American Water Works Company, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 25, 2011. This is an annual report, not a standalone fourth-quarter filing. The filing also provides unaudited Q4 results.
Business context
American Water is a regulated water and wastewater utility with market-based service businesses. It served approximately 15 million people across more than 30 states and two Canadian provinces. Regulated Businesses generated 89.4% of consolidated operating revenue; Market-Based Operations provide contract operations, homeowner service-line protection, and biosolids services.
Financial and operating results
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Operating revenue | $2,710.7 million | $2,440.7 million |
| Operating income | $748.1 million | $173.6 million |
| Net income (loss) | $267.8 million | ($233.1 million) |
| Diluted EPS | $1.53 | ($1.39) |
| Cash from operating activities | $774.9 million | $596.2 million |
| Capital expenditures | $765.6 million | $785.3 million |
| Dividends per common share | $0.86 | $0.82 |
Revenue increased 11.1%, driven mainly by regulated rate increases and higher sales volumes, plus market-based contract growth. Operating margin was approximately 27.6% in 2010 versus 7.1% in 2009; the comparison is heavily affected by 2009’s $450.0 million goodwill impairment. Excluding that charge, 2009 operating income was approximately $623.6 million, or a 25.6% margin. Net margin was approximately 9.9% in 2010.
Regulated revenue rose 9.8% to $2,424.2 million; segment Adjusted EBIT increased to $721.2 million from $591.6 million. Market-Based revenue rose 21.0% to $311.8 million and Adjusted EBIT increased to $27.0 million from $21.3 million. The company reported interest expense, net, of $315.0 million, up $18.5 million, mainly reflecting long-term refinancing and borrowing for capital spending.
Q4 2010 revenue was $664.5 million, operating income $152.1 million, net income $40.2 million, and diluted EPS $0.23. Q4 2009 comparables were $597.8 million, $137.4 million, $36.4 million, and $0.21, respectively.
Debt, liquidity, and capital
At year-end, total debt and redeemable preferred stock were $5.71 billion, including $5.68 billion of short- and long-term debt. Cash was $13.1 million; working capital was in deficit, with no clear deficit amount stated in the cited discussion. Short-term debt was $229.7 million, including $175.3 million of commercial paper. The $850 million revolving facility had $810.5 million of available capacity at December 31, 2010; the company reported compliance with its 0.70 maximum debt-to-capitalization covenant, at 0.58. Ratings were Baa2/P2 from Moody’s and BBB+/A2 from S&P, both with stable outlooks.
Operating cash flow exceeded capital expenditures by only about $9.3 million before dividends and other investing needs. The company paid $150.3 million in common dividends. It expects to finance future investment through operating cash flow and external debt or equity as needed.
Changes versus prior period
- Revenue rose $270.0 million year over year, including a 9.8% increase in regulated revenue and a 21.0% increase in market-based revenue.
- Net income swung from a 2009 loss to profit, substantially because there was no 2010 goodwill impairment; 2009 included a $450.0 million noncash charge.
- Operating and maintenance expense increased 8.2% to $1.39 billion, led by higher employee-related costs (up 11.7%), maintenance costs (up 25.2%), and production costs (up 7.7%).
- Operating cash flow increased $178.8 million. Capital spending declined 2.5%, partly due to weather-related construction delays and lower treatment-plant spending than in 2009.
- Debt and redeemable preferred stock increased from $5.49 billion to $5.71 billion; common dividends per share rose from $0.82 to $0.86.
Outlook, commentary, and material items
- Management estimated company-funded capital investment of $800 million to $1 billion annually, including infrastructure renewal and regulatory projects. It expected to continue filing rate cases and pursuing infrastructure surcharges to mitigate regulatory lag.
- Management anticipated continued pressure from weak economic conditions and declining residential water use. It reported long-term per-customer usage declines of approximately 0.5% to 2% annually across states, despite higher total water volumes in 2010 than in 2009.
- A strategic portfolio review included a pending purchase of 11 water and 59 wastewater systems in Missouri for approximately $3 million, subject to approval, and an agreed sale of Texas systems for approximately $6 million. In January 2011, the company agreed to sell its Arizona and New Mexico subsidiaries for approximately $470 million, subject to regulatory approval; proceeds were intended to reduce debt and equity financing.
- A multi-year business transformation program was expected to cost up to $280 million; $34.5 million had been spent through year-end 2010. Implementation was targeted for completion by the end of 2014. Cost overruns, delays, realization of efficiencies, and rate recovery remain risks.
- California-American Water faced a state cease-and-desist order requiring reductions and eventual cessation of unpermitted Carmel River diversions by 2016. The company appealed; a regional desalination project was approved by the state PUC, but costs, timing, and compliance remain material considerations. The company also had an ongoing steelhead conservation agreement with scheduled payments through 2016.
- Seven local union contracts covering approximately 1,000 employees had expired without new agreements by year-end; the national benefits agreement was at impasse. Management did not expect a system-wide stoppage but had contingency plans.
- Other risks include rate-case delays or disallowances, environmental compliance and remediation, drought and weather, infrastructure failures, pension funding, financing access and interest rates, and goodwill impairment. Goodwill was $1.25 billion; no impairment was recorded in 2010.
- The auditor gave an unqualified opinion on the financial statements and reported effective internal control over financial reporting at year-end. Previously identified material weaknesses were reported as remediated.
Key facts investors should verify
- Whether approved and pending rate increases, infrastructure surcharges, and other regulatory mechanisms deliver timely recovery of capital and operating costs.
- Execution and funding of the $800 million–$1 billion annual capital program, including the transformation initiative and its expected savings and rate recovery.
- Progress, required approvals, closing terms, and use of proceeds for the Missouri, Texas, Arizona, and New Mexico transactions.
- Debt refinancing needs, liquidity availability, covenant compliance, interest-rate exposure, and the sustainability of dividends alongside capital spending.
- Developments in the Carmel River order and desalination project, environmental proceedings, union negotiations, and pension contributions.
- Whether customer growth and rate increases can offset conservation-driven declines in per-customer water usage and changing weather conditions.