American Water Works Company, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unless noted, financial amounts are in millions. American Water primarily owns regulated water and wastewater utilities, with military and municipal water-services activities reported in “Other.”
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,097 | $937 | $2,035 | $1,779 |
| Operating income | $432 | $327 | $727 | $573 |
| Net income attributable to common shareholders | $280 | $218 | $450 | $376 |
| Diluted EPS | $1.44 | $1.20 | $2.37 | $2.07 |
| Operating cash flow | Not separately presented for the quarter | $714 | $196 | |
| Capital expenditures | Not separately presented for the quarter | $1,153 | $995 |
Q2 operating and net margins were approximately 39.4% and 25.5%, respectively, versus 34.9% and 23.3% a year earlier. For the first half, the corresponding margins were approximately 35.7% and 22.1%, versus 32.2% and 21.1%.
- First-half operating cash flow less capital expenditures was negative $439 million, compared with negative $799 million in 2022. Management attributed much of the cash-flow increase to deferred taxes and working-capital movements, including prior-year tax payments related to asset sales.
- At June 30, cash and cash equivalents were $794 million; available liquidity, including $2.675 billion of revolver capacity, was $3.469 billion. Short-term debt was zero.
- Long-term debt was $11.607 billion, with $579 million of current maturities. The company reported a 0.56-to-1.00 debt-to-capitalization ratio for covenant purposes, within its 0.70 maximum.
- Adjusted regulated O&M efficiency ratio, a non-GAAP measure, was 33.1% for the trailing twelve months, compared with 33.7% in the prior-year period.
Changes versus prior comparable periods
- Q2 revenue rose $160 million (17%) and first-half revenue rose $256 million (14%). Management attributed regulated-revenue increases mainly to authorized rate increases and infrastructure surcharges, plus customer growth and drier-than-normal Q2 weather.
- Q2 diluted EPS increased $0.24; first-half diluted EPS increased $0.30. Management cited new rates recovering capital and acquisition investments, partly offset by higher production and pension costs. Favorable Q2 weather contributed an estimated $0.07 per share; equity-financing dilution reduced EPS by $0.10 in Q2 and $0.11 for the first half.
- First-half O&M expense increased $72 million, while depreciation and amortization increased $25 million. Management cited inflationary fuel, power and chemical costs, higher headcount, and additional plant in service.
- Financing included a March common-stock offering of 12.65 million shares that generated approximately $1.688 billion net proceeds, and $1.035 billion of 3.625% exchangeable senior notes due 2026 issued in June. Proceeds were used partly to repay commercial paper and otherwise for general corporate purposes.
Outlook, commentary and material risks
- Management plans approximately $2.9 billion of 2023 investment across its footprint. It expects capital investment to exceed operating cash flow over the next several years and anticipates funding the shortfall with debt and equity issuance and remaining proceeds from the Homeowner Services Group sale. It may delay some investment or pursue other financing if needed.
- The company estimates that proposed EPA PFAS limits could require more than $1 billion of treatment-facility capital expenditures over three to five years and approximately $50 million in annual operating expense, in today’s dollars. These are preliminary estimates subject to the final rule and system-level engineering analysis.
- The California subsidiary’s Monterey Peninsula Water Supply Project has permitting, litigation, cost-recovery and schedule uncertainty. The company reported $223 million of cumulative project costs at June 30, 2023 and cannot assure recovery of all costs. Potential continued noncompliance with Carmel River diversion orders could lead to additional costs, fines or penalties.
- Key pending proceedings include the Monterey system acquisition/condemnation dispute, water-supply project challenges, and class-action litigation involving the Dunbar, West Virginia water-main break. The company said it could not reasonably estimate potential losses for certain matters; approximately $6 million of probable loss contingencies were accrued overall.
- Management identified rate-case outcomes, regulatory decisions, water supply and weather, infrastructure needs, inflation and interest rates, financing access, PFAS regulation, cybersecurity, supply-chain costs and litigation as risks. No material changes to previously disclosed risk factors were reported.
- Rate actions effective in 2023 were expected to add $273 million of annualized revenue from general rate cases and $67 million from infrastructure surcharges, assuming constant sales volume and customer count. Additional rate requests are pending in Kentucky, West Virginia, Indiana and California; requested amounts are not approved revenues.
Important facts for investors to verify
- Whether approved and pending rate cases and surcharges translate into realized revenue and timely recovery of capital and operating costs.
- Actual PFAS compliance requirements, treatment costs, customer-bill impacts, and any manufacturer recoveries.
- Funding needs and financing costs relative to the planned $2.9 billion 2023 investment program and future capital spending.
- Cash collection and timing for the $720 million seller promissory note and the contingent payment of up to $75 million due subject to conditions by December 31, 2023.
- Progress, permitting, cost recovery and potential liabilities associated with the Monterey water-supply project and related proceedings.
- Effects of the share issuance and exchangeable notes on future interest expense, share count and diluted EPS.