American Water Works Company, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Figures are unaudited and in millions of dollars except per-share amounts. The company primarily operates regulated water and wastewater utilities, alongside market-based businesses. Results are seasonal, with demand generally higher in warmer months.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $999 | $931 | $1,887 | $1,775 |
| Operating income | $330 | $313 | $559 | $552 |
| Net income attributable to common shareholders | $207 | $176 | $340 | $300 |
| Diluted EPS | $1.14 | $0.97 | $1.87 | $1.65 |
- Q2 revenue rose 7.3% and net income rose 17.6% year over year; six-month revenue rose 6.3% and net income rose 13.3%.
- Derived operating margin was approximately 33.0% in Q2 versus 33.6% a year earlier; six-month operating margin was 29.6% versus 31.1%. Derived net margin increased to 20.7% from 18.9% in Q2 and to 18.0% from 16.9% for the six-month period.
- Operating cash flow was $520, down from $531. Cash capital expenditures were $752, versus $870; operating cash flow less capital expenditures was negative $232, compared with negative $339.
- At June 30, cash and cash equivalents were $70; total available liquidity, including revolving credit availability, was $1.638 billion. Short-term debt was $606, current long-term debt $49, and long-term debt $10.343 billion. The debt-to-capitalization covenant ratio was 0.62, within the 0.70 limit.
- Property, plant and equipment, net, was $20.214 billion. Total assets were $24.952 billion and shareholders’ equity was $6.690 billion.
Changes and operating drivers
- Regulated revenue benefited from authorized rate increases and infrastructure surcharges, higher demand—including warmer, drier Northeast weather—and acquisitions and organic growth. These benefits were partly offset by revenue reductions from amortization of excess deferred income taxes (EADIT), generally offset by lower income tax expense.
- Q2 regulated revenue increased $54 year over year; the six-month increase was $89. Regulated O&M expense rose $26 in Q2 and $48 for the six months, reflecting employee costs, purchased water and other production costs, maintenance, and uncollectible accounts.
- The effective income tax rate declined to 17.5% from 24.1% for Q2 and to 16.3% from 23.3% for the six months, primarily due to EADIT amortization under regulatory orders and stock-based compensation deductions.
- Management reported diluted EPS growth from regulated-business growth and weather-related demand, partly offset by higher Homeowner Services claims, including claims associated with extreme cold in early 2021.
- The adjusted regulated O&M efficiency ratio, a company-defined non-GAAP measure, improved to 33.9% for the 12 months ended June 30, 2021, from 34.3% a year earlier.
Financing, outlook and material matters
- Management planned approximately $1.9 billion of investment across its footprint in 2021. The company reported $782 million invested during the first six months, primarily in regulated businesses.
- In May, the company issued $1.1 billion of senior notes: $550 million at 2.30% due 2031 and $550 million at 3.25% due 2051. Proceeds supported subsidiaries and general purposes, repaid commercial paper, and funded early repayment of $327 million of higher-coupon notes. A $15 million make-whole premium was paid; most early extinguishment costs were recorded as regulatory assets based on expected recovery in future rates.
- The company stated that existing liquidity should meet foreseeable cash needs, while noting that future access to credit and commercial-paper markets on acceptable terms is not assured. No specific earnings guidance was provided in the filing text.
- COVID-19 has affected revenue, operating costs, bad debts and financing costs. At June 30, the company recorded $44 million of related regulatory assets and $5 million of regulatory liabilities. Recovery or deferral treatment varies by jurisdiction; Kentucky denied deferral, and certain proceedings remained pending.
- The planned sale of the New York subsidiary for approximately $608 million in cash remained subject to conditions and approvals. The parties extended the termination date to January 3, 2022; the subsidiary’s assets and liabilities remained classified as held for sale. New York legislative and municipalization developments were identified as uncertainties.
- California’s Monterey Peninsula Water Supply Project faces permitting and approval challenges. The company reported $166 million of costs incurred through June 30, including $41 million of AFUDC, and could not assure timely completion or recovery of all costs. Delayed approvals may affect compliance with Carmel River diversion requirements; noncompliance could bring additional costs, fines or penalties.
- Other matters include class actions concerning water-main failures, potential eminent-domain proceedings involving the Monterey system and a Chicago-area pipeline, and a federal grand jury subpoena to a subsidiary’s home-services business. The company said it could not estimate losses for certain proceedings; it did not believe the subpoena investigation would have a material adverse effect.
Investor verification points
- Track rate-case and infrastructure-surcharge outcomes, including pending West Virginia and California matters, and the timing and amount of authorized revenue recovery.
- Verify the New York sale’s regulatory and closing status, final consideration, and any effect of municipalization or condemnation proposals.
- Monitor Monterey project permits, construction progress, cost recovery, and compliance with Carmel River diversion orders.
- Assess whether operating cash flow, capital spending, debt issuance and dividends remain consistent with the company’s liquidity and leverage plans.
- Review COVID-19 bad-debt trends and regulatory recovery decisions, alongside unresolved litigation and investigation outcomes.