Business context and reporting period
American Water Works Company, Inc. filed its Form 10-K for the fiscal year ended December 31, 2022. It is a regulated water and wastewater utility serving about 14 million people in 24 states; its regulated operations generated 92% of 2022 revenue. The filing also provides unaudited fourth-quarter results.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Operating revenue | $3.792 billion | $3.930 billion |
| Operating income | $1.273 billion | $1.196 billion |
| Net income attributable to common shareholders | $820 million | $1.263 billion |
| Diluted EPS | $4.51 | $6.95 |
| Cash from operating activities | $1.108 billion | $1.441 billion |
| Capital expenditures | $2.297 billion | $1.764 billion |
| Long-term debt and redeemable preferred stock | $10.929 billion | $10.344 billion |
- Cash and cash equivalents were $85 million; total available liquidity, including revolving-credit availability, was $1.580 billion at year-end.
- Short-term debt was $1.175 billion and current maturities of long-term debt were $281 million. Total debt, including these amounts and redeemable preferred stock, was about $12.4 billion. The company was within its debt covenant limit, with a debt-to-capitalization ratio of 0.62 against a maximum of 0.70.
- Regulated Businesses revenue increased to $3.505 billion from $3.384 billion; segment net income rose to $854 million from $789 million. The adjusted regulated O&M efficiency ratio, a non-GAAP measure, improved to 33.7% from 34.1%.
- Fourth-quarter 2022 revenue was $931 million and net income was $147 million, or diluted EPS of $0.81, versus $951 million, $645 million and $3.55, respectively, in fourth-quarter 2021.
Material changes versus the prior comparable period
- Consolidated revenue fell 3.5%, mainly reflecting the 2021 sale of Homeowner Services Group (HOS) and the January 2022 sale of New York operations. Excluding New York operations, regulated revenue increased $248 million, driven principally by authorized rate increases and infrastructure surcharges ($180 million), acquisitions and organic growth ($36 million), lower EADIT-related revenue reductions ($17 million), and favorable weather ($13 million).
- Net income and EPS declined from 2021, which included a $748 million pretax gain on the HOS sale and a $45 million charitable contribution. Management says 2022 diluted EPS increased $0.26 compared with 2021 after excluding those 2021 items.
- Operating income increased despite lower consolidated revenue. Operating expenses declined, in part due to divestitures, while regulated production costs rose $42 million excluding New York, largely from inflation in fuel, power and chemicals. Interest expense increased $30 million overall to $433 million.
- Operating cash flow decreased $333 million, including tax payments related primarily to the HOS and New York sales and the 2021 noncash gain comparison. Capital expenditures rose $533 million; the company spent $315 million on acquisitions and received $608 million from the New York sale.
- HOS sale proceeds include a $720 million five-year seller note bearing 7% interest and a contingent $75 million payment subject to conditions by December 31, 2023. In 2022, the company recorded $50 million of seller-note interest income and $9 million of revenue-share income.
Outlook, commentary, risks and unusual items
- Management expects $14–$15 billion of total investment over five years, including $12.5–$13 billion in regulated infrastructure and $1.5–$2 billion for acquisitions. The 2023 investment plan is $2.9 billion, including $2.5 billion for infrastructure and $400 million for acquisitions. The company also projects $30–$34 billion of investment over ten years. No company-wide EPS or earnings guidance is stated in the provided filing text.
- Management cites continued regulated growth from infrastructure investment, acquisitions and organic customer growth, partly offset by inflation, higher interest expense and depreciation. The company expects capital investment to exceed operating cash flow over the next several years and plans to fund the difference through debt, equity and remaining HOS-sale proceeds.
- California water-supply risk remains important: Cal Am must replace Carmel River diversions with a permanent alternative supply. The proposed Monterey supply project faces permitting and litigation contingencies; construction of the desalination plant was expected to begin in 2024 and service to begin by end-2027, subject to litigation and approvals. Cal Am reported $206 million of project costs incurred through 2022 and cannot assure recovery of all costs.
- A January 2023 fire at the sole Western Hemisphere supplier of permanganate sharply constrained supplies of chemicals used in water treatment. The company is pursuing alternatives; failure to secure adequate supply or substitutes could affect regulatory compliance.
- Other significant exposures include rate-case and regulatory recovery risk, rising financing costs and inflation, drought and water availability, aging infrastructure, PFAS and other emerging contaminants, extreme weather, cyber and physical security, supply-chain disruption, and potential condemnation of utility assets. The Monterey condemnation dispute and water-main-break class actions remain matters to monitor; losses in some cases cannot be estimated from the filing.
- The auditor issued an unqualified opinion and found internal control over financial reporting effective. The audit identified rate-regulation accounting as a critical audit matter, involving judgment over whether regulatory assets are recoverable and liabilities refundable.
Most important facts for investors to verify
- Whether the company can convert substantial planned capital spending into timely rate recovery and returns, particularly as interest rates and operating costs rise.
- Progress, permits, litigation outcomes, cost caps and recoverability for the Monterey alternative-water-supply project and compliance with Carmel River diversion orders.
- Collection of the HOS seller note, the contingent payment, and continued revenue-share income; also confirm how sale proceeds are deployed.
- Funding requirements and access to debt and equity markets: operating cash flow was below capital expenditures, year-end liquidity was $1.580 billion, and debt maturities include $281 million in 2023.
- Impact of chemical supply constraints, PFAS and lead-line requirements, and the company’s ability to maintain safe and reliable service while meeting evolving standards.
- Interpret 2021 earnings and fourth-quarter comparisons in light of the HOS divestiture gain and other one-time items; distinguish GAAP results from management’s adjusted EPS comparison and non-GAAP efficiency ratio.