included a Corporate Alternative Minimum Tax payment that IRS Notice 2026-7 has since made unnecessary. That is a one-time timing benefit. Capital spending of $2,407 million plus $391 million of acquisitions exceeded operating cash flow by about $1.16 billion. It was covered by the one-time $795 million note repayment, $476 million of new equity and net new debt, including $500 million of 5.550% notes due 2033 sold on September 16. Total debt was $16.3 billion at September 30, about 57.8% of debt plus equity, down from 59.4% at year end because of the equity raise.

Two items to keep an eye on. The $93 million income tax receivable (from $9 million at year end) is the CAMT refund claim, not an operating item. And in Monterey, California, the company raised its cost estimate for the desalination water-supply project to $825 million plus financing costs, from $279 million approved in 2018. It has spent $371 million so far and says it cannot predict recovery of costs above the $123 million of construction costs regulators have already approved. That is now a material regulatory risk.

On balance, the quarter is understated: GAAP EPS was flat, but about $0.06 of weather swing and $0.02 more in merger costs explain most of the gap to adjusted EPS, which grew 5.8% despite losing the seller-note interest.

Takeaway: Underneath a flat $1.94, the regulated utility grew net income 6.3% even in a wet quarter, and adjusted EPS rose 5.8% after absorbing the end of $20 million a quarter of note interest. The constraint is not operations but price: New Jersey granted $68 million of a $145 million request at a 9.50% allowed return, and an Illinois judge has proposed 9.67% against a 10.75% ask. American Water still grows earnings by investing faster than regulators compress its return, and it funds that with new shares and debt.

Regulation: more revenue, lower allowed returns

Authorized ROE (return on equity) is the return on shareholders' money that a regulator lets the utility earn on its asset base, the "rate base". It sets the ceiling on profitability.

Since January 1 the company has been granted $284 million of additional annual revenue, $179 million from general rate cases and $105 million from infrastructure surcharges (which let rates rise for pipe-replacement spending without a full rate case). That compares with $216 million at the end of Q2. Rate cases are pending in five states and surcharge filings in two, asking for $360 million in total.

New Jersey matters most: its $6.1 billion rate base is close to Pennsylvania's $6.6 billion, and it was one of the two pending cases our Q2 report flagged. (The $145 million request is the updated figure from the Q2 10-Q; this 10-Q reports only the approved amount.) The Illinois judge also recommended against the company's second-step increase for 2028. The commission can still change that.

The Essential Utilities merger

The all-stock deal (0.305 American Water shares per Essential share) is moving through state approvals. Kentucky, Ohio and Virginia have approved, the federal antitrust waiting period expired on August 14, and the earnings release says settlements have been reached in Pennsylvania, North Carolina and Texas. Management still expects to close by the end of the first quarter of 2027. Merger costs total $28 million so far. The exchange ratio is fixed. The deal can only close if no remaining approval carries conditions severe enough to count as a "Burdensome Effect" under the agreement, which is where regulators usually ask for rate concessions.

Did last time's read hold up?

Mostly. Our Q2 report said the second half had to accelerate to hit guidance, and named the drivers: Pennsylvania's new rates from August 13, a full quarter of Nexus, and surcharges in Missouri, Pennsylvania and New Jersey. It said the real risk was a cool, wet third quarter. Both parts happened. Rate increases ($72M) and acquisitions ($23M) drove revenue, and weather and demand took $31 million back. Adjusted EPS still rose 5.8%, and guidance moved up, not down. On regulation, we said the Missouri and New Jersey cases mattered most and that a result in the 9.55–9.80% band was likely. New Jersey came in just below it at 9.50%, at less than half the requested revenue.

Guidance and outlook

• 2026: adjusted EPS guidance narrowed to $6.07–$6.12 from $6.02–$6.12. Year-to-date adjusted EPS is $4.63 (+5.2%), so the fourth quarter needs $1.44–$1.49. On our Q2 report's figures (2025 GAAP EPS of $5.69 for the year), Q4 2025 GAAP EPS was about $1.22, so this implies a big step up. That comparison is between adjusted and GAAP figures, so treat it as approximate. New Jersey's $68 million from September 15 and a full quarter of Pennsylvania's increase are the identifiable sources.
• 2027 (standalone, before the merger): adjusted EPS of $6.53–$6.63, 8% growth at the midpoint, and a $4.1 billion capital plan, up from $3.7 billion in 2026.
• Long term (unchanged): 7–9% EPS and dividend growth, 8–9% rate base growth, and $20+ billion of capital investment for 2026–2030 ($48+ billion for 2026–2035).
• Dividend: $0.8950 a quarter, declared Oct 27 and payable Dec 1, 8.2% above last year's $0.8275. Dividends paid in Q3 were about $178 million: nine-month cash dividends of $514 million less the $336 million paid in the first half.

Our view: the 2027 guidance rests on rate base growing about 8–9% a year while allowed returns drift down. Three things to watch next: the Illinois final order (due by December 18) on whether it lands near the 9.67% proposal; settlement of the remaining 4.7 million forward shares, which adds about 2.4% more stock; and whether Monterey costs above the approved amount turn into a write-down. With the seller-note cash spent, 2027's funding gap has to be filled with debt and equity alone.