American Water Works Company, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed April 27, 2022. American Water provides regulated water and wastewater services and operates smaller market-based businesses. Interim results are seasonal and may not indicate full-year performance. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $842 | $888 | Down 5.2% |
| Operating income | $246 | $229 | Up 7.4% |
| Operating margin | 29.2% | 25.8% | Up 3.4 percentage points |
| Net income attributable to common shareholders | $158 | $133 | Up 18.8% |
| Diluted EPS | $0.87 | $0.73 | Up $0.14 |
| Cash from operating activities | $154 | $179 | Down $25 |
| Capital expenditures | $424 | $342 | Up $82 |
Operating expenses fell to $596 from $659, including operation and maintenance expense of $364 versus $419. The consolidated effective tax rate increased to 18.1% from 14.2%. Regulated Businesses revenue rose to $778 from $755 and net income increased to $160 from $135. The adjusted regulated O&M efficiency ratio improved to 33.9% for the trailing 12 months from 34.1%.
At March 31, 2022, cash and cash equivalents were $75; short-term debt was $321, current long-term debt $57, and long-term debt $10,347. Total available liquidity was $1,928, including $1,853 of revolving-credit availability. The company reported a debt-to-capitalization covenant ratio of 0.59 against a maximum of 0.70 and said it was in compliance. Shareholders’ equity was $7,460.
Changes versus the prior period and notable items
- Reported revenue declined mainly because of the sale of Homeowner Services Group (HOS) in December 2021 and the sale of New York operations on January 1, 2022. Market-Based Businesses and Other revenue fell to $64 from $133, primarily reflecting the HOS divestiture. Excluding New York operations, management said revenue increased $46, primarily from rate increases and surcharges, acquisitions, and organic growth.
- Q1 2022 EPS included approximately $0.06 per share from interest on the HOS seller note and income under the related revenue-share agreement. The company recorded $13 of seller-note interest income, $2 of revenue-share income, and a $10 pre-tax post-close adjustment associated with the HOS sale.
- The New York sale generated $608 in cash proceeds and a $2 loss on sale in Q1. The company also completed the sale of its Michigan operations for $6. HOS sale proceeds included a $720 seller note and a contingent payment valued at $72; the note bears 7% annual interest and has a five-year term.
- Operating cash flow was lower, in part because of working-capital movements and payment of a $45 charitable foundation contribution accrued in 2021. Investing cash flow was positive $159, largely due to New York sale proceeds, while financing used $353, including $263 of net short-term debt repayments and $109 of dividends.
Outlook, risks and contingencies
- Management plans approximately $2.5 billion of investment across its footprint in 2022; $437 was invested in Q1, primarily in regulated businesses. It expects capital investment over the next several years to exceed operating cash flow and anticipates funding the gap with debt, equity, and proceeds from the HOS and New York sales. No full-year earnings or revenue guidance is stated in the supplied filing text.
- Growth plans include regulated acquisitions. Pennsylvania regulators approved the proposed $235 purchase of York City wastewater assets on April 14, 2022; closing was expected by or before mid-June, subject to conditions. The company also had pending acquisition agreements expected to add approximately 77,300 customers.
- California’s Monterey Peninsula Water Supply Project remains subject to permitting and regulatory review, with coastal permit applications pending. Cal Am had incurred $192 in project costs, including $50 of allowance for funds used during construction, and cannot assure full recovery of costs. Compliance with future Carmel River diversion limits depends on developing alternative water supplies; noncompliance could result in additional costs, fines, or penalties.
- Other material uncertainties include regulatory rate outcomes, infrastructure and supply-chain costs, inflation and interest rates, access to capital markets, weather and water supply, aging infrastructure, cybersecurity, and litigation. The company reported approximately $6 of accrued probable loss contingencies and $3 as the estimated maximum of reasonably possible losses that could be reasonably estimated; some matters could not be estimated.
- Class actions related to West Virginia and Tennessee water-main incidents remain pending; the company says it cannot currently estimate possible losses. The Monterey Peninsula water-system condemnation effort also remains contested, and a Chicago-area pipeline valuation trial was scheduled for June 2022.
- The filing says there were no material changes to previously disclosed risk factors, no significant changes in market-risk exposure, and disclosure controls were effective at a reasonable level of assurance.
Most important facts for investors to verify
- How much reported revenue and earnings growth is sustainable after accounting for the HOS and New York divestitures and HOS-related seller-note and revenue-share income.
- Progress and final regulatory outcomes for rate cases, infrastructure surcharges, and the York City and other pending acquisitions.
- Funding needs for the planned $2.5 billion 2022 investment program, debt and equity issuance, and continued covenant and liquidity capacity.
- Permitting, cost recovery, and timing for the Monterey water-supply project, including the company’s ability to comply with Carmel River diversion requirements.
- Developments in pending class actions, condemnation proceedings, and other contingencies for which losses are not currently estimable.