Business context and reporting period
American Water Works Company, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. It primarily operates regulated water and wastewater utilities, alongside market-based water and related services. Management notes that results are seasonal and interim results may not indicate full-year performance.
Financial results and condition
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $882 | $853 | $1,695 | $1,614 |
| Operating income | $302 | $302 | $540 | $519 |
| Net income attributable to common shareholders | $170 | $162 | $283 | $268 |
| Diluted EPS | $0.94 | $0.91 | $1.56 | $1.50 |
| Operating margin, approximate | 34.2% | 35.4% | 31.9% | 32.2% |
| Net margin, approximate | 19.3% | 19.0% | 16.7% | 16.6% |
- Operating revenue increased 3.4% in Q2 and 5.0% year to date; net income increased 4.9% and 5.6%, respectively. Adjusted diluted EPS, a non-GAAP measure, was $0.94 for Q2 and $1.55 for the first half, up 13.3% and 9.2% from the comparable periods.
- Operating cash flow was $480 versus $525 year to date. Investing cash outflow was $817, including $712 of capital expenditures and $80 for acquisitions; financing cash inflow was $265. Cash, cash equivalents and restricted funds ended at $87, compared with $97 a year earlier.
- At June 30, total assets were $21.854 billion, shareholders’ equity $6.027 billion, long-term debt $8.642 billion, short-term debt $397 million and current long-term debt $25 million. Cash and cash equivalents were $64 million. The company issued $1.1 billion of 2029 and 2049 notes in May, at 3.45% and 4.15%, respectively.
- AWCC’s revolving credit facility had $2.17 billion available; commercial paper outstanding was $397 million. The company reported a debt-to-capitalization covenant ratio of 0.60 against a maximum of 0.70 and said it was in compliance. S&P affirmed A/A-1 ratings with stable outlook; Moody’s lowered senior unsecured debt to Baa1 from A3, with stable outlook.
Material changes versus prior comparable periods
- Regulated revenue grew 1.5% in Q2 and 2.1% year to date, but billed water volumes fell 3.1% and 3.8%. Rate increases and infrastructure surcharges partly offset lower demand, including unusually wet weather and ongoing conservation.
- Q2 operating income was unchanged despite higher revenue; operating expenses rose 5.3%. Regulated-segment net income declined 6.6% in Q2 and 1.8% year to date, while Market-Based Businesses net income rose 61.5% and 64.0%, respectively. Market-Based growth was largely tied to Pivotal, acquired in 2018, and new military contracts.
- Year-to-date operating cash flow fell $45 million, partly due to a $30 million settlement of forward-starting swaps, pension contributions and other non-cash/regulatory-account movements. Investing outflow was lower than in 2018, which included the $363 million Pivotal acquisition.
Outlook, management commentary and risks
- Management expects 2019 capital investments, including acquisitions, of $1.8 billion to $1.9 billion. It reported $792 million of capital investment in the first half and said pending regulated acquisitions could add about 38,200 customers.
- Management cited infrastructure investment, acquisitions and organic growth as drivers of adjusted earnings growth. The adjusted regulated O&M efficiency ratio was 35.4% for the twelve months ended June 30, versus 35.3% a year earlier; management attributed the slight deterioration largely to wet-weather effects on revenue.
- Rate actions include Kentucky authorization for $13 million of annualized incremental revenue effective June 28, and Indiana approval for $4 million in the first rate year and $13 million in the second. California filed a rate request for 2021 and later escalation years; additional rate and surcharge requests remained pending. Requested increases are not assured.
- Risks include regulatory decisions and rate recovery, water demand and supply, weather and natural disasters, infrastructure and cybersecurity, operating costs, access to capital and interest rates, environmental and water-quality obligations, litigation, and possible condemnation of utility assets. The company said there were no material changes to previously disclosed risk factors.
- The Monterey Peninsula water-supply project faced permitting and litigation issues; management estimated the desalination plant’s earliest completion could be in 2021, with no assurance it will be completed on time or at all. In July, Cal Am reserved its right to terminate a water-purchase agreement after a counterparty’s missed water-delivery milestone. The Dunbar, West Virginia water-main-break class action remained in discovery; losses could not be reasonably estimated.
- Other notable items: the company recorded a $6 million gain on a Pennsylvania land sale; a $30 million swap-termination loss is to be amortized through interest expense over 10- and 30-year periods. Q2 2018 results included a $20 million insurance-settlement benefit related to the Freedom Industries spill, affecting year-over-year comparisons. The company accrued approximately $21 million for probable loss contingencies and estimated up to $24 million for reasonably possible losses that could be estimated.
Important facts for investors to verify
- Whether rate increases and infrastructure surcharges are approved and realized, and whether they offset lower usage and weather-related demand.
- Execution, funding and returns on the $1.8 billion to $1.9 billion 2019 investment plan and pending acquisitions.
- Debt, interest costs, refinancing needs and liquidity, particularly after the Moody’s downgrade and the large 2019 debt issuance.
- Progress and potential costs or outcomes of the Monterey water-supply project, condemnation matters and the Dunbar litigation.
- How much of reported earnings growth is recurring, given acquisition contributions, the land-sale gain, tax effects and prior-period settlement items.