Business context and reporting period
American Water Works Company, Inc. is a U.S. water and wastewater utility with regulated businesses and market-based operations. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; interim results may be affected by seasonal demand.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $759.2 million | $724.3 million | $1,441.1 million | $1,360.4 million |
| Operating income | $253.8 million | $241.9 million | $439.9 million | $406.1 million |
| Net income | $109.3 million | $101.3 million | $177.4 million | $158.9 million |
| Diluted EPS | $0.61 | $0.57 | $0.99 | $0.89 |
| Operating margin | 33.4% | 33.4% | 30.5% | 29.9% |
- Operating cash flow for the first half was $450.6 million, versus $290.2 million a year earlier. Capital expenditures were $401.8 million; investing cash outflow was $438.2 million.
- At June 30, cash was $32.1 million. Short-term commercial paper was $702.4 million; long-term debt was $5,217.5 million and current maturities were $15.0 million. The company reported $1.21 billion of available revolving-credit capacity and no facility borrowings.
- Total assets were $15.43 billion and stockholders’ equity was $4.87 billion. The debt-to-capitalization covenant ratio was 0.55 to 1.00, below the 0.70 limit.
- The declared quarterly dividend rose to $0.31 per share from $0.28 in 2013.
Material changes versus the prior comparable period
- Second-quarter revenue rose 4.8%, net income 7.9%, and diluted EPS from $0.57 to $0.61. First-half revenue increased 5.9%, net income 11.7%, and diluted EPS from $0.89 to $0.99.
- Revenue growth primarily reflected regulated rate increases, surcharges, acquisitions and increased usage, along with growth in military contracts and homeowner services. First-half regulated revenue rose $64.6 million; market-based revenue increased $16.1 million.
- Operating and maintenance costs increased 6.1% in Q2 and 5.8% for the first half. Higher production, maintenance, customer-uncollectible and chemical-spill-related costs were partly offset by lower employee-related costs. Depreciation also increased as additional plant and systems entered service.
- Net interest expense declined year over year, with management citing savings from 2013 refinancings. The first-half 2013 tax rate benefited from a $3.3 million discrete tax benefit that did not recur.
- The regulated O&M efficiency ratio improved to 37.5% from 38.1% for Q2 and to 39.4% from 40.4% for the first half. These are non-GAAP measures.
Outlook, management commentary, risks and unusual items
- Management estimated a 2014 capital plan of up to $1.1 billion, including approximately $900 million to $1.0 billion for infrastructure and systems. This is a capital-spending plan, not earnings guidance; the filing provides no clear full-year EPS or revenue guidance.
- Management planned to pursue rate cases, infrastructure surcharges and other regulatory mechanisms. As of August 4, two state general rate cases seeking about $52 million of annualized revenue awaited final orders; approval was not assured. A California settlement proposing $13.6 million of 2015 annualized revenue remained subject to regulatory approval.
- The January 2014 Freedom Industries chemical spill reduced pretax income by $10.9 million for the first half. Related litigation and a West Virginia Public Service Commission investigation remained pending; the company said adverse outcomes could materially affect financial condition, results, cash flows, liquidity and reputation.
- On July 31, 2014, the NLRB affirmed, with modifications, an order concerning implementation of the company’s labor-benefits offer. The company appealed on August 1. If upheld, estimated cash impact was $3.5 million to $4.5 million per year, excluding possible tax compensation; total exposure depends on resolution timing.
- Other disclosed exposures include approximately $1.7 million accrued for legal matters, with additional reasonably possible losses of up to $31.4 million; some matters could not be estimated. Environmental remediation accruals were $2.2 million.
- Management described slower customer collections following a 2013 customer-information-system rollout, with improvement in the first half of 2014, but cautioned that collection patterns might not return to historical levels. The filing also cited higher uncollectible expense and harsh-winter-related main breaks.
- Management reported no material change in previously disclosed risk factors, no significant change in market risk, and effective disclosure controls as of June 30, 2014.
Most important facts for investors to verify
- Progress and final outcomes of the Freedom Industries lawsuits and regulatory investigation, and the ultimate cost beyond the $10.9 million pretax impact recognized to date.
- Outcome of the labor dispute appeal, duration of exposure, and any back-pay, interest or tax-compensation payments.
- Rate-case decisions and the timing and realization of requested or approved revenue increases.
- Whether customer collections and uncollectible expense normalize, and whether cash-flow improvement is sustainable given receivables, capital spending and seasonal cash flows.
- Execution and funding of the up-to-$1.1-billion capital plan, including commercial-paper refinancing and continued access to credit markets.