American Water Works Company, Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. American Water’s principal business is regulated water and wastewater utilities, alongside market-based services. Results are seasonal; first-quarter performance is not necessarily indicative of full-year results. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $813 | $761 | +$52; 6.8% |
| Operating income | $238 | $217 | +$21; 9.7% |
| Net income attributable to common shareholders | $113 | $106 | +$7; 6.6% |
| Diluted EPS | $0.62 | $0.59 | +$0.03 |
| Adjusted diluted EPS (non-GAAP) | $0.61 | $0.59 | +$0.02; 3.4% |
| Cash from operating activities | $168 | $219 | -$51 |
| Capital expenditures, cash-flow statement | $326 | $364 | -$38 |
- Operating margin was approximately 29.3%, versus 28.5% in Q1 2018; net margin was approximately 13.9% in both periods.
- Revenue growth reflected a $19 increase in regulated businesses and a $34 increase in market-based businesses. Regulated revenue benefited from rate increases and surcharges; market-based growth chiefly reflected the Pivotal acquisition and new military contracts.
- Regulated billed water volumes fell 3.8%. Rate increases and surcharges more than offset lower demand, which reduced regulated revenue by $10.
- Operating expenses rose 5.7% to $575, including 11.6% higher depreciation and amortization. Net interest expense increased $9 to $93, partly offsetting operating growth.
- Operating cash flow declined mainly because of working-capital timing and other non-cash items. Management notes that operating cash flows are generally greater in warmer months.
- At March 31, cash and cash equivalents were $63 and restricted funds were $22. Current assets were $691 and current liabilities $2,156. Long-term debt was $7,562, current long-term debt $68, and short-term debt $1,201. The covenant debt-to-capitalization ratio was 0.60, within the 0.70 maximum.
- The $2.25 billion revolving facility had approximately $2.17 billion available; $1.2 billion of commercial paper was outstanding. Total capitalization was $13.5 billion and shareholders’ equity $5.932 billion.
Material changes and operating developments
- Regulated businesses generated $685 of revenue and $110 of net income attributable to common shareholders. Market-based businesses generated $134 of revenue and $20 of net income.
- The company closed three regulated-system acquisitions in Q1 for $22 and reported five acquisitions year to date, adding about 4,700 customers. Agreements for pending regulated acquisitions would add approximately 61,500 customers.
- The West Virginia rate-case settlement authorized $19 of annualized additional revenue effective February 25, 2019. Other rate cases and infrastructure surcharges effective during the quarter authorized a further $11 annualized. Additional authorizations totaling $6 became effective April 1.
- The adjusted regulated-business O&M efficiency ratio was 35.5% for the twelve months ended March 31, 2019, versus 35.6% a year earlier. This is a company-defined non-GAAP measure.
- Operating lease assets and liabilities were recognized upon adoption of the new lease standard. Adoption recorded approximately $117 of right-of-use assets and $115 of liabilities at January 1, 2019, with no material effect on results or cash flows.
Outlook, risks, contingencies, and unusual items
- Management expects 2019 capital investments, including acquisitions, of $1.7 billion to $1.8 billion. No full-year EPS guidance is provided in the supplied filing text.
- Q1 GAAP diluted EPS included a benefit from reducing the Freedom Industries settlement liability. The company excluded this item, net of tax, to report adjusted diluted EPS of $0.61. The filing identifies the net adjustment as negative $0.01 per share.
- The company reported approximately $28 of accrued probable loss contingencies and up to $24 of reasonably possible losses that it could estimate; it could not estimate losses for certain other matters. The Dunbar, West Virginia water-main-break class action remains pending, and the company says it cannot reasonably estimate possible losses.
- Monterey water-supply and desalination project approvals and permitting remain subject to litigation and regulatory processes. The company estimates the earliest completion date for the desalination plant as sometime in 2021 and cautions that completion is uncertain and could entail additional costs.
- Municipal acquisition or condemnation risk includes the Monterey service territory and a Chicago-area pipeline dispute. The filing describes potential multi-year proceedings and valuation uncertainty.
- On April 1, 2019, Moody’s lowered the senior unsecured debt rating to Baa1 from A3, with a stable outlook; the commercial-paper rating was unchanged. The filing reports no rating-triggered default or prepayment, but a downgrade could increase financing costs or prompt counterparties to seek assurance.
- Other material risks include rate-case outcomes, water demand and supply, weather and natural disasters, infrastructure and cybersecurity, environmental and water-quality regulation, interest rates, access to capital, and execution of acquisitions and projects. The company reported no material changes to the risk factors in its 2018 Form 10-K.
- The board declared a quarterly dividend of $0.50 per share, payable June 4, 2019. Future dividends remain subject to board discretion, earnings, cash flow, and other requirements.
Important facts for investors to verify
- Whether operating cash flow recovers from Q1’s working-capital-driven decline as seasonal demand strengthens, while the company funds its capital program and dividends.
- Progress and final costs of the planned $1.7 billion to $1.8 billion 2019 investment program, and the timing and approval of pending acquisitions and rate requests.
- Whether the Moody’s downgrade affects borrowing costs, commercial-paper access, or counterparties’ collateral demands.
- Developments in the Dunbar litigation, Monterey project permitting and litigation, and municipal condemnation proceedings.
- How lower water volumes, regulatory decisions, tax-related customer rate adjustments, and market-based business growth affect ongoing earnings and the non-GAAP efficiency ratio.