American Water Works Company, Inc. — 2014 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; filed November 5, 2014. Unless stated otherwise, financial amounts below are in millions of dollars. American Water operates regulated water and wastewater utilities and market-based services. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $846.2 | $822.2 | $2,280.0 | $2,172.7 |
| Operating income | $337.3 | $323.2 | $779.5 | $730.5 |
| Income from continuing operations | $156.6 | $149.9 | $335.9 | $309.7 |
| Net income | $152.2 | $150.7 | $329.6 | $309.6 |
| Diluted EPS | $0.85 | $0.84 | $1.83 | $1.73 |
| Operating margin | 39.9% | 39.3% | 34.2% | 33.6% |
Revenue grew 2.9% in the quarter and 4.9% year to date. Continuing-operations income rose 4.5% and 8.4%, respectively. Regulated revenue benefited from rate increases, surcharges, balancing accounts and acquisitions, partly offset by lower consumption associated with cooler, wetter weather. Market-Based Operations revenue increased, led by military contract project activity and homeowner services growth.
Quarterly operating income improved despite higher consolidated operating expenses. Regulated O&M costs fell in the quarter, while Market-Based O&M rose with contract activity. For the first nine months, O&M increased 4.3% and depreciation and amortization increased 5.1%, reflecting higher activity and utility plant placed in service. Net interest expense declined versus 2013, principally reflecting prior refinancing savings. The regulated-business O&M efficiency ratio, a non-GAAP measure, improved to 32.6% for Q3 from 35.3%, and to 36.9% year to date from 38.5%.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $840.3, versus $688.7 in 2013. Capital expenditures were $664.9; net cash used in investing activities was $721.3.
- At September 30, cash and cash equivalents were $74.1. Current assets were $757.0 and current liabilities $1,058.9; the resulting current ratio was approximately 0.71. The company reported $1.21 billion of available revolving-credit capacity and $314.0 of commercial paper outstanding, with no revolver borrowings.
- Long-term debt was $5.54 billion on the balance sheet, and short-term debt was $314.0; the current portion of long-term debt was $55.6. Total long-term debt, including related adjustments, was reported as $5.61 billion in the debt note. The debt-to-capitalization covenant ratio was 0.55 against a maximum of 0.70.
- Common stockholders’ equity was $4.92 billion, up from $4.73 billion at December 31, 2013. The company issued $500 million of senior notes in August, primarily to refinance commercial paper and fund debt redemptions. Dividends declared were $0.31 per share in Q3; a further $0.31 quarterly dividend was declared for payment December 1, 2014.
- Management estimated a 2014 capital plan of approximately $1.0 billion, mainly for infrastructure and system improvements, plus up to $15 million for acquisitions and strategic investments. Nine acquisitions closed in the first nine months, adding approximately 2,100 water and 1,600 wastewater customers.
Material changes, outlook and commentary
- Rate activity: 2014 authorizations generated $5.0 million in annualized general-rate increases and $25.6 million in annualized infrastructure-charge increases through September. A California rate-case settlement, if approved, would provide $13.6 million of annualized 2015 revenue and specified escalations in 2016 and 2017. Rate requests in Indiana and California remained pending; approval was not assured.
- Terratec divestiture: The company classified its Canadian biosolids business as discontinued operations and expected the sale to close in Q4 2014. The nine-month discontinued-operations loss was $6.3, including an estimated $3.5 disposal loss; estimates remain subject to adjustment.
- Freedom Industries spill: The West Virginia chemical spill reduced pretax income by $0.5 in Q3 and $11.4 year to date. The company cited ongoing litigation and government investigation, asserted it has valid defenses, and warned that an adverse outcome could materially affect financial condition, results, cash flow, liquidity or reputation.
- Labor settlement: A post-quarter settlement established a 2014–2018 national benefits agreement and included a $10 million lump-sum payment. The majority was expected to be funded through a previously contributed VEBA trust and therefore not affect earnings.
- Other contingencies: The company had accrued approximately $3.2 for legal matters and said reasonably possible additional losses could range up to $31.1; some matters could not be estimated. A California environmental settlement required a $461,000 penalty. A Monterey Peninsula water-supply project faced permitting, property-access and litigation issues, with potential schedule implications.
- Management outlook: No earnings or EPS guidance is provided in the supplied filing text. Management emphasized regulatory progress, operating efficiency, capital investment, acquisitions and customer service. It cautioned that results are seasonal and that actual outcomes can differ from forward-looking statements.
- Controls and risk: Management concluded disclosure controls were effective at a reasonable level of assurance, and reported no material change in internal control over financial reporting. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Progress and timing of the Terratec sale, including the final disposal loss and any tax effects.
- Outcomes of pending rate cases and infrastructure-charge requests, including California and Indiana, and how much revenue is ultimately authorized.
- Cash collection trends and receivables aging following the customer-information-system implementation; management said collections improved but offered no assurance of sustained improvement.
- Exposure and developments in the Freedom Industries litigation and investigation, the Monterey water-supply project proceedings, and other legal or environmental matters.
- Execution and funding of the approximately $1.0 billion capital plan, future borrowing needs, and the ability to maintain covenant compliance and credit ratings.