American Water Works Company, Inc. — 2014 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2014, and includes unaudited quarterly results. American Water provides water, wastewater and related services to an estimated 15 million people in 47 states and one Canadian province. Its principal businesses are regulated utilities and market-based services.
Financial results and position
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $3.011 billion | $2.879 billion |
| Operating income | $1.003 billion | $948.3 million |
| Income from continuing operations | $429.8 million; diluted EPS $2.39 | $370.8 million; diluted EPS $2.07 |
| Net income | $423.1 million; diluted EPS $2.35 | $369.3 million; diluted EPS $2.06 |
| Cash from operating activities | $1.097 billion | $896.2 million |
| Capital expenditures | $956.1 million | $980.3 million |
Revenue increased 4.6% and operating income 5.7%. Regulated Businesses generated $2.674 billion in revenue; Market-Based Operations generated $354.7 million, partly offset by $17.7 million of other items and eliminations. The regulated O&M efficiency ratio, a company-defined non-GAAP measure, improved to 36.7% from 38.5%.
At year-end, cash was $23.1 million, short- and long-term debt totaled $5.942 billion, and redeemable preferred stock was $17.2 million. The filing reports a working-capital deficit. The company had a $1.25 billion revolving credit facility, with $1.212 billion of available capacity reported at December 31, 2014. Debt to capitalization was 0.55:1, within the 0.70:1 covenant limit.
Fourth quarter: Revenue was $731.4 million versus $706.2 million in Q4 2013; operating income was $223.1 million versus $217.8 million. Continuing-operations income was $93.9 million versus $61.1 million, and diluted EPS from continuing operations was $0.52 versus $0.34.
Material changes and unusual items
- Continuing-operations income rose year over year, reflecting rate increases, infrastructure surcharges, acquisitions, lower operating expenses and lower interest expense. Management said adjusted continuing-operations earnings, excluding specified items, increased 10%.
- Regulated revenue growth included rate increases and surcharges, partly offset by an estimated $27 million reduction from lower demand. Billed residential water volume declined 2.2%; total billed water volume increased 0.5%.
- Operating cash flow improved partly because customer collections recovered from billing and collection delays associated with the new customer information system. The company also cited continuing collection effects during 2014.
- 2014 continuing results included $7.0 million, or $0.04 per share, of after-tax costs related to the West Virginia Freedom Industries chemical spill. 2013 included a $40.6 million pretax debt-extinguishment loss from a tender offer, equivalent to $0.14 per diluted share as described by management.
- The company sold its Terratec biosolids business in November 2014 and reported it as discontinued operations, including a $1.454 million pretax loss on sale.
Outlook, management commentary and key risks
Management projected approximately $6.0 billion of Company-funded capital investment for 2015–2019, including $5.2 billion for infrastructure and systems. The 2015 capital plan was approximately $1.2 billion. The company set a goal of an O&M efficiency ratio at or below 34% by 2020. Management also emphasized customer affordability, service quality, safety, growth and operational efficiency; these are plans and targets, not guarantees.
Rate recovery and regulatory timing are central risks. As of February 20, 2015, the company was awaiting final orders in four states for approximately $91.1 million of annualized general-rate-case revenue and in Tennessee for $2.4 million of infrastructure-charge revenue. Other important exposures include weather-driven demand and water availability, major infrastructure needs, financing access and debt service, pension obligations, and environmental and water-quality requirements.
The 2014 Elk River chemical spill resulted in a Do Not Use order affecting about 93,000 customer accounts. The filing reported 58 lawsuits and ongoing government and Public Service Commission investigations; the company said it believed it had valid defenses but could not predict outcomes. In California, Cal Am faced a December 31, 2016 deadline to end unpermitted Carmel River diversions; its proposed water-supply project was not expected to be completed before early 2019, and an extension had not been assured.
Most important facts for investors to verify
- Progress and final outcomes of the West Virginia spill litigation, investigations, costs and potential insurance or rate recovery.
- California alternative-water-supply approvals, project schedule and whether the Carmel River deadline is extended.
- Regulatory decisions and timing for pending rate cases and infrastructure surcharges, including actual recovery of costs and capital investment.
- Customer receivable aging and collection performance following the billing-system implementation.
- Capital-plan funding, debt maturities and access to financing; cash flow was below capital expenditures in 2014 before other investing and financing items.
- Assumptions and funding needs for pension and postretirement plans; year-end benefit obligations increased substantially, including due to updated mortality assumptions.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2014.