American Water Works Company, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless otherwise noted, financial amounts are in millions of dollars. American Water’s primary business is regulated water and wastewater utilities, supplemented by market-based water and wastewater services. Interim results are subject to seasonal demand fluctuations.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $936 | $930 | $2,536 | $2,500 |
| Operating income | $430 | $319 | $965 | $832 |
| Net income attributable to common stockholders | $203 | $148 | $427 | $367 |
| Diluted EPS (GAAP) | $1.13 | $0.83 | $2.39 | $2.05 |
| Adjusted diluted EPS (non-GAAP) | $1.08 | $1.05 | $2.34 | $2.27 |
- Q3 adjusted EPS rose 2.9%; nine-month adjusted EPS increased 3.1%. Management attributed underlying growth mainly to regulated infrastructure investment, acquisitions and organic growth, plus Homeowner Services Group growth.
- Q3 operating margin was approximately 45.9%, versus 34.3% a year earlier; the comparison is substantially affected by Freedom Industries settlement-related items in both periods. O&M expense fell $108 in Q3 and $121 for the nine months, while depreciation and amortization rose $9 and $28, respectively.
- Operating cash flow was $986 for the first nine months, compared with $945 in 2016. Capital expenditures were $964; net cash used in investing activities was $1,021. Cash at September 30 was $93.
- At September 30, total current assets were $860 and current liabilities $1,747. Debt consisted of $6,672 long-term debt, $687 current portion of long-term debt and $103 short-term debt. Stockholders’ equity was $5,518. The debt-to-capitalization covenant ratio was 0.58 to 1.00, within the 0.70 maximum.
- A $1.75 billion revolving credit facility had approximately $1.66 billion available for short-term liquidity and letters of credit. It supported $103 of commercial paper at quarter-end.
- Dividends declared were $0.415 per share in Q3, up from $0.375 a year earlier. Cash dividends paid during the nine months were $215.
Material changes and notable items
- Revenue increased 0.6% in Q3 and 1.4% for the nine months. Rate increases, infrastructure surcharges, acquisitions and organic growth were partly offset by lower water demand. Market-Based Businesses revenue declined, largely because of lower military-base capital upgrades and the completion of a large project in 2016.
- GAAP earnings comparisons reflect a $22 after-tax benefit in Q3 2017 from an insurance settlement related to the 2014 Freedom Industries spill, versus a $39 after-tax charge in Q3 2016 for the proposed global settlement. Q3 2017 also included a $6 pretax parent-company debt-extinguishment charge. Adjusted EPS excludes these specified items.
- In August, the company issued $1,350 of senior notes: $600 at 2.95% due 2027 and $750 at 3.75% due 2047. Proceeds funded debt prepayments, commercial paper repayment and general corporate purposes. The company paid a $34 make-whole premium to prepay older notes.
- New York and Illinois tax-law changes generated noncash parent-company charges of $4 and $3, respectively, in 2017. The effective tax rate was 40.3% in Q3 2017 versus 39.1% in Q3 2016.
- For the 12 months ended September 30, the adjusted O&M efficiency ratio improved to 34.2% from 34.9%, which management attributed primarily to higher regulated revenue.
Outlook, management commentary and risks
- Management expected 2017 capital investment, including regulated acquisitions, of approximately $1.65 billion. The estimate includes the anticipated approximately $159 McKeesport wastewater-system acquisition; regulatory approval was received October 26, but closing remained subject to conditions and was expected by year-end.
- The company reported a 50-year Wright-Patterson Air Force Base contract award with estimated revenue of approximately $490 over the contract term; military-contract revenue backlog was approximately $3.5 billion.
- Construction of the new Camden headquarters was estimated to cost up to $164, excluding tax incentives; approximately $36 had been spent through September and $72 was expected in 2017.
- No formal full-year earnings guidance is stated in the provided filing text. Pending rate cases and infrastructure surcharge requests could affect future revenue, but approvals and amounts are uncertain.
- The proposed $126 Freedom Industries settlement had preliminary court approval, not final approval. American Water Works’ subsidiary, WVAWC, was expected to contribute $43 net of the described insurance recovery. The opt-out and objection deadline was December 8, 2017, and a fairness hearing was scheduled for January 9, 2018. Further insurance recovery remained subject to arbitration.
- Other matters include a Dunbar, West Virginia water-main-break class action with losses not reasonably estimable; a California rate-administration proceeding with a potential penalty range discussed by the administrative law judge; and permitting, litigation and timing risks for the Monterey Peninsula water-supply project. The filing also identifies regulatory, weather, water-demand, infrastructure, cyber, financing, interest-rate, tax and environmental risks.
Important facts for investors to verify
- Whether the Freedom Industries settlement receives final approval, the level of claimant opt-outs, and the outcome of insurance arbitration.
- Actual closing terms and financing for the McKeesport acquisition and the realized 2017 capital-investment total.
- Outcomes and timing of pending rate cases, surcharge requests and the California penalty proceeding.
- Whether regulated revenue growth and efficiency gains persist despite lower demand and increased depreciation and interest expense.
- Debt, liquidity and dividend capacity after capital spending, debt refinancing and settlement payments.