American Water Works Company, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, filed February 24, 2021. The filing is an annual report; quarterly data are unaudited. American Water provides water and wastewater services to more than 15 million people. Its regulated utilities generated 86% of 2020 operating revenue.
Financial results and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $3.777 billion | $3.610 billion | +4.6% |
| Operating income | $1.248 billion | $1.170 billion | +6.7% |
| Net income attributable to common shareholders | $709 million | $621 million | +14.2% |
| Diluted EPS | $3.91 | $3.43 | +14.0% |
| Operating margin | 33.0% | 32.4% | +0.6 percentage points |
| Operating cash flow | $1.426 billion | $1.383 billion | +$43 million |
| Capital expenditures | $1.822 billion | $1.654 billion | +$168 million |
- Operating cash flow less capital expenditures was approximately negative $396 million, compared with negative $271 million in 2019.
- Total debt was approximately $10.9 billion. Cash was $547 million; available liquidity, including unused revolving-credit capacity, was $1.935 billion. Working capital was negative approximately $975 million.
- The debt-to-capitalization covenant ratio was 0.63 against a maximum of 0.70. The $500 million variable-rate term loan was due to mature in March 2021; the company reported $329 million of 2021 debt maturities and sinking-fund payments, excluding that loan.
- Cash dividends declared were $2.20 per share, up from $2.00. The fourth-quarter unaudited results were revenue of $923 million and net income of $145 million, versus $902 million and $98 million, respectively, in Q4 2019.
Material changes and management commentary
- Regulated revenue increased $161 million, principally from $122 million in rate increases and infrastructure surcharges, $36 million from acquisitions and organic growth, and $16 million from demand. Residential demand rose during work-from-home activity, partly offset by lower commercial and industrial demand.
- Warmer, drier third-quarter weather contributed an estimated $0.07 to 2020 diluted EPS. The year-over-year earnings comparison also benefited from the $0.19-per-share after-tax loss on the Keystone business sale recorded in Q4 2019.
- Regulated-business net income was $715 million, up from $654 million. Market-based-business net income was $91 million, up from $46 million; revenue was essentially flat at $540 million.
- The adjusted regulated O&M efficiency ratio, a company-defined non-GAAP measure, improved to 34.3% from 34.5%. The company reported a 2020 federal effective tax rate of 23.3%, versus 25.4% in 2019.
Outlook, risks and contingencies
- Investment outlook: Management expects $10.3–$10.5 billion of investment during 2021–2025 and $22–$25 billion during 2021–2030, including acquisitions. Planned 2021 investment is $1.9 billion. The filing provides no explicit EPS or revenue guidance.
- COVID-19: Reported impacts included higher uncollectible-account expense, debt costs and O&M expense, and lower late and reconnect fees. At year-end, $30 million of related regulatory assets and $4 million of regulatory liabilities were recorded. Recovery is not assured in every jurisdiction; Kentucky denied the company’s deferral request.
- Monterey water supply: Delays and permitting disputes threaten completion of the desalination and related water-supply project. The California subsidiary said it did not expect to meet the December 31, 2021 Carmel River diversion deadline; noncompliance could bring material costs, fines or penalties. $154 million had been incurred on the project by year-end, and full cost recovery is uncertain.
- Pending New York sale: The company agreed to sell its New York subsidiary, serving approximately 125,000 customers, for about $608 million, subject to adjustments and approvals. The transaction remained pending and subject to closing conditions; a state municipalization study could affect timing or outcome.
- Other proceedings: Eminent-domain efforts involving the Monterey system and an Illinois pipeline remain material uncertainties. Class-action litigation relates to past water-main failures in West Virginia and Tennessee; the company could not estimate possible losses for those cases. The company accrued about $10 million for probable loss contingencies and estimated $4 million of reasonably possible losses where estimable; some matters could not be quantified.
- Key ongoing risks include regulatory decisions and lag in rate recovery, water quality and emerging contaminants, water supply and drought, aging infrastructure, severe weather, cyber or physical attacks, access to capital, and pension funding. The independent auditor reported effective internal control over financial reporting and identified accounting for rate regulation as a critical audit matter.
Important facts for investors to verify
- Progress on Monterey permits, construction, alternative water supply and compliance with Carmel River diversion orders, including potential penalties and project cost recovery.
- Status, final consideration and closing conditions for the proposed New York subsidiary sale.
- Final outcomes and timing of Missouri, Pennsylvania, Iowa and California rate proceedings, and the extent of COVID-19 cost recovery.
- Repayment or refinancing of the $500 million term loan and other 2021 maturities, and maintenance of debt covenants and liquidity.
- Updated exposure from lead-service-line replacement, emerging contaminant requirements, and pending eminent-domain and outage-related litigation.