American Water Works Company, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. American Water is a U.S. water and wastewater utility with regulated businesses and market-based operations. Amounts below are in millions, except per-share data.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $724.3 | $745.6 | $1,360.4 | $1,364.2 |
| Operating income | $241.9 | $270.6 | $406.1 | $430.4 |
| Income from continuing operations | $101.3 | $116.7 | $158.9 | $165.9 |
| Net income | $101.3 | $107.0 | $158.9 | $148.8 |
| Diluted EPS | $0.57 | $0.60 | $0.89 | $0.84 |
| Operating cash flow | Not separately stated | Not separately stated | $290.2 | $316.9 |
| Capital expenditures | Not separately stated | Not separately stated | $429.8 | $476.3 |
- Q2 operating margin was approximately 33.4%, versus 36.3% a year earlier; the six-month margin was approximately 29.9%, versus 31.5%. These are calculated from reported operating income and revenue.
- At June 30, total assets were $15.0 billion and stockholders’ equity was $4.57 billion. Long-term debt was $5.18 billion, current maturities of long-term debt $113.9 million, and commercial paper $466.5 million. Cash and cash equivalents were $20.4 million.
- The $1.0 billion revolving credit facility had $971.1 million of available capacity; no facility borrowings were outstanding, and letters of credit totaled $28.9 million. The company reported compliance with debt covenants and a debt-to-capitalization covenant ratio of 0.56 against a maximum of 0.70.
Material changes and management commentary
- Q2 revenue declined 2.9%, chiefly because regulated customer usage fell amid much wetter 2013 weather than in 2012. Regulated Businesses revenue decreased $19.7 million for the quarter, while six-month regulated revenue rose $11.7 million on rate increases and acquisitions, partly offset by lower consumption.
- Q2 income from continuing operations fell $15.4 million. Higher depreciation and amortization—up $9.0 million for the quarter and $16.6 million year to date—reflected utility plant placed in service, including the business transformation project. Lower revenue was also a key factor.
- Six-month net income increased despite lower continuing-operations income because 2012 included losses from discontinued operations, following sales of the Arizona, New Mexico and Ohio subsidiaries. Q2 2012 also included discontinued-operation losses.
- Regulated O&M efficiency ratio, a non-GAAP measure, worsened to 38.1% for Q2 from 36.6%, and to 40.4% for the first half from 39.7%; management attributed the change primarily to lower revenue. The Market-Based segment’s six-month revenue decreased $15.3 million, largely due to ended contracts and lower military construction activity.
- Operating cash flow decreased $26.7 million year over year in the first half. The company cited working-capital changes, including receivables and unbilled revenue, as a significant cash-flow factor. Investing cash outflow was $459.4 million; 2012 investing cash flow had benefited from divestiture proceeds.
Outlook, risks and unusual items
- Management estimated 2013 capital expenditures of $950 million, including the business transformation program. It had spent $294.9 million on that program through June 30 and expected Phase II implementation to be substantially complete by year-end.
- The company expected to file up to four general rate cases and seek infrastructure surcharges in 2013. As of August 1, it was awaiting final orders in five states on requests totaling $135.4 million in annualized revenue; management cautioned that requested increases might not be granted. Interim rates in Iowa and Kentucky and a West Virginia rate-case stipulation remained subject to regulatory processes.
- Weather-sensitive water demand, regulatory lag, rate-case outcomes, capital spending, and access to debt and commercial-paper markets are material considerations. Management said operating cash flow, capital-market access and its credit facility were expected to fund short-term capital needs, but gave no assurance of future market access or lender performance.
- In May 2013, the company implemented new asset-management and customer-information systems at certain regulated subsidiaries. Management said implementation was not a response to control deficiencies; testing of affected financial controls was ongoing and it could not assure all impacts had been mitigated. Disclosure controls were judged effective at a reasonable level of assurance.
- Legal matters had approximately $2.0 million accrued as probable costs, with reasonably possible additional losses up to $31.7 million; losses on some matters could not be estimated. Environmental remediation accruals were $3.3 million. The Monterey Peninsula water-supply project settlement agreements remained subject to CPUC approval and environmental review; proposed project cost caps were $295.7 million to $338.4 million.
- The six-month tax rate included a $3.3 million benefit from a business reorganization that enabled use of state net operating loss carryforwards. The company declared a $0.28-per-share quarterly dividend payable September 3, 2013.
Important facts for investors to verify
- Whether regulated usage and billed volumes recover, and how the customer-information-system billing review affects unbilled usage and collections.
- Final outcomes and timing of the pending rate cases, interim rates, infrastructure surcharges and Monterey project approvals.
- Capital expenditure execution and transformation-project costs, including whether expected completion and the $950 million 2013 estimate remain on track.
- Liquidity and refinancing needs given commercial-paper borrowings, low cash balances, and the planned investment program.
- Whether legal, environmental and other contingencies change materially, and the effects of ongoing control testing after system implementation.