American Water Works Company, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 3, 2021. American Water provides regulated water and wastewater utility services and market-based services. Results are unaudited, and management notes that seasonal demand makes interim results not necessarily indicative of full-year performance. Financial amounts below are in millions except per-share data.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Operating revenue | $888 | $844; up $44 (5.2%) |
| Operating income | $229 | $239; down $10 |
| Net income attributable to common shareholders | $133 | $124; up $9 (7.3%) |
| Diluted EPS | $0.73 | $0.68; up $0.05 |
| Net cash provided by operating activities | $179 | $180 |
| Capital expenditures | $342 | $408 |
| Cash and cash equivalents at March 31 | $69 | $547 at December 31, 2020 |
| Long-term debt | $9,325 | $9,329 at December 31, 2020 |
| Short-term debt | $1,115 | $1,282 at December 31, 2020 |
Revenue growth reflected authorized rates and infrastructure surcharges, acquisitions and organic growth; these were partly offset by $20 million of revenue reductions from amortization of excess accumulated deferred income taxes (EADIT), generally offset by lower income tax expense. Operating expenses rose $54 million, including higher operation and maintenance and depreciation, so operating income declined despite revenue growth. The effective tax rate fell to 14.2% from 22.0%, mainly due to EADIT amortization and stock-based compensation deductions.
Operating cash flow less capital expenditures was negative $163 million for the quarter, calculated from reported cash flow and capex. Investing activities used $363 million; financing activities used $293 million, including $100 million of dividends and repayment at maturity of a $500 million term loan. The company reported $1.128 billion of total available liquidity at quarter-end, comprising $69 million cash and $1.059 billion remaining revolving-credit availability. The $2.25 billion revolving facility matures in 2025. The company said existing liquidity was sufficient for foreseeable requirements. Its debt-to-capitalization covenant ratio was 0.62 versus a maximum 0.70, and it reported covenant compliance.
Material changes and business developments
- Regulated Businesses revenue was $755 million versus $720 million; net income was $135 million versus $123 million. Market-Based Businesses revenue increased to $137 million from $128 million, while net income declined to $17 million from $22 million, reflecting higher operating costs, including cold-weather-related Homeowner Services claims.
- Regulated revenue growth included $43 million from rate increases and infrastructure surcharges and $8 million from acquisitions and organic growth, partly offset by $20 million of EADIT-related reductions. Billed water volumes decreased to 71,689 million gallons from 72,615 million gallons.
- Quarter-end assets were $24.525 billion, versus $24.766 billion at year-end. Shareholders’ equity was $6.583 billion, versus $6.454 billion. Current assets were $1.466 billion and current liabilities $2.451 billion.
- The company invested $342 million in the quarter, primarily in regulated infrastructure, and expects to invest approximately $1.9 billion across its footprint in 2021. It added about 600 customers through first-quarter acquisitions and about 3,600 through organic growth.
Outlook, commentary, risks and contingencies
- Outlook: Management cited continued regulated growth from infrastructure investment, acquisitions and organic growth, and said it expects existing liquidity to meet foreseeable cash requirements. The filing provides no numerical full-year earnings or revenue guidance.
- Rates and investment recovery: Pennsylvania’s first rate-case step took effect in January 2021, with a further step scheduled for January 2022. Rate cases, surcharge approvals and recovery of invested capital remain subject to regulatory decisions. New Jersey regulators had not yet ruled on a $29 million acquisition-adjustment request; an administrative law judge recommended denial.
- COVID-19: Impacts included forgone late and reconnection fees, incremental operating costs, higher uncollectible accounts expense and additional debt costs. The company recorded $43 million of related regulatory assets and $5 million of regulatory liabilities. As of May 3, 2021, deferred accounting or cost-recovery orders covered 11 of 14 jurisdictions; one jurisdiction denied a deferral request and proceedings remained pending in three. Five states continued service-disconnection moratoria.
- New York divestiture: The planned sale of the New York subsidiary for approximately $608 million in cash, subject to adjustments and conditions, remained pending. Its assets and liabilities were classified as held for sale. A state study found municipalization feasible and in the public interest, adding regulatory and transaction uncertainty.
- Water-supply project: California subsidiary Cal Am had incurred $161 million, including $38 million of allowance for funds used during construction, on the Monterey Peninsula Water Supply Project. Required coastal approvals remained pending, and the company said timely completion could not be assured. Cal Am did not expect to fully meet Carmel River diversion requirements by the December 31, 2021 deadline; noncompliance could result in additional costs, fines or penalties, and recovery of project costs is not assured.
- Other risks and contingencies: The filing describes class-action claims concerning water-main breaks, potential eminent-domain proceedings affecting utility assets, and routine legal matters. An April 2021 grand jury subpoena sought records about a subsidiary’s operations and contractor network in the New York City area; the company said it was cooperating and did not then expect a material adverse effect. The company reported approximately $5 million of accrued probable loss contingencies and $4 million of reasonably possible losses that could be estimated; some matters could not be estimated.
- Other operating factors: Extreme cold increased Homeowner Services claims, primarily in Texas and Illinois. The company identified regulatory approvals, water availability, infrastructure condition, weather and climate events, cybersecurity, access to capital, interest rates, and cost control among its risks. It reported no material change in market-risk exposure and no significant derivatives outstanding at quarter-end.
Important facts for investors to verify
- Whether the New York sale closes, its final proceeds and adjustments, and any effect of municipalization developments.
- Progress, permitting, cost recovery and deadline compliance for the Monterey Peninsula Water Supply Project and Carmel River diversion requirements.
- Regulatory outcomes for pending rate cases, surcharges, COVID-19 cost recovery and the New Jersey acquisition-adjustment request.
- Whether operating cash generation and available liquidity support the approximately $1.9 billion 2021 investment plan, dividends and debt requirements.
- Trends in customer collections and uncollectible accounts as service-disconnection moratoria expire, along with litigation and the subpoena investigation.