American Water Works Company, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. American Water provides regulated water and wastewater service in 16 states and complementary market-based services; it served approximately 15 million people across 46 states.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $3.610 billion | $3.440 billion | +4.9% |
| Operating income | $1.170 billion | $1.102 billion | +6.2% |
| Net income attributable to common shareholders | $621 million | $567 million | +9.5% |
| Diluted GAAP EPS | $3.43 | $3.15 | +$0.28 |
| Adjusted diluted EPS (non-GAAP) | $3.61 | $3.30 | +9.4% |
| Cash from operating activities | $1.383 billion | $1.386 billion | Down $3 million |
| Capital expenditures | $1.654 billion | $1.586 billion | +4.3% |
Operating margin was approximately 32.4%, versus 32.0% in 2018; net margin was approximately 17.2%, versus 16.5%. Adjusted regulated-business O&M efficiency ratio improved to 34.5% from 35.6% (non-GAAP). Regulated revenue rose $110 million, principally from $132 million of authorized rate increases and infrastructure surcharges and $20 million from acquisitions and organic growth; lower water demand and TCJA-related customer rate reductions partly offset growth. Market-based revenue increased $63 million, led by Homeowner Services and military contracts.
Fourth-quarter revenue was $902 million versus $850 million, while net income attributable to common shareholders was $98 million versus $112 million. The quarter included a $44 million pretax ($35 million after-tax) loss on the sale of Keystone.
Cash, debt and liquidity
- Cash and cash equivalents were $60 million at year-end, compared with $130 million a year earlier; cash, including restricted funds, was $91 million.
- Long-term debt and redeemable preferred stock were $8.644 billion; short-term debt was $786 million. The filing reports aggregate short- and long-term debt of approximately $9.5 billion including mandatory-redemption preferred stock. Working capital was in deficit.
- Debt represented 55.6% of capitalization, up from 52.4% in 2018; the debt-to-capitalization covenant ratio was 0.61 against a maximum of 0.70.
- The $2.25 billion revolving credit facility had $2.174 billion of available capacity; commercial paper outstanding was $786 million. Moody’s lowered the senior unsecured rating to Baa1 in April 2019 (stable outlook); S&P affirmed A (stable).
- Cash dividends paid were $353 million, and declared dividends were $2.00 per share, versus $1.82 in 2018.
Material changes, outlook and key risks
- Capital spending was $1.7 billion in 2019. Management expects total investment of $8.8–$9.4 billion in 2020–2024 and $20–$22 billion in 2020–2029, including $1.7–$1.9 billion in 2020. This includes regulated infrastructure investment and planned acquisitions; expected funding includes operating cash flow and additional debt and equity.
- American Water agreed to sell New York American Water for approximately $608 million in cash, subject to adjustments and regulatory and other approvals. The company estimated closing in early 2021; the transaction was not completed as of the filing.
- The company sold Keystone for $31 million cash consideration, subject to working-capital adjustment, and recorded the loss noted above. The sale followed Keystone’s 2018 impairment and operating difficulties.
- Water usage volumes declined and unusually wet second-quarter weather reduced demand. Rate increases and infrastructure surcharges supported revenue, but rate approvals, regulatory lag and recovery of costs remain material dependencies.
- Management identified the Monterey Peninsula Water Supply Project as a significant uncertainty. Delays and permitting challenges mean the California subsidiary expected it could not fully meet Carmel River diversion-reduction requirements by the 2021 deadline; noncompliance could bring additional costs, fines or penalties. The project also faced contested permits, groundwater issues and contractual defaults by project agencies.
- Other notable exposures include proposed lead and copper rule changes and estimated lead service line replacement costs of $600 million–$1.2 billion through 2030; PFAS and other emerging contaminants; aging infrastructure, severe weather and water-supply constraints; cyber and operational disruption; condemnation proceedings involving Monterey assets and an Illinois pipeline; and class-action litigation related to water-main breaks. The company accrued $17 million for probable loss contingencies and estimated up to $25 million for reasonably possible losses that could be estimated; certain matters could not be estimated.
- Management stated that federal NOLs were expected to be used in 2020, after which the company expected to begin paying federal income taxes. The company’s financial statements reflect $1.128 billion in regulatory assets and $1.806 billion in regulatory liabilities, whose recovery or settlement depends on regulatory outcomes.
- CEO Susan Story planned to retire effective April 1, 2020; COO Walter Lynch was designated as successor. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; the critical audit matter was regulatory accounting.
Investor verification priorities
- Track New York American Water sale approvals, timing, final proceeds and use of proceeds.
- Verify Monterey project permitting, construction schedule, cost recovery and the subsidiary’s compliance path for the 2021 diversion deadline.
- Monitor capital spending, rate-case and surcharge approvals, and whether cash generation covers the investment and dividend plan without materially increasing leverage.
- Review debt refinancing needs, credit ratings, covenant headroom and the company’s transition to federal cash tax payments.
- Follow lead-service-line requirements and costs, emerging-contaminant regulation, and the outcomes of water-main-break and condemnation proceedings.
- Reconcile adjusted EPS and O&M efficiency claims to GAAP results, including the Keystone disposal loss and other adjustments.