American Water Works Company, Inc. quarterly report, Q3 FY2022

American Water Works Company, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022. Amounts are in millions of dollars except per-share data. American Water primarily owns regulated water and wastewater utilities, alongside smaller market-based businesses.

Financial performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Operating revenue	$1,082	$1,092	$2,861	$2,979
Operating income	$439	$417	$1,012	$976
Net income attributable to common shareholders	$297	$278	$673	$618
Diluted EPS	$1.63	$1.53	$3.70	$3.40
Operating cash flow	Not separately presented	Not separately presented	$764	$1,029
Capital expenditures	Not separately presented	Not separately presented	$1,597	$1,205

For the quarter, revenue decreased about 1%, while net income rose about 7% and diluted EPS rose about 7%. For the first nine months, revenue declined about 4%, while net income increased about 9% and diluted EPS about 9%.
Regulated Businesses revenue increased to $1,003 from $944 in Q3 and to $2,646 from $2,556 year to date. The consolidated revenue decline largely reflects the sale of Homeowner Services Group (HOS) and the New York utility operations, rather than a decline in comparable regulated revenue.
Management attributed regulated revenue growth mainly to rate increases and infrastructure surcharges, acquisitions and organic growth, and warmer, drier weather. Q3 weather contributed an estimated $0.06 per share favorably.
Consolidated operating margin was approximately 40.6% in Q3 versus 38.2% a year earlier, and 35.4% for the first nine months versus 32.8%. These are calculated from reported operating income and revenue.
Operating cash flow declined $265 year to date, primarily due to working-capital and deferred-tax movements, including $313 of estimated tax payments related to the HOS and New York sales and a $45 contribution to the American Water Charitable Foundation. Investing cash outflows were $1,362, including $1,597 of capital expenditures and $288 for acquisitions, partly offset by $608 of sale proceeds.
At September 30, cash and cash equivalents were $77; total available liquidity, including undrawn revolving credit capacity, was $1,618. Short-term debt was $634 and current long-term debt was $265; long-term debt was $10,940. The debt-to-capitalization ratio under the relevant covenant was 0.60, within the 0.70 maximum.
American Water issued $800 of 4.45% senior notes due 2032 in May. The weighted-average rate on commercial paper rose to 3.22% from 0.20% at year-end 2021. On October 26, after quarter-end, the revolving facility was expanded to $2.75 billion and extended to October 2027; the commercial paper program limit increased to $2.60 billion.
Quarterly dividends paid were $0.655 per share. The Board declared the same amount for payment December 1, 2022.

Material changes and significant items

HOS was sold in December 2021 and New York regulated operations were sold on January 1, 2022; Michigan operations were sold in February 2022. New York sale proceeds were $608. The prior-year HOS and New York results therefore limit direct consolidated comparisons.
HOS sale consideration included a $720 seller note bearing 7% interest and a contingent payment of up to $75. The note’s carrying amount was $720, while its estimated fair value at September 30 was $681. The Company recorded $38 of seller-note interest income, $6 of revenue-share income, and $20 of post-closing sale adjustments during the first nine months of 2022.
Rate authorizations effective during 2022 included $61 of annualized incremental revenue in New Jersey and $15 in West Virginia, in addition to rate and surcharge changes in other states. Pennsylvania’s tax-rate reduction led to a $132 reduction in deferred-tax liabilities and a corresponding regulatory liability expected to be returned to customers; Iowa’s comparable amounts were $1.
The Company acquired York’s wastewater system for $235 and completed 14 other regulated-system acquisitions for $73 during the first nine months, adding about 65,300 customers in total. It also reported approximately 14,000 customers from organic growth.
The adjusted regulated O&M efficiency ratio, a non-GAAP measure, improved to 33.6% for the twelve months ended September 30, from 33.9% a year earlier.

Outlook, commentary and risks

Management planned approximately $2.5 billion of investment across its footprint in 2022; $1.9 billion had been invested in the first nine months. Management expects capital investment to exceed operating cash flow over the next several years and anticipates funding the excess through debt, equity, and proceeds from asset sales. The filing does not provide a clear full-year EPS guidance figure.
Inflation increased fuel, power and chemical costs; regulated O&M expense excluding the sold New York operations rose $29 in Q3 and $44 year to date. Interest expense also increased. Management cited rate implementation, acquisitions and organic growth as key earnings drivers.
Pending rate proceedings include requests in California, Missouri, Pennsylvania, Illinois and Virginia. A Pennsylvania settlement proposal would provide a $138 annualized increase including agreed tax-related reductions, subject to regulatory approval. Outcomes and timing remain uncertain.
The Monterey Peninsula Water Supply Project remains subject to permits and regulatory review. Cal Am had incurred $206 in project costs through September 30, including $55 of allowance for funds used during construction. The Coastal Commission deemed a permit application complete, but approval and cost recovery are not assured. Continued compliance with Carmel River diversion limits depends on developing alternative supplies; noncompliance could result in additional costs, fines or penalties.
Other material risks include aging infrastructure, supply-chain and cost pressures, interest-rate and capital-market access, regulatory decisions, weather and water availability, cybersecurity, and litigation. The Company could not estimate potential losses in the Dunbar and Chattanooga water-main class actions. It reported approximately $4 of accrued probable loss contingencies and $3 of reasonably possible losses that could be estimated; some matters remain unquantifiable.
The Company reported that disclosure controls were effective at a reasonable level of assurance and that there were no material changes in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Progress and final outcomes in major rate cases, including Pennsylvania, Illinois and Virginia, and the amount and timing of approved revenue increases.
Permitting, construction schedule, cost caps and recoverability of Monterey Peninsula Water Supply Project spending, as well as compliance with Carmel River diversion requirements.
Funding needs for the capital program, debt issuance and refinancing costs, available liquidity, and the effects of higher rates on interest expense.
Collection of the HOS seller note and the conditions for receiving its contingent payment; distinguish recurring utility earnings from related sale proceeds and income.
Developments in the Dunbar and Chattanooga litigation and the U.S. Attorney’s investigation involving a former HOS subsidiary employee.