American Water Works Company, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020, compared with Q1 2019. American Water provides regulated water and wastewater services and operates complementary market-based businesses. Management notes that results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenues | $844 million | $813 million | +$31 million |
| Operating income | $239 million | $238 million | +$1 million |
| Net income attributable to common shareholders | $124 million | $113 million | +$11 million |
| Diluted EPS (GAAP) | $0.68 | $0.62 | +$0.06 |
| Adjusted diluted EPS (non-GAAP) | $0.67 | $0.61 | +$0.06 |
| Net cash from operating activities | $180 million | $168 million | +$12 million |
| Capital expenditures | $408 million | $326 million | +$82 million |
Operating margin was approximately 28.3%, versus 29.3% in Q1 2019; net margin was approximately 14.7%, versus 13.9%. These percentages are calculated from reported figures. Operating cash flow less capital expenditures was negative $228 million, compared with negative $158 million in the prior-year quarter.
- Regulated Businesses revenue increased $35 million to $720 million, mainly from $31 million of authorized rate increases and infrastructure surcharges, plus acquisition and organic growth. Billed water volumes declined slightly, to 72,615 million gallons from 72,939 million.
- Market-Based Businesses revenue declined $6 million to $128 million, principally following the 2019 sale of Keystone operations; segment net income increased to $22 million from $20 million.
- Operating and maintenance expense rose $18 million to $383 million; general taxes rose $8 million to $77 million. Lower income-tax provision and improved non-service benefit costs supported net income growth. The effective tax rate fell to 22.0% from 25.7%.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $556 million and total current assets were $1.801 billion. Current liabilities were $2.767 billion, implying a working-capital deficit of approximately $966 million.
- Long-term debt was $8.621 billion; short-term debt was $1.641 billion and the current portion of long-term debt was $49 million. Including redeemable preferred stock, the filing reports aggregate short- and long-term debt of approximately $10.3 billion.
- Available liquidity was reported at $1.839 billion: $556 million cash, $1.033 billion available under the revolving facility and $250 million available under the term-loan facility. The company reported a 0.62-to-1 consolidated debt-to-capitalization ratio, within its 0.70 covenant limit.
- Financing included a $500 million draw on a new $750 million, 364-day term facility in March. After quarter-end, the company issued $1.0 billion of senior notes, with maturities in 2030 and 2050, and extended its revolving credit facility to 2025.
- Cash dividends paid were $90 million. The board subsequently declared a quarterly dividend of $0.55 per share, payable June 2, 2020.
Changes, outlook and notable matters
- Management attributed earnings growth primarily to regulated infrastructure investment, acquisitions, organic growth and rate increases. Q1 investment was $432 million in regulated capital projects and $21 million in regulated acquisitions; two acquisitions added approximately 5,100 customers.
- Full-year 2020 capital investments, including acquisitions, were expected to be approximately $1.9 billion. The company also reported pending regulated acquisition agreements involving approximately 45,800 customers.
- The adjusted regulated O&M efficiency ratio improved to 34.5% for the twelve months ended March 31, 2020, from 35.5% a year earlier; this is a non-GAAP measure.
- COVID-19 had no material effect on financial results through March 31, but future effects were uncertain. Management cited potential pressure on capital-market access, customer collections and regulatory processes, and said it was monitoring liquidity and supply-chain impacts. It stated existing liquidity was expected to meet foreseeable cash requirements, subject to evolving conditions.
- New York American Water remained classified as held for sale under an agreement for approximately $608 million in cash, subject to adjustment. Completion was anticipated no later than early 2021. The New York subsidiary’s scheduled rate increases were postponed to September 2020, with a make-whole provision for delayed revenues.
- Key risks include regulatory approval and rate recovery, COVID-19 impacts, high debt and refinancing needs, aging infrastructure, weather and water-supply disruptions, and litigation. Monterey system acquisition/condemnation activity and class actions concerning West Virginia and Chattanooga water-main breaks remain relevant; losses for the latter cases could not be estimated. The company reported $12 million of accrued probable loss contingencies and $2 million of reasonably possible losses that it could estimate.
- The company reported compliance with debt covenants and effective disclosure controls as of quarter-end. Management said there were no material changes to previously disclosed risk factors apart from the updates in the filing.
Important facts for investors to verify
- Whether COVID-19, customer payment protections or economic conditions materially affect collections, demand, regulatory recovery or financing access after quarter-end.
- Use of the April 2020 note proceeds, subsequent debt balances and the company’s ability to maintain liquidity and covenant compliance.
- Completion timing, final proceeds and regulatory status of the proposed New York subsidiary sale.
- Approval and timing of pending rate cases, infrastructure surcharges and acquisition agreements, alongside the stated 2020 investment plan.
- Developments in Monterey water-supply and condemnation matters, the Dunbar and Chattanooga litigation, and other contingencies for which potential losses may be uncertain.