American Water Works Company, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 5, 2020. Unaudited consolidated results. Amounts below are in millions except per-share data.
Business context and key financial metrics
American Water provides regulated water and wastewater services, alongside market-based services, including contracts with the U.S. government and municipalities. The Regulated Businesses are its primary business and reportable segment.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $931 | $882 | $1,775 | $1,695 |
| Operating income | $313 | $302 | $552 | $540 |
| Net income attributable to common shareholders | $176 | $170 | $300 | $283 |
| Diluted EPS | $0.97 | $0.94 | $1.65 | $1.56 |
| Net cash from operating activities | Not presented separately | Not presented separately | $531 | $480 |
| Cash capital expenditures | Not presented separately | Not presented separately | $870 | $712 |
- Revenue increased 5.6% in Q2 and 4.7% for the first half; net income increased 3.5% and 6.0%, respectively. Reported diluted EPS rose 3 cents in Q2 and 9 cents for the first half.
- Calculated operating margin was approximately 33.6% in Q2 2020 versus 34.2% in Q2 2019; first-half operating margin was approximately 31.1% versus 31.9%. Calculated net margin was approximately 18.9% versus 19.3% in Q2 and 16.9% versus 16.7% for the first half.
- First-half operating cash flow less cash capital expenditures was negative $339, compared with negative $232 in 2019; this is a simple calculation, not a company-defined measure.
- At June 30, cash and cash equivalents were $569, total assets $24,009, and shareholders’ equity $6,338. Long-term debt was $9,589; short-term debt was $920 and current long-term debt was $69. The filing cites aggregate debt, including redeemable preferred stock, of approximately $10.6 billion and a working-capital deficit.
- Available liquidity was reported at $2,323, comprising cash of $569 and $1,754 available under the revolving credit facility. The company was in compliance with its debt-to-capitalization covenant, at 0.63 versus a maximum of 0.70.
Material changes versus the prior comparable period
- Regulated Businesses revenue rose $48 in Q2 and $83 in the first half, driven mainly by authorized rate increases and infrastructure surcharges, acquisitions and organic growth. Management also cited demand shifts: commercial and industrial demand weakened during the pandemic, partly offset by higher residential demand.
- First-half regulated revenue included an estimated $10 reduction from COVID-19-related demand impacts. COVID-19 also contributed to higher uncollectible-account expense, additional debt costs, incremental operating costs, and waived late and reconnection fees.
- Regulated O&M expense increased $12 in Q2 and $32 in the first half, with higher employee-related and production costs among the drivers. Depreciation and general taxes also increased, mainly reflecting utility plant additions and higher property assessments.
- Market-Based Businesses revenue was flat in Q2 and declined $6 for the first half, partly reflecting the 2019 sale of Keystone Clearwater Solutions; growth in military services and homeowner services partly offset the decline.
- Operating cash flow increased $51 for the first half, while cash used in investing increased $141, primarily due to higher infrastructure investment. Financing cash flow increased to $941 from $265, reflecting the term loan, lower net short-term debt repayments and no anti-dilutive share repurchases.
Outlook, management commentary, risks and unusual items
- Investment and growth: The company planned approximately $1.9 billion of 2020 investment across its footprint. It reported $881 of regulated capital investment and $40 spent on regulated acquisitions during the first half. Management expects growth to be led by regulated infrastructure investment and acquisitions. The filing provides no explicit full-year earnings or EPS guidance.
- Liquidity and financing: Management said existing liquidity should meet cash requirements for the foreseeable future, while noting that pandemic-related market deterioration could require alternative funding. The company borrowed $500 under a 364-day term facility and issued $1.0 billion of senior notes in April; $500 of term-loan principal remained outstanding at quarter-end. The revolving facility maturity was extended to March 2025.
- COVID-19 regulatory recovery: As of August 5, regulators had authorized deferred accounting for pandemic-related impacts in 10 of 14 jurisdictions, with four requests pending. California and Illinois had approved cost-recovery mechanisms. At June 30, the company recorded $14 of related regulatory assets and $2 of regulatory liabilities; recovery of all impacts is not assured.
- New York divestiture: The company classified the New York subsidiary as held for sale under an agreement to sell it to Liberty for approximately $608 in cash, subject to adjustment and regulatory and other closing conditions. Management estimated completion in early 2021; the agreement could be terminated if not completed by June 30, 2021, subject to an extension provision.
- Regulatory and legal matters: General rate cases and surcharge requests were pending in several states and are subject to approval. The Monterey Peninsula water-supply project faced approval and schedule delays; the company cited potential additional costs, diversion restrictions, fines or penalties if requirements are not met. Water-main-break class actions in West Virginia and Tennessee remain pending; the company said it could not estimate the likelihood or amount of loss for those matters. The filing accrued approximately $8 for probable loss contingencies overall.
- Other items: A $6 loss from terminated treasury-lock agreements is being amortized through interest expense over 10 years. The company recorded a $1 pension settlement charge in the first half, maintained as a regulatory asset. Management attributed the lower effective tax rate partly to amortization of excess deferred taxes and, for the first half, stock-based compensation benefits.
Important facts for investors to verify
- Progress and final regulatory approval for the New York sale, including final proceeds and timing.
- Whether COVID-19-related demand, collection losses and incremental costs persist, and whether deferred costs are ultimately recovered through rates.
- Actual 2020 capital spending, financing needs and cash generation relative to the planned $1.9 billion investment program.
- Outcomes and potential financial exposure from the Monterey project and the West Virginia and Tennessee water-main litigation.
- Rate-case and infrastructure-surcharge decisions, and any changes to debt, liquidity or covenant headroom.