American Water Works Company, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 2, 2021. Unaudited results. American Water primarily operates regulated water and wastewater utilities, alongside market-based services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1.092 billion | $1.079 billion | $2.979 billion | $2.854 billion |
| Operating income | $417 million | $433 million | $976 million | $985 million |
| Net income attributable to common shareholders | $278 million | $264 million | $618 million | $564 million |
| Diluted EPS | $1.53 | $1.46 | $3.40 | $3.11 |
| Net cash from operating activities | Not provided for quarter | $1.029 billion | $988 million |
- Revenue grew approximately 1% in Q3 and 4% year to date; net income increased approximately 5% and 10%, respectively. Diluted EPS rose $0.07 in Q3 and $0.29 year to date.
- Operating margin, calculated as operating income divided by revenue, was approximately 38.2% in Q3 versus 40.1%; year-to-date it was 32.8% versus 34.5%. Operating costs rose faster than revenue.
- For the nine months, capital expenditures were $1.205 billion and cash from operations was $1.029 billion, a calculated $176 million shortfall before acquisitions, dividends and other cash uses. Investing cash outflow was $1.353 billion; financing cash outflow was $152 million.
- At September 30, cash and cash equivalents were $70 million. Long-term debt was $10.349 billion, short-term debt $684 million and current long-term debt $48 million. Available liquidity, including the revolving facility, was $1.560 billion, down from $1.935 billion at year-end 2020. The company reported a 0.62 debt-to-capitalization covenant ratio against a maximum of 0.70 and stated it was compliant.
Changes and drivers
- Q3 operating revenue was nearly flat: regulated revenue was $944 million versus $945 million. Rate increases and acquisitions were offset by weather, the prior-year COVID-related demand comparison, excess deferred income tax amortization and a Pennsylvania regulatory disallowance.
- Year-to-date regulated revenue increased $88 million, primarily from rate increases and infrastructure surcharges, acquisitions and organic growth. The company attributed EPS growth mainly to regulated-business expansion and lower effective income tax rates, partly offset by weather.
- Year-to-date operation and maintenance expense increased $93 million company-wide, while depreciation and amortization rose $25 million. Drivers included staffing and compensation, purchased water and energy costs, maintenance spending, and assets placed in service.
- The effective tax rate declined to 18.2% for Q3 and 17.2% year to date, from 25.0% and 24.1%. The company cited increased amortization of excess accumulated deferred income taxes, generally accompanied by corresponding revenue reductions.
Outlook, transactions and risks
- Management planned approximately $1.9 billion of investment across its footprint in 2021; $1.3 billion had been invested through September, mostly in regulated infrastructure. No explicit full-year earnings guidance is provided in the supplied filing text.
- On October 28, 2021, after quarter-end, the company agreed to sell Homeowner Services Group for estimated consideration of $1.275 billion: $480 million cash, a five-year $720 million secured seller note bearing 7% interest, and up to $75 million contingent cash. Closing was subject to conditions, including antitrust review. Management expected closing in Q4 2021 and intended to redeploy initial cash proceeds to regulated-business investment.
- The proposed sale of New York American Water for approximately $608 million cash remained pending, with the closing end date extended to January 3, 2022. The filing described regulatory and municipalization-related uncertainty.
- COVID-19 continued to affect revenues, operating costs and bad debt. As of November 2, the company had deferred-accounting or cost-recovery orders in 11 of 14 jurisdictions; New York and Tennessee proceedings were pending, and Kentucky had denied deferral. COVID-related regulatory assets and liabilities were $39 million and $6 million, respectively.
- California subsidiary Cal Am faced deadlines to reduce Carmel River diversions while its alternative water-supply project remained subject to permits and regulatory review. The company said timely completion was uncertain and warned of potential additional costs, fines or penalties if requirements were not met.
- Other exposures include water-main-break class actions, potential condemnation of utility assets, and a federal investigation involving HOS subsidiary American Water Resources. The company said the investigation’s outcome and potential liabilities could not be estimated and did not currently expect a material adverse effect. Accrued probable legal contingencies were approximately $4 million; the estimated maximum for reasonably possible losses that could be reasonably estimated was $2 million, excluding matters for which losses could not be estimated.
Important facts for investors to verify
- Whether the HOS and New York sales close on the expected terms and timing, and the collectability and eventual cash value of the HOS seller note and contingent payment.
- Regulatory outcomes and timing for rate cases, COVID-19 cost recovery, and the Carmel River alternative water-supply project.
- Whether planned capital spending, acquisitions and dividends can be funded while maintaining liquidity, credit ratings and debt-covenant compliance.
- How operating costs, water demand, weather and customer receivables evolve, including effects from pandemic-related disconnection policies.