American Water Works Company, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in millions of dollars unless stated otherwise. American Water provides regulated water and wastewater services and complementary market-based services. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,079 | $1,013 | $2,854 | $2,708 |
| Operating income | $433 | $406 | $985 | $946 |
| Net income attributable to common shareholders | $264 | $240 | $564 | $523 |
| Diluted EPS | $1.46 | $1.33 | $3.11 | $2.89 |
| Operating margin (calculated) | 40.1% | 40.1% | 34.5% | 34.9% |
| Net margin (calculated) | 24.5% | 23.7% | 19.8% | 19.3% |
- For the nine months, operating cash flow was $988, versus $945 in 2019. Capital expenditures were $1,314, compared with $1,115; operating cash flow less capital expenditures was negative $326, versus negative $170.
- At September 30, cash and cash equivalents were $560; total available liquidity, including $1,629 of revolving-credit availability, was $2,189. Working capital was in deficit.
- Long-term debt was $9,580, short-term debt $1,044, and current maturities of long-term debt $67. The company reported aggregate debt, including redeemable preferred stock, of approximately $10.7 billion. Its debt-to-capitalization covenant ratio was 0.62 against a 0.70 limit.
- Quarterly dividend declared was $0.55 per share. Nine-month dividends paid were $290.
Material changes and drivers
- Q3 revenue increased $66 (about 6.5%) and net income increased $24 (10%) year over year. Nine-month revenue rose $146 (about 5.4%) and net income rose $41 (about 7.8%).
- Regulated revenue growth reflected authorized rate increases, acquisitions and organic growth, and higher demand. Q3 demand benefited from warmer, drier weather and increased residential use during the pandemic; management estimated $14 of favorable weather impact and $10 of favorable COVID-related revenue impact.
- Regulated revenue increases were partly offset by lower commercial and industrial volumes in some periods. COVID-related impacts also included higher uncollectible-account expense, incremental operating costs, additional debt costs, and waived late and reconnect fees.
- O&M expense rose $25 in Q3 and $57 for the nine months, including higher employee, production, supplies and technology costs. Nine-month results also compared against a $4 benefit recorded in 2019 related to the Freedom Industries settlement.
- Nine-month operating cash flow increased $43, while investing cash use rose $192, primarily because of greater infrastructure investment. Financing cash flow was $966, versus $266, reflecting the $500 term-loan borrowing and other financing changes.
Outlook, commentary and material risks
- Management planned approximately $1.9 billion of 2020 investment across its footprint. It reported $1.31 billion of regulated capital investment and $59 million spent on 15 regulated-system acquisitions through September; additional acquisitions closed or were pending after quarter-end.
- The company stated that existing liquidity should meet cash requirements for the foreseeable future, while cautioning that COVID-19 and capital-market conditions could change liquidity needs and financing access. The $500 term loan matures in March 2021; the additional $250 million borrowing option expired unused.
- COVID-19 cost-recovery protection remained jurisdiction-dependent. As of November 4, 2020, 11 of 14 jurisdictions had authorized deferred accounting, two had approved specified recovery mechanisms, and proceedings remained pending in three. The company recorded $29 of COVID-related regulatory assets and $3 of regulatory liabilities.
- The proposed sale of the New York subsidiary, with approximately 125,000 customer connections, was for about $608 million in cash subject to adjustments and approvals. Management expected completion in early 2021; the subsidiary was classified as held for sale.
- California’s Monterey Peninsula Water Supply Project faced permitting opposition, litigation and a stay on physical plant construction. Cal Am had incurred $147 in project costs, including $33 of AFUDC, and could not assure full recovery of costs or timely completion. Delays could impede compliance with Carmel River diversion orders and expose the subsidiary to additional costs, fines or penalties.
- Other significant exposures include regulatory decisions and rate recovery, water demand and weather, aging infrastructure, capital-market access and interest rates, and ongoing water-main-break litigation. The company reported approximately $10 of accrued probable loss contingencies; it could not estimate potential losses in certain proceedings.
- Management cited an adjusted regulated O&M efficiency ratio of 34.2% for the trailing twelve months, improved from 34.8% a year earlier. This is a non-GAAP measure and may not be comparable across companies.
Important facts for investors to verify
- Progress and final approvals for the New York sale, including closing timing and proceeds after adjustments.
- Regulatory treatment and recovery of COVID-19 costs, and the effect of pandemic-related demand, arrears and customer protections.
- Monterey project permitting, construction schedule, cost recovery, and compliance with Carmel River diversion requirements.
- Execution and funding of planned capital investment, debt maturities and refinancing needs, and continued covenant and credit-rating capacity.
- Rate-case outcomes and the extent to which authorized rates and infrastructure surcharges support earnings and cash flow.