Business context and reporting period
American Water Works Company, Inc. is a U.S. water and wastewater utility. Its primary business is regulated water and wastewater service, supplemented by market-based businesses serving, among others, military installations and residential customers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; amounts below are in millions unless stated otherwise. The company notes that results are seasonal.
Financial results and key metrics
| Metric | Third quarter 2019 | Third quarter 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,013 | $976 | $2,708 | $2,590 |
| Operating income | $406 | $335 | $946 | $854 |
| Net income attributable to common shareholders | $240 | $187 | $523 | $455 |
| Diluted EPS | $1.33 | $1.04 | $2.89 | $2.53 |
| Adjusted diluted EPS, non-GAAP | $1.33 | $1.20 | $2.88 | $2.61 |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $945 | $992 |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $1,115 | $1,136 |
- Third-quarter operating margin was approximately 40.1%, compared with 34.3% a year earlier; nine-month operating margin was approximately 34.9%, compared with 33.0%. These are calculated from reported operating income and revenue.
- Nine-month operating cash flow less capital expenditures was approximately negative $170 million, before acquisitions and other investing activity.
- At September 30, cash and cash equivalents were $94; restricted funds were $22. Total assets were $22,238 and shareholders’ equity was $6,190.
- Balance-sheet debt included $8,640 of long-term debt, $29 of current long-term debt and $474 of short-term debt. The company issued $1,100 of senior notes in May, at 3.45% due 2029 and 4.15% due 2049.
- The $2.25 billion revolving credit facility had approximately $2.17 billion available, including $80 of letters of credit outstanding. The company reported a debt-to-capitalization covenant ratio of 0.60 against a maximum of 0.70, and stated it was in compliance.
Material changes versus the prior comparable period
- Third-quarter revenue increased $37, or about 3.8%, and common-shareholder net income increased $53. Nine-month revenue increased $118, or about 4.6%, and common-shareholder net income increased $68.
- Regulated-business revenue rose $26 in the quarter and $56 year to date, chiefly from authorized rate increases and infrastructure surcharges. Lower water demand partially offset growth; nine-month demand was also affected by unusually wet weather in the Northeast and Midwest and conservation.
- Market-based revenue rose $11 in the quarter and $63 year to date, primarily from the Pivotal Home Solutions acquisition and military contracts added in 2018. Higher related operating costs partly offset revenue gains.
- Reported earnings comparisons benefited from the absence of a $57 goodwill and intangible-asset impairment charge recorded in 2018. The prior-year period also included a gain on the sale of most Contract Services Group O&M contracts. Adjusted EPS excludes specified unusual items; it increased 11 cents in the quarter and 27 cents year to date.
- Nine-month operating cash flow declined $47, mainly reflecting the $30 settlement of cash-flow hedges, higher pension contributions and other non-cash and working-capital factors. Investing cash outflow was lower largely because the 2018 period included the Pivotal acquisition.
- Long-term debt increased from $7,569 at December 31, 2018 to $8,640 at September 30, 2019. Net interest expense rose $25 year to date, partly due to debt issued to support growth.
Outlook, management commentary, risks and unusual items
- Management expects 2019 capital investments, including acquisitions, of approximately $1.9 billion. It reported approximately $1.25 billion of capital investment in the first nine months, including $85 for regulated-system acquisitions.
- The adjusted regulated-business O&M efficiency ratio was 35.0% for the twelve months ended September 30, 2019, versus 35.7% a year earlier. Management attributed the improvement largely to revenue growth. This is a non-GAAP measure.
- The company reported $45 of annualized incremental revenue from general rate cases and $42 from infrastructure surcharges that became effective in the first nine months. Further rate and surcharge requests were pending; approval of all or any requested amounts is not assured.
- Two new military-services contracts, at Joint Base San Antonio and West Point, carry estimated aggregate revenues of approximately $967 over 50 years, subject to annual economic price adjustments and customary government termination provisions. Three regulated-system acquisitions for $137 closed after quarter-end.
- The company terminated forward-starting swaps in May, recognizing a $30 loss to be amortized through interest expense over 10- and 30-year periods. Operating lease accounting adoption added lease right-of-use assets and liabilities; the company said it did not materially affect results or cash flows.
- Legal matters include class actions related to water-main breaks in Dunbar, West Virginia and Chattanooga, Tennessee; the company said it could not estimate reasonably possible losses for these cases. It had accrued approximately $20 for probable loss contingencies and estimated up to $25 for reasonably possible losses that could be estimated; some matters could not be estimated.
- The Monterey Peninsula water-supply project faces permitting and litigation uncertainty. The filing said the desalination plant could be completed no earlier than sometime in 2021, if completed; a court stay prevented physical construction from beginning before November 19, 2019, pending further proceedings and a Coastal Commission decision.
- Moody’s lowered the company’s senior unsecured debt rating to Baa1 from A3 in April 2019; S&P affirmed its A rating. Both outlooks were stable as of October 30, 2019. Management cited regulatory decisions, weather and water demand, infrastructure needs, financing access and costs, environmental and water-quality matters, litigation, and operational and cybersecurity risks as factors that could affect results.
- No specific full-year EPS guidance is provided in the supplied filing text. The company stated it believed operating cash flows, capital-market access and its revolving facility would fund short-term requirements, while cautioning that future market access and lender performance are not assured.
Important facts for investors to verify
- Whether rate-case and infrastructure-surcharge requests are approved, and how much of requested revenue is ultimately realized.
- Whether operating cash flow can support the planned approximately $1.9 billion of 2019 capital investment, acquisitions and dividends without additional debt or equity financing.
- Debt levels, interest expense, credit ratings, covenant headroom and continued access to commercial-paper and capital markets.
- How much revenue and earnings growth is recurring versus attributable to acquisitions, rate actions, tax effects or prior-year unusual items; review the company’s non-GAAP reconciliations.
- Developments in the Monterey project, condemnation proceedings and water-main-break litigation, including potential costs or delays not currently estimable.
- Whether demand, conservation and weather trends continue to offset rate-driven revenue growth, and whether the reported efficiency improvement is sustained.