American Water Works Company, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results; amounts below are in millions unless stated otherwise. American Water operates regulated water and wastewater utilities and unregulated market-based services. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $829.2 | $831.8 | $2,189.6 | $2,196.0 |
| Operating income | $323.9 | $327.6 | $730.0 | $758.0 |
| Operating margin | 39.1% | 39.4% | 33.3% | 34.5% |
| Income from continuing operations | $150.7 | $154.1 | $309.6 | $320.0 |
| Net income | $150.7 | $153.8 | $309.6 | $302.6 |
| Diluted EPS | $0.84 | $0.86 | $1.73 | $1.70 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $688.7 | $735.0 |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $665.3 | $680.4 |
For the nine-month period, operating cash flow less capital expenditures was approximately $23.4 million before acquisitions, dividends, debt service, and other investing and financing needs. Cash and cash equivalents were $32.5 million at September 30, 2013, versus $24.4 million at December 31, 2012. Current assets were $613.2 million and current liabilities $1,141.5 million.
At September 30, long-term debt was $5,174.1 million on the balance sheet, with $389.4 million of short-term debt and $113.7 million of current long-term debt. Long-term debt including current portion was approximately $5,287.7 million. Stockholders’ equity was $4,632.9 million. The company reported covenant compliance; its debt-to-capitalization ratio for the relevant covenant was 0.55:1.00 against a maximum of 0.70:1.00.
Changes versus comparable periods
- Q3 revenue declined 0.3%; nine-month revenue declined 0.3%. Regulated revenue fell $7.7 million in Q3, principally from lower demand, while nine-month regulated revenue rose $4.0 million as rate increases and acquisitions were offset by weaker consumption.
- Regulated billed water volume fell 10.1% in Q3 and 6.5% for nine months. Management attributed lower demand mainly to cooler/wetter 2013 weather compared with hot/dry conditions in 2012; it also cited timing shifts in billing during the new customer-information system rollout.
- Nine-month operating income declined $28.0 million. Higher depreciation and amortization (+$23.1 million) and general taxes (+$10.9 million) outweighed lower operating and maintenance expense. Q3 O&M fell $11.5 million, partly due to lower employee costs and a $3.8 million release of market-based loss-contract reserves.
- Market-Based Operations’ nine-month revenue declined $10.6 million, mainly following termination of municipal and industrial contracts and lower military construction activity. Pre-tax income nevertheless increased $7.3 million, helped by lower expenses. Q3 segment revenue and pre-tax income increased.
- Nine-month net income increased $7.0 million, despite lower continuing-operations income, because 2012 included a $17.4 million after-tax discontinued-operations loss. Continuing-operations diluted EPS declined to $1.73 from $1.80.
- Regulated O&M efficiency ratio, a company-defined non-GAAP measure, was 35.3% in Q3 versus 35.8%; for nine months it was 38.5% versus 38.2%.
Liquidity, investment, outlook and risks
- Management estimated 2013 capital expenditures of approximately $950 million. It had invested $665.3 million through September 30 and reported $119.8 million of capital expenditures acquired on account but unpaid at period-end.
- The revolving credit facility was increased to $1.25 billion and largely extended to October 2018; the commercial-paper program limit rose to $1.0 billion. At September 30, $389.4 million of commercial paper was outstanding and approximately $1.2 billion of facility capacity was available, including support for commercial paper and letters of credit.
- Management said collections slowed after customer-information system implementations, with the slowdown expected to continue through year-end and into the first half of 2014. Management believed it was temporary but stated there was no assurance collections would return to historical patterns. The remaining regulated subsidiaries implemented the system in October.
- After quarter-end, the company paid $271.8 million to repurchase $225.8 million principal of 6.085% notes due 2017, funded with commercial paper. It recorded a $40.6 million debt-extinguishment loss in October and estimated approximately $13 million of pre-tax interest savings in 2014. It also announced redemptions of $74.8 million and $75.0 million of senior notes and had $101.0 million of debt maturing in December 2013; it expected to issue senior notes to finance these obligations.
- Rate activity included an $8.5 million annualized West Virginia rate increase effective October 11 and a Kentucky final order approving $6.9 million, with customer refunds due for interim collections above authorized rates. A Pennsylvania settlement proposing $26.0 million annualized revenue was pending approval. As of November 1, requests totaling $97.4 million in three states awaited final orders; approval was not assured.
- Environmental remediation accruals were $3.3 million. For routine legal matters, approximately $1.4 million was accrued; reasonably possible additional losses were estimated up to $28.9 million, with some matters not estimable. The company said it did not expect these matters to materially adversely affect results, financial position, or cash flows.
- Long-term service contracts carried estimated remaining revenue commitments of $2,009.8 million for military services and $954.1 million for municipal and other operations and maintenance agreements; military contracts are subject to federal termination provisions.
- Management cited regulatory lag, consumption variability, slower receivable collections, access to capital markets, debt and interest-rate exposure, and execution of the business-transformation systems as matters to monitor. It reported no material change in previously disclosed risk factors and no significant change in market risk.
Most important facts for investors to verify
- Whether slower collections after the customer-information system rollout reverse as management expects, and the resulting effects on receivables and cash flow.
- Final outcomes and timing of pending rate cases and infrastructure surcharges, including the pending Pennsylvania settlement and the $97.4 million of requests awaiting orders.
- Funding and cost of the announced debt redemptions and December maturity, including the impact of commercial-paper use and the October tender premium.
- Whether the $950 million 2013 capital-expenditure estimate is met and how the investment program is financed.
- Whether reduced water demand, billing timing effects, and higher depreciation and taxes continue to pressure regulated earnings and margins.
- Developments in the California water-project litigation and any changes to legal or environmental contingencies.