American Water Works Company, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company primarily provides regulated water and wastewater services, alongside market-based businesses. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $937 | $999 | $1,779 | $1,887 |
| Operating income | $327 | $330 | $573 | $559 |
| Net income attributable to common shareholders | $218 | $207 | $376 | $340 |
| Diluted EPS | $1.20 | $1.14 | $2.07 | $1.87 |
| Operating margin | 34.9% | 33.0% | 32.2% | 29.6% |
| Net margin | 23.3% | 20.7% | 21.1% | 18.0% |
Revenue fell year over year, largely reflecting the sale of Homeowner Services Group (HOS) and the New York utility. Regulated Businesses revenue increased to $865 million from $857 million in Q2 and to $1,643 million from $1,612 million year to date, excluding neither divestiture effects nor other adjustments. Management attributed regulated growth principally to authorized rate increases and infrastructure surcharges, acquisitions and organic growth. Lower demand partly offset growth; billed water volumes declined about 5% in both the quarter and first half.
GAAP diluted EPS rose $0.06 in Q2 and $0.20 year to date. Management cited regulated rate changes and infrastructure investment, partly offset by inflationary pressures estimated at $0.06–$0.08 per share year to date. 2022 results also included seller-note interest and revenue-share income after the HOS sale, and HOS sale post-close adjustments.
Cash flow, investment, debt and liquidity
- Operating cash flow was $196 million in the first half, down from $520 million. Management attributed the decline mainly to working-capital and deferred-tax movements, including $280 million of estimated tax payments on taxable gains from the HOS and New York sales and a $45 million contribution to the American Water Charitable Foundation.
- Capital expenditures were $995 million and acquisition spending was $240 million; net cash used in investing was $676 million. The company plans approximately $2.5 billion of investment across its footprint in 2022.
- Financing provided $441 million in the first half, including $811 million of long-term debt proceeds and $228 million of dividends paid. Cash, cash equivalents and restricted funds totaled $97 million at June 30.
- Long-term debt was $11.023 billion, current maturities were $178 million, and short-term debt was $420 million. On May 5, the company issued $800 million of 4.45% senior notes due 2032.
- Available liquidity was $1.826 billion, including $1.755 billion of remaining revolving-credit capacity. The company reported a 0.61-to-1 debt-to-capitalization covenant ratio against a maximum of 0.70 and was in compliance.
- Shareholders’ equity was $7.570 billion at June 30, compared with $7.298 billion at year-end 2021. The quarterly dividend was $0.655 per share.
Material changes, outlook and risks
- Completed the sale of New York regulated operations for $608 million on January 1, 2022, and Michigan operations for $6 million on February 4. The HOS sale closed in December 2021; its $720 million seller note bears 7% interest, and the company recognized $25 million of related interest income in the first half of 2022.
- Acquired the York, Pennsylvania wastewater system for $235 million and eight other regulated systems for $25 million during the first half. The York assets serve more than 45,000 customers. A further acquisition adding approximately 29,200 customers remained pending.
- The adjusted regulated O&M efficiency ratio improved to 33.7% for the twelve months ended June 30, from 33.9% a year earlier. Management reported higher fuel, power and chemical costs in regulated operations, alongside increased depreciation from assets placed in service.
- No formal full-year EPS guidance is stated in the supplied filing text. Management expects capital investment to exceed operating cash flow over the next several years and plans to fund the gap with debt and equity, as needed, and proceeds from asset sales. It says it may defer some investment or other funding requirements if necessary.
- Pending rate cases seek additional annualized revenues in California, Missouri, Pennsylvania, Illinois, New Jersey and Virginia; these requests are subject to regulatory review, not guaranteed outcomes. New Pennsylvania and Kentucky infrastructure surcharges took effect July 1, 2022.
- Key exposures include inflation and higher financing costs, regulatory decisions and rate timing, water demand and weather, supply-chain costs, aging infrastructure, and capital-market access. California’s Monterey Peninsula water-supply project faces permitting and approval uncertainty; continued compliance with Carmel River diversion limits depends on alternative supplies, and noncompliance could bring additional costs, fines or penalties.
- Legal matters include class actions related to West Virginia and Chattanooga water-main incidents. The company says losses in those proceedings cannot currently be estimated. It reported no material changes to previously disclosed risk factors and stated disclosure controls were effective at a reasonable level of assurance.
Important facts for investors to verify
- Separate underlying regulated growth from revenue and expense declines caused by divestitures, particularly HOS and New York.
- Track the timing and final outcomes of pending rate cases, infrastructure surcharges and the California Monterey water-supply approvals.
- Assess whether operating cash flow can support the capital program and dividends, given high investment needs and planned reliance on external financing.
- Monitor debt costs, covenant headroom, credit ratings and the use of HOS/New York sale proceeds; review the seller note’s repayment and contingent HOS consideration.
- Follow demand, inflation-sensitive operating costs, litigation developments and any exposure to fines or unrecovered project costs.