American Water Works Company, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 2, 2018. Amounts are in millions except per-share data. The company operates regulated water and wastewater utilities and market-based water-related businesses. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $761 | $756 |
| Operating income | $217 | $230 |
| Net income attributable to common stockholders | $106 | $93 |
| Diluted EPS | $0.59 | $0.52 |
| Cash provided by operations | $219 | $277 |
| Capital expenditures | $364 | $270 |
- Revenue rose 0.7%; net income increased 14.0% and diluted EPS rose 13.5%. The effective tax rate fell to 24.3% from 35.9%, principally following the federal corporate tax rate reduction from 35% to 21%.
- Operating expenses increased 3.4% to $544, outpacing revenue growth; operating income declined 5.7%. Operating margin was approximately 28.5%, compared with 30.4% a year earlier. Net margin was approximately 13.9%, versus 12.3%.
- Operating cash flow decreased $58, primarily due to working-capital timing and lower deferred-tax adjustments. Investing activities used $386, including $364 of capital expenditures; financing activities provided $166, including $278 of net short-term borrowings and $74 of dividends paid.
- At March 31, cash and cash equivalents were $55, with $26 of restricted funds reported in current assets. Long-term debt was $6,396; short-term debt was $1,183, and the current portion of long-term debt was $421.
- The company reported $2.172 billion of available credit-facility capacity and $1.18 billion of commercial paper outstanding. Its debt-to-capitalization covenant ratio was 0.59 to 1.00, within the 0.70 maximum.
- Total assets were $19.728 billion and common stockholders’ equity was $5.451 billion at quarter-end. The company repurchased 0.56 million shares for $45 million during the quarter.
Material changes and business drivers
- Regulated-business revenue increased $7 to $666. Authorized rate increases, acquisitions and organic growth, and higher water demand were partly offset by a $32 reserve for estimated tax savings expected to benefit customers.
- Regulated-business O&M rose $19 to $278, mainly due to more main breaks during severe cold weather, higher production costs, and increased employee-related expenses.
- Market-based revenue declined $3 to $100, primarily due to lower military-base capital upgrades. Segment net income increased to $12 from $7, driven mainly by lower Homeowner Services claims expenses.
- The adjusted regulated-business O&M efficiency ratio improved to 35.6% for the 12 months ended March 31, from 36.6% on the company’s adjusted comparison basis. This is a non-GAAP measure and is not necessarily comparable with other companies’ measures.
- Fourteen regulatory jurisdictions had opened or planned proceedings to address the Tax Cuts and Jobs Act. The company recorded a $32 regulatory liability related to estimated first-quarter customer tax benefits.
Outlook, commentary, risks and contingencies
- Management expected 2018 capital investment of $1.9 billion to $2.1 billion, including the planned Pivotal acquisition. It also estimated headquarters construction costs of up to $164 million, with $76 million expected in 2018.
- The company expected to begin paying federal income taxes around the beginning of 2020 as federal NOL carryforwards are used, and to become a full cash taxpayer by 2021; timing depends on results and regulatory outcomes.
- Subsequent to quarter-end, the company agreed to acquire Pivotal Home Solutions for approximately $365 million, expected to close in Q2 2018 and intended to be financed approximately 50% with debt and 50% with equity. It also agreed to acquire Alton, Illinois’ wastewater system for approximately $54 million, subject to regulatory approval and expected to close in Q1 2019.
- A proposed global settlement of the Freedom Industries spill litigation totals $126 million. The company stated WVAWC’s contribution, net of insurance recoveries, is $43 million (approximately $26 million after tax); the settlement remained subject to final court approval. The company had accrued approximately $135 million for probable loss contingencies and estimated up to $25 million for reasonably possible contingencies that could be reasonably estimated.
- Other risks include regulatory rate decisions and recovery of costs, weather-related main breaks and service disruptions, water supply and quality, environmental and legal matters, capital-market access and interest rates, and cyber or physical threats to infrastructure. Moody’s changed its outlook on the company to negative; S&P’s outlook was stable.
- The company’s California Water Supply Project remained subject to approvals; management estimated the earliest completion of the desalination plant could be in 2021. The company cautioned that approval and timely completion were not assured.
- Disclosure controls were assessed as effective at a reasonable level of assurance, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Final court approval and funding mechanics for the Freedom Industries settlement, including the remaining insurance arbitration and actual company-funded amount.
- Whether planned acquisitions close as expected, their final funding mix, and the impact of issuing shares under the forward-sale agreements.
- How regulators implement the lower federal tax rate and customer refunds or rate adjustments across jurisdictions.
- Whether operating costs, weather-driven main breaks, and capital spending affect cash generation and the company’s expected investment program.
- Progress on pending rate cases, the California Water Supply Project, and the company’s ability to maintain credit ratings and covenant compliance.