American Water Works Company, Inc. — Q1 2013 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2013; comparison is with Q1 2012 unless otherwise noted. American Water operates regulated water and wastewater utilities and unregulated market-based services. Results are unaudited, cover continuing operations unless specified, and may not indicate full-year performance because of seasonality.
Financial performance and liquidity
- Revenue: $636.1 million, up 2.8%. Regulated Businesses revenue rose 5.8% to $573.2 million, primarily on rate increases; Market-Based Operations revenue fell 16.4% to $67.3 million.
- Profit: Operating income was $164.2 million, up 2.8%. Continuing-operations income was $57.6 million versus $49.3 million; diluted EPS was $0.32 versus $0.28. Net income was $57.6 million versus $41.8 million, which included a $7.5 million discontinued-operations loss in 2012.
- Margins: Operating margin was approximately 25.8%, broadly unchanged year over year. Continuing-operations net margin increased to approximately 9.1% from 8.0%.
- Cash flow and investment: Operating cash flow was $149.6 million versus $148.1 million. Capital expenditures were $213.1 million, implying approximately $63.5 million of negative operating cash flow after capex. Cash ended at $21.2 million. The company invested about $213 million in company-funded capital improvements.
- Debt and liquidity: Balance-sheet long-term debt was $5.18 billion; short-term debt was $333.8 million and current long-term debt was $115.9 million. Cash and current assets were $21.2 million and $491.9 million, respectively, against current liabilities of $958.3 million. A $1.0 billion revolving facility had $971.0 million available, with $29.0 million of letters of credit outstanding; commercial paper was $333.8 million. The company reported compliance with debt covenants and a debt-to-capitalization covenant ratio of 0.56:1.00.
- Equity and dividends: Stockholders’ equity was $4.51 billion. No common dividend was paid in Q1 2013; the company said the customary March payment had been made in December 2012 for tax reasons. In May, the board declared $0.28 per share, payable June 3, 2013.
Material changes versus Q1 2012
- Regulated rate increases and acquisitions lifted revenue, partly offset by lower water demand. Billed water volume declined across customer classes; total water sales were about 1.2% lower.
- Regulated O&M expense rose 4.3% to $268.9 million, while the company’s non-GAAP regulated O&M efficiency ratio improved to 42.9% from 43.6%, mainly because of revenue growth. Consolidated depreciation and amortization increased 8.2% to $99.6 million as additional plant entered service.
- Market-Based Operations pre-tax income fell $4.8 million to $5.7 million. Contract Operations revenue declined, largely from delayed military construction and ended municipal and industrial contracts.
- The effective tax rate on continuing operations fell to 35.1% from 41.8%, including a $3.3 million benefit from a Market-Based segment reorganization that enabled use of state tax loss carryforwards.
- Investing cash flow shifted to a $227.7 million use from $229.6 million provided in Q1 2012, when asset-sale proceeds included $461.1 million from the Arizona and New Mexico divestitures.
Outlook, commentary, risks and unusual items
- Management expected 2013 capital investment of approximately $950 million and planned up to four general rate cases plus infrastructure surcharge filings. It noted that requested rate increases are subject to regulatory approval and may not be granted in full.
- At the time of the filing, management cited pending rate requests in five states totaling $134.6 million in annualized revenue. Subsequent filings and rate actions described in the report included Pennsylvania and Iowa cases and Missouri infrastructure charges.
- Management reported five regulated-system acquisitions closed in Q1 for $2.8 million. A May 2 agreement to acquire a Virginia wastewater utility for $12.0 million cash plus approximately $13.8 million of assumed debt was expected to add about 20,000 customers.
- Phase II of the business transformation project—enterprise asset management and customer information systems—was expected to be substantially complete by year-end 2013. The filing says implementation is reasonably likely to significantly change internal controls over financial reporting, and the company cannot assure all impacts will be mitigated.
- For legal matters, approximately $2.4 million was accrued; additional losses could range up to $26.7 million, while losses on certain matters could not be estimated. Environmental remediation accruals were $4.4 million, including obligations under a conservation agreement.
- Military services contracts had estimated remaining contract revenue of $1.914 billion and are subject to customary federal termination provisions. Market risk had no significant change from year-end; interest-rate and equity-price exposures remain. Management cautioned that access to commercial paper and credit markets is not assured.
- The filing reported effective disclosure controls at a reasonable level of assurance and no material change in internal control during the quarter. It reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether rate-case and infrastructure surcharge requests are approved, and the timing and realized revenue impact.
- Whether lower billed water volumes persist and how usage trends affect regulated revenue and rate mechanisms.
- Execution and cost of the approximately $950 million capital program, including the transformation project and its control implications.
- Market-Based Operations recovery from delayed military construction and contract losses.
- Funding needs, commercial-paper access, interest costs, and the company’s capacity to maintain covenant compliance and credit ratings.
- Resolution and financial exposure of legal and environmental matters, including amounts beyond recorded accruals.
- Dividend policy and the significance of the shift in payment timing and subsequent $0.28-per-share declaration.