American Water Works Company, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Filed May 1, 2024. Amounts are in millions unless noted. American Water primarily owns regulated water and wastewater utilities, alongside military and municipal water-service businesses.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Operating revenue | $1,011 | $938; up 7.8% |
| Operating income | $326 | $295; up 10.5% |
| Operating margin | 32.2% | 31.4% |
| Net income attributable to common shareholders | $185 | $170; up 8.8% |
| Diluted EPS | $0.95 | $0.91; up $0.04 |
| Net margin | 18.3% | 18.1% |
| Operating cash flow | $382 | $285 |
| Capital expenditures | $609 | $526 |
| Cash and cash equivalents | $584 at March 31 | $330 at December 31, 2023 |
| Funded debt, approximate | $13.1 billion at March 31 | $12.4 billion at December 31, 2023 |
| Available liquidity | $3.26 billion | $2.83 billion at December 31, 2023 |
Operating cash flow less capital expenditures was negative $227 million, compared with negative $241 million a year earlier. Cash flow from operations is seasonal and generally higher in warmer months. The company reported a 0.57 debt-to-capitalization ratio under its debt covenant, within the 0.70 maximum.
Changes and operating drivers
- Regulated-business revenue rose $68 million. Management attributed the increase principally to $53 million from authorized rate increases and infrastructure surcharges, $8 million from acquisitions and organic growth, and $6 million from reduced amortization of excess deferred income taxes.
- Operation and maintenance expense increased $23 million overall, to $416 million; regulated-business increases reflected higher purchased water, fuel, power, chemicals, and employee costs. Depreciation and amortization rose $16 million, mainly as infrastructure entered service.
- Interest expense increased to $124 million from $115 million, reflecting additional long-term debt and lower allowance for funds used during construction. The effective tax rate rose to 23.6% from 20.6%.
- Weighted-average shares increased to 195 million from 186 million, tempering EPS growth relative to net income growth.
- On March 11, the Illinois subsidiary acquired a wastewater treatment plant and related assets for $86 million, adding approximately 26,000 customers.
Capital, rates, outlook, and management commentary
- Management plans approximately $3.1 billion of investment in 2024 growth strategies. It reported $720 million invested in Q1, including $634 million of capital investment and the $86 million acquisition. The company expects capital investment to exceed operating cash flow over the next several years and plans to fund the excess with debt, equity, and remaining proceeds from the Homeowner Services Group sale; it may defer some investment if needed to preserve liquidity.
- New general-rate-case authorizations effective in 2024 represented $43 million of annualized incremental revenue: $18 million in West Virginia and a $25 million Indiana step increase. Infrastructure-surcharge authorizations effective during 2024 were reported at $55 million annualized; timing varies by jurisdiction.
- Pending rate requests include New Jersey ($162 million), Pennsylvania ($204 million), and Illinois ($132 million effective 2025 plus $16 million effective 2026), among others. These are requests, not approved revenue. Iowa and Tennessee filed additional requests on May 1, after quarter-end.
- No company-wide EPS guidance is provided in the supplied filing text. Management cited rate implementation and investment growth as earnings drivers, partly offset by operating and employee costs, financing costs, and $0.05 per share of net unfavorable year-over-year one-time items.
- American Water issued $1.4 billion of senior notes in February: $700 million at 5.150% due 2034 and $700 million at 5.450% due 2054. Proceeds helped repay commercial paper and fund other corporate needs. No short-term debt was outstanding at quarter-end; $2.675 billion remained available under the revolving facility.
- The Homeowner Services Group seller note was amended to $795 million from $720 million, with interest increased from 7% to 10% and maturity remaining December 2026. The amendment removed the company’s conditional right to demand full repayment beginning December 2024. The note is secured; repayment depends on the buyer’s ability to pay.
Risks, contingencies, and unusual items
- The EPA finalized drinking-water limits for six PFAS in April 2024. The company estimates approximately $1 billion in capital spending over five years and up to $50 million of annual operating expense for testing and treatment, subject to further review and potentially stricter state requirements. EPA also designated PFOA and PFOS hazardous substances under CERCLA; the company is evaluating the rule and pursuing claims against manufacturers.
- California’s Monterey Peninsula water-supply project remains subject to permits, litigation, and regulatory review. Cal Am reported $248 million of cumulative project costs, including $76 million of AFUDC, and cannot assure recovery of all costs or timely completion. A local agency’s condemnation lawsuit concerning Cal Am’s Monterey system assets is also pending.
- Litigation remains pending over the 2015 West Virginia water-main break and the 2023 West Virginia water and gas outages. The company says losses in the named matters cannot currently be estimated. Separately, routine legal matters carry approximately $6 million of accrued probable losses and up to $2 million of reasonably possible losses that can be estimated.
- The company expects to be subject to the 15% Corporate Alternative Minimum Tax beginning in 2024 and expects CAMT to exceed regular tax liability under current guidance, potentially increasing cash tax payments.
- Other key risks include regulatory decisions and rate timing, drought and water-supply constraints, aging infrastructure, extreme weather, environmental compliance, cyber incidents, higher interest rates and financing access, acquisition approvals, and potential condemnation. Management reported no material changes to the risk factors in its 2023 Form 10-K.
- Q1 results included $17 million of interest income on the amended seller note. The company also realized a $14 million pretax gain on terminated treasury locks, to be amortized against interest expense over the terms of the related debt.
Important facts for investors to verify
- Progress and outcomes of pending rate cases, including the amount and timing of any approved increases versus requested amounts.
- Execution and funding of the approximately $3.1 billion 2024 investment plan, including future debt and equity needs and the impact of financing costs.
- Collectability and repayment terms of the $795 million secured seller note, particularly after removal of the earlier repayment right.
- Final PFAS compliance requirements, actual treatment costs, cost recovery through rates, and outcomes of manufacturer claims.
- Developments in Monterey water-supply project permitting and condemnation proceedings, and the recoverability of project costs.
- Cash-tax effects of CAMT and any material developments in the West Virginia outage-related litigation or investigations.