American Water Works Company, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company operates regulated water and wastewater utilities and market-based businesses. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Interim results are seasonal and not necessarily indicative of full-year results.
Financial results and position
- Third quarter: Revenue was $896.2 million, up 5.9% year over year; operating income was $361.3 million, up 7.1%; net income was $173.9 million, up 14.3%. Diluted EPS was $0.96 versus $0.85, including continuing-operations EPS of $0.96 versus $0.87.
- Nine months: Revenue was $2,376.4 million, up 4.2%; operating income was $843.1 million, up 8.2%; net income was $377.0 million, up 14.4%. Diluted EPS was $2.09 versus $1.83, including continuing-operations EPS of $2.09 versus $1.87. Prior-year results included discontinued Terratec operations and Freedom Industries spill costs.
- Margins: Operating margin was approximately 40.3% for Q3 (39.9% prior year) and 35.5% year to date (34.2% prior year). Net margin was approximately 19.4% for Q3 (18.0%) and 15.9% year to date (14.5%).
- Cash flow and investment: Nine-month operating cash flow was $855.6 million versus $840.3 million. Capital expenditures were $791.1 million versus $664.9 million, and acquisition-related cash outflow was $175.6 million. Investing cash outflow totaled $1,044.0 million; financing provided $240.5 million. Cash at September 30 was $75.2 million.
- Debt and liquidity: Long-term debt was $5,940.6 million, short-term debt $379.9 million, and current long-term debt $22.0 million. The debt-to-capitalization covenant ratio was 0.55 to 1.00 against a 0.70 maximum; the company reported compliance. A $1.25 billion revolving facility had $1,166.6 million of available capacity after letters of credit; commercial paper outstanding was $379.9 million. Moody’s upgraded long-term ratings to A3 in August; outlook was stable.
- Equity and shareholder returns: Stockholders’ equity was $5,165.5 million, up from $4,915.6 million at year-end 2014. The company paid a $0.34-per-share dividend in September and declared another $0.34 dividend for December. It repurchased 750,000 shares through September under its anti-dilution program.
Changes versus the prior comparable period
- Growth reflected regulated rate increases, infrastructure charges and demand, as well as military-services and homeowner-services contract growth and the Keystone acquisition. Q3 regulated revenue increased $27.0 million and market-based revenue $23.4 million; year-to-date increases were $43.5 million and $54.0 million, respectively.
- Year-to-date regulated O&M expense declined $26.6 million, supported by cost management and the absence of $10.3 million in 2014 Freedom Industries spill costs. Market-based O&M rose $48.0 million year to date, accompanying contract growth and Keystone.
- Net interest expense increased year to date by $6.1 million, primarily reflecting additional debt. Depreciation and amortization rose $9.1 million, mainly from utility plant placed in service.
- Adjusted regulated O&M efficiency ratio, a non-GAAP measure, improved to 35.8% for the twelve months ended September 30, 2015, from 36.8% a year earlier.
Outlook, management commentary and risks
- Management expected 2015 capital investment, including acquisitions, of $1.3–$1.4 billion, primarily for regulated infrastructure. The company was also considering a new headquarters project estimated to cost up to $165 million; no final commitment or location was stated.
- Rate authorizations effective in 2015 included $32.8 million of annualized general-rate increases and $25.7 million of infrastructure charges through September. As of November 4, the company was awaiting final orders in three states on requests totaling $69.5 million; approvals were not assured. Separate Missouri and Virginia cases requested approximately $25.2 million and $8.7 million, respectively.
- California drought restrictions reduced water usage; management said California revenue decoupling meant conservation reductions did not affect earnings. A California application sought recovery of approximately $43 million in under-collections over 20 years and changes to rate design and conservation plans; a decision was expected in mid-to-late 2016, subject to review of a subsequent regulatory ruling.
- The Freedom Industries spill litigation remained unresolved. A court certified certain liability issues but denied class certification for damages; any damages would be determined individually. The company said it could not reasonably estimate possible losses for these proceedings. Across other probable and reasonably possible contingencies, it reported approximately $3.6 million accrued and a $33.6 million maximum estimate for reasonably possible losses, excluding matters it could not estimate.
- Keystone added exposure to environmental regulation and potential remediation liabilities connected with its water-services work for oil and gas customers. Goodwill was $1.3 billion, including $102.8 million provisionally recorded for Keystone; impairment could materially affect reported results and capitalization.
- Management cited customer service, safety, growth and operational efficiency as priorities. The filing also notes seasonality, regulatory outcomes, financing-market access, interest rates and litigation as risks. Management reported disclosure controls effective at a reasonable level of assurance.
Investor verification points
- Track whether revenue and earnings growth persist after separating rate increases, demand, acquisitions and market-based contract activity.
- Compare planned capital spending and acquisition outlays with operating cash flow, borrowing needs and future rate recovery.
- Monitor pending rate cases, California drought-related regulatory recovery and the timing and terms of any authorizations.
- Follow Freedom Industries litigation and other contingencies, noting that the company could not estimate potential spill-related losses.
- Assess Keystone’s operating performance, environmental exposure and goodwill impairment risk, and confirm the final acquisition purchase-price allocation.
- Review debt levels, interest costs, credit ratings and revolving-facility availability as capital investment continues.