American Water Works Company, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; amounts below are in millions except per-share data. American Water primarily operates regulated water and wastewater utilities, with military and municipal contract services reported in “Other.”
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,167 | $1,082 | $3,202 | $2,861 |
| Operating income | $478 | $439 | $1,205 | $1,012 |
| Net income attributable to common shareholders | $323 | $297 | $773 | $673 |
| Diluted EPS | $1.66 | $1.63 | $4.03 | $3.70 |
| Operating margin | 41.0% | 40.6% | 37.6% | 35.4% |
Cash flow and investment: Nine-month operating cash flow was $1,347, versus $764 a year earlier. Capital expenditures were $1,779, leaving operating cash flow less capital expenditures of negative $432 (versus negative $833). Investing activities used $1,928; financing activities provided $1,125. Capital expenditures acquired but unpaid at period-end were $348.
Debt and liquidity: At September 30, long-term debt was $11,698 and current maturities were $492; short-term debt was zero. Cash and cash equivalents were $628. Available liquidity, including $2,675 of remaining revolving-credit capacity, was $3,303. The company reported a debt-to-capitalization covenant ratio of 0.55 against a maximum of 0.70 and stated it was in compliance.
Changes versus prior comparable periods
- Q3 revenue rose $85, or about 8%; nine-month revenue rose $341, or about 12%. Management attributed growth primarily to authorized rate increases and infrastructure surcharges, with additional contributions from acquisitions and organic growth.
- Q3 net income increased $26 and nine-month net income increased $100. Diluted EPS rose $0.03 for Q3 and $0.33 year to date.
- Rate authorizations effective in 2023 represented $273 of annualized incremental revenue; infrastructure surcharge authorizations represented a further $86. These are annualized amounts, not revenue recognized solely in the reporting period.
- Operating costs also increased: nine-month regulated O&M expense rose $52, mainly from higher fuel, power and chemical costs; depreciation and amortization increased $42, primarily from infrastructure investment and acquisitions. Higher interest and pension costs partly offset operating gains.
- Management estimated warmer, drier weather increased 2023 EPS by $0.04 in Q3 and $0.11 year to date. The March 2023 equity offering’s share dilution reduced EPS by an estimated $0.12 and $0.22, respectively, approximately offset by avoided interest expense.
- Cash from operations increased substantially, partly reflecting deferred-tax and working-capital comparisons, including tax payments made in 2022 related to asset sales. The 2022 investing comparison included $608 of proceeds from the sale of New York regulated operations.
Outlook, management commentary and material risks
- Management planned approximately $2.9 billion of 2023 investment in infrastructure and regulated acquisitions; $1.8 billion had been invested in the first nine months. It expects capital investment over the next several years to exceed operating cash flow and anticipates funding the gap with debt, equity and remaining Homeowner Services Group sale proceeds. The filing provides no specific full-year EPS guidance.
- Management reported an adjusted regulated O&M efficiency ratio of 32.6% for the 12 months ended September 30, versus 33.6% a year earlier. This is a company-defined non-GAAP measure and may not be comparable across companies.
- The company estimated that the proposed federal PFAS drinking-water rules could require about $1 billion of capital investment over three to five years and about $50 million in annual operating expense, in today’s dollars. Estimates are preliminary and depend on the final rule and system-level analysis; the company is pursuing claims against PFAS manufacturers.
- Major regulatory matters include pending rate cases and surcharge requests, including Virginia, Kentucky, West Virginia, Indiana and California. Outcomes and timing are subject to regulatory review.
- California’s Monterey Peninsula water-supply project faces permitting, cost-recovery and litigation uncertainties. Cal Am had incurred $233 million through September 30, including $69 million of allowance for funds used during construction; full recovery of costs is not assured. The Monterey system also faces a potential eminent-domain action: the local district adopted a resolution authorizing suit, and a court decision issued after quarter-end directed reconsideration of the district’s application to become a retail water provider.
- Other contingencies include water-main-break class actions in West Virginia and Tennessee, for which the company says losses cannot currently be estimated. The West Virginia class trial on specified liability issues is set for September 2024; a proposed business-customer-only class in Tennessee remains pending.
- Financing included a March public offering of 12.65 million shares with approximately $1,688 million net proceeds and $1,035 million of 3.625% exchangeable notes due 2026. The notes are exchangeable into shares subject to specified terms. The $720 million Homeowner Services Group seller note bears 7% interest; a contingent payment of up to $75 million was subject to conditions by December 31, 2023.
- On October 26, 2023, after quarter-end, the company extended its $2.75 billion revolving credit facility to October 2028. Other key risks cited include rate-setting and regulatory decisions, weather and water availability, inflation and interest rates, aging infrastructure, supply constraints, cybersecurity, and access to capital markets.
Important facts for investors to verify
- Whether rate-case and surcharge approvals arrive on schedule and recover rising operating and infrastructure costs.
- The final PFAS rule, actual treatment requirements and costs, and potential recoveries from manufacturers.
- Monterey project permitting, cost recovery, water-supply compliance and condemnation developments.
- Funding needs and financing terms as planned capital investment exceeds operating cash flow; monitor debt, equity dilution, liquidity and covenant compliance.
- Collection of the HOS seller note and contingent consideration, and the outcomes or estimability of material litigation and other contingencies.