American Water Works Company, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; filed May 4, 2016. American Water operates regulated water and wastewater utilities and complementary market-based services. Unless noted, amounts are in millions of dollars.
Financial results and position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $743 | $698 | +$45 (6.4%) |
| Operating income | $214 | $204 | +$10 (4.9%) |
| Operating margin | 28.8% | 29.2% | Down about 0.4 percentage points |
| Net income attributable to common stockholders | $82 | $80 | +$2 (2.5%) |
| Diluted EPS | $0.46 | $0.44 | +$0.02 (4.5%) |
| Operating cash flow | $247 | $198 | +$49 |
| Capital expenditures | $284 | $226 | +$58 |
- Revenue growth reflected regulated rate increases, surcharge and balancing-account revenues, acquisitions, and market-based business growth. Regulated revenue rose 3.1%; market-based revenue rose 31.0%, partly due to the Keystone acquisition.
- Operating expenses increased 7.1% to $529, faster than revenue. O&M rose $24 and depreciation and amortization rose $9. Net interest expense increased $5, primarily due to long-term debt issued in the prior six months.
- Regulated segment net income increased 7.4% to $87; market-based segment net income declined to $6 from $7.
- Cash and cash equivalents were $66 at quarter-end, versus $45 at year-end 2015. Total assets were $17,417. Current liabilities of $1,614 exceeded current assets of $638.
- Long-term debt was $5,850; short-term debt was $839 and the current portion of long-term debt was $54. Common stockholders’ equity was $5,082. Short-term debt rose from $628 at year-end, primarily reflecting commercial paper borrowings.
- Operating cash flow exceeded net income, but investing outflows were $323, including $284 of capital expenditures and $22 for acquisitions. Financing provided $97, including $211 of net short-term borrowings; the company paid $61 in dividends and repurchased $62 of stock.
Changes, outlook and management commentary
- Management attributed higher regulated revenues chiefly to authorized rate increases and investment-related growth; lower customer consumption, associated in part with milder weather, partly offset the increase. Billed water volume declined 3.1% year over year.
- The adjusted regulated O&M efficiency ratio for the twelve months ended March 31 improved to 35.6% from 36.3% a year earlier. This is a company-defined non-GAAP measure.
- Management expected 2016 capital investment, including acquisitions, of $1.3–$1.4 billion. The company reported approximately $236 million of capital investments in Q1, including $214 million primarily for regulated infrastructure and $22 million for acquisitions.
- Seven regulated-system acquisitions closed during Q1 for an aggregate $22 million net of cash received, adding approximately 7,000 customers. A planned Scranton-area wastewater system acquisition had an approximately $195 million transaction value, subject to approvals and adjustments, and was expected to close by September 30, 2016. The system’s consent decree calls for estimated upgrades of $140 million.
- Rate authorizations effective in Q1 represented $22 million of annualized general-rate-case revenue and $14 million of annualized infrastructure surcharges. Pending rate requests and orders as of May 3 included $115 million of annualized general-rate-case revenue and $15 million of surcharges; recovery was not assured. Additional filings and Missouri rate-case developments are described in the filing.
- The revolving credit facility commitment increased to $1.75 billion and the commercial-paper program limit to $1.6 billion. At March 31, commercial paper outstanding was $839 million; the filing reported $1.66 billion available under the facility for short-term liquidity and letters of credit. The debt-to-capitalization covenant ratio was 0.57:1, within the 0.70:1 limit.
- The company entered forward-starting swaps with $225 million aggregate notional value and a 2.30% fixed rate to reduce interest-rate exposure on expected 2017 debt issuance. Management stated it believed operating cash flows, capital-market access and credit facilities could fund short-term needs, while noting access and lender commitments were not assured.
Risks, contingencies and unusual items
- Freedom Industries spill litigation: 69 cases were pending concerning the 2014 Elk River chemical spill. The company said it could not reasonably estimate possible losses for these proceedings and was vigorously defending itself. The filing reported $5 million accrued for probable loss contingencies overall and a maximum of $61 million for reasonably possible loss contingencies, with some matters not estimable.
- Missouri surcharge litigation: A state appeals court ruled the regulator lacked authority for a Missouri infrastructure surcharge order. The company planned to continue challenging the ruling; the estimated reasonably possible loss range was zero to $26 million.
- Technology incident: On April 1, 2016, a non-cybersecurity firmware failure affected an IT storage device used for core business functions. Water and wastewater systems were not affected; disaster recovery procedures enabled financial systems and controls to be used. Management reported disclosure controls effective at a reasonable level of assurance.
- Other risks include regulatory timing and rate outcomes, weather and demand variability, infrastructure and operating costs, access to capital and interest-rate changes, environmental and legal matters, and technology or service disruptions. Results are seasonal, and Q1 results may not indicate full-year performance.
Investor verification points
- Track whether revenue and earnings growth persist as regulated rate increases are realized and water consumption remains below prior-year levels.
- Verify execution of the $1.3–$1.4 billion investment plan, funding needs, and recovery of infrastructure spending through rates or surcharges.
- Monitor commercial-paper usage, liquidity headroom, debt costs, and compliance with debt covenants as investment and acquisition spending continues.
- Follow approvals, final purchase terms, and required wastewater-system upgrades for the planned Scranton acquisition.
- Assess developments and potential financial exposure in Freedom Industries litigation and Missouri surcharge proceedings; the former has no estimable loss range in the filing.
- Review subsequent rate-case orders and filings, including whether pending revenue requests are approved, modified, or delayed.