American Water Works Company, Inc. — 2012 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2012, with fourth-quarter comparative data. American Water provides water, wastewater and related services to an estimated 14 million people across more than 30 U.S. states and two Canadian provinces. Regulated utilities generated 89.1% of 2012 operating revenue; Market-Based Operations generated the balance. Financial comparisons below generally reflect continuing operations unless noted.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $2,876.9 million | $2,666.2 million | +7.9% |
| Operating income | $925.0 million | $803.1 million | +15.2% |
| Income from continuing operations | $374.3 million | $304.9 million | +22.7% |
| Net income, including discontinued operations | $358.1 million | $309.6 million | +15.7% |
| Diluted EPS from continuing operations | $2.11 | $1.73 | +22.0% |
| Cash provided by operating activities | $955.6 million | $808.4 million | +18.2% |
| Capital expenditures | $928.6 million | $924.9 million | +0.4% |
| Cash and cash equivalents at year-end | $24.4 million | $14.2 million | +$10.2 million |
| Debt and redeemable preferred stock | $5,595.3 million | $5,905.0 million | -$309.7 million |
- Operating margin was approximately 32.2% in 2012 versus 30.1% in 2011; net margin was approximately 12.4% versus 11.6%.
- Regulated revenue rose 8.3% to $2,564.4 million, primarily from rate increases, higher water use in warmer and drier weather, and the New York acquisition. Market-Based revenue increased 0.8% to $330.3 million.
- The regulated O&M efficiency ratio, a non-GAAP measure, improved to 40.1% from 42.4%. Consolidated O&M expense rose 3.7%; depreciation and amortization rose 8.4%, reflecting plant placed in service.
- Working capital was in deficit: year-end current assets of $499.4 million compared with current liabilities of $994.8 million. The company reported a $1.0 billion revolving credit facility, $270.0 million of commercial paper outstanding, and $967.1 million of available facility capacity at year-end. Debt covenants were met.
- Dividends paid were $213.5 million, or $1.21 per share. The company said operations and external financing would fund its substantial investment needs.
Material changes versus the prior comparable period
- Continuing-operations income increased substantially, driven mainly by rate increases and higher customer usage; regulated revenue was up $195.5 million. Favorable weather contributed an estimated $39.1 million to regulated revenue growth.
- Operating expenses increased, including higher O&M, depreciation and general taxes. O&M increases included purchased water, contracted services and business-transformation support; reduced employee-related costs partly offset these items.
- Operating cash flow increased by $147.2 million, mainly from increased revenues and lower pension and postretirement contributions. Capital spending remained near $929 million.
- Portfolio changes included the sale of Arizona and New Mexico operations for net proceeds of $458.9 million and Ohio operations for $102.2 million; ten regulated-system acquisitions cost $44.6 million, including the New York acquisition that added about 50,000 customers.
- Discontinued operations recorded a $16.2 million after-tax loss in 2012, compared with $4.7 million of income in 2011. The 2012 result included losses associated with the Arizona, New Mexico and Ohio divestitures.
- Fourth-quarter revenue increased to $680.9 million from $639.8 million, but operating income fell to $167.0 million from $177.1 million; continuing-operations income declined to $54.2 million from $60.9 million.
Outlook, management commentary, risks and contingencies
- Management expects approximately $950 million of company-funded capital investment in 2013 and estimates annual investment of $800 million to $1 billion in subsequent years. It expects to file up to four general rate cases and pursue infrastructure surcharges.
- The company aims to reduce its regulated O&M efficiency ratio below 40%, a five-year goal established in 2011, one to two years ahead of schedule. Phase II of its business-transformation program was expected to be substantially complete by December 31, 2013; $257.8 million had been spent on the program through year-end 2012.
- Rate-setting and regulatory lag, declining per-customer water use, weather and drought, water-supply constraints, environmental rules, infrastructure reliability, financing access, interest rates, pension obligations and execution of the business-transformation program are material risks.
- California-American Water faces a deadline to end unpermitted Carmel River diversions by December 31, 2016. Its proposed Monterey Peninsula water-supply project was estimated to cost $330 million to $384 million and required regulatory and other approvals; the company said it did not expect a project to be operational by the deadline based on the then-current schedule. Related disputes and settlement terms remained subject to approvals and litigation.
- In Illinois, a municipal water agency voted to pursue eminent domain and filed a case in January 2013 concerning a pipeline; its reported offer increased from $34 million to $37.6 million. The company disputed that condemnation posed a material threat to its operations.
- A labor ruling concerning the implementation of employee benefit terms was under appeal. If upheld, estimated cash impact was $2.5 million to $3.5 million per year, depending on how long the matter remained unresolved.
- Other notable items include Hurricane Sandy impacts and recovery claims, a 2012 New Jersey treatment-plant pipe-bridge collapse under regulatory review, and the approved San Clemente Dam removal project with approximately $49 million of prospective costs and about $27 million of historical costs authorized for rate recovery.
- The company reported no goodwill impairment in continuing operations for 2012. Its auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether rate-case and infrastructure-surcharge approvals support recovery of capital spending and operating-cost increases, and whether usage growth persists without favorable weather.
- Funding needs for the planned capital program, debt maturities and refinancing, liquidity under the revolving facility, and the effect of dividends on internally available cash.
- Progress, cost and expected benefits of the business-transformation program, including completion of Phase II and any effects on customer service or financial controls.
- Regulatory approvals, schedule, final cost and rate recovery for the Monterey Peninsula water-supply project, along with exposure related to Carmel River diversions and associated disputes.
- Outcomes and potential financial effects of the labor appeal, Illinois condemnation case, New Jersey reliability review and other disclosed contingencies.