American Water Works Company, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; filed May 6, 2015. American Water operates regulated water and wastewater utilities and unregulated market-based services. Financial amounts below are in millions unless otherwise noted.
Financial results and condition
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $698.1 | $679.0 | +2.8% |
| Operating income | $204.3 | $187.4 | +$16.9 |
| Operating margin | 29.3% | 27.6% | +1.7 percentage points |
| Income from continuing operations | $80.0 | $69.1 | +$10.9 |
| Net income | $80.0 | $68.1 | +$11.9 |
| Diluted EPS | $0.44 | $0.38 | +$0.06 |
| Operating cash flow | $198.6 | $244.9 | -$46.3 |
| Capital expenditures | $226.4 | $192.5 | +$33.9 |
- Regulated Businesses revenue rose 1.3% to $615.4 million; pretax income increased $19.1 million to $134.1 million. Market-Based Operations revenue increased 15.3% to $87.5 million, but pretax income was nearly flat at $12.1 million.
- Regulated billed water volume fell 7.8%; rate increases and infrastructure surcharges largely offset lower consumption. Consolidated operating and maintenance expense declined 0.4% to $323.8 million, while depreciation and general taxes increased.
- Management’s non-GAAP regulated O&M efficiency ratio improved to 36.3% for the twelve months ended March 31, 2015, from 38.0% a year earlier.
- At March 31, cash was $24.3 million and current assets were $729.0 million. Short-term commercial paper debt was $544.5 million; long-term debt was $5.429 billion, with a further $61.1 million current portion. The company had $1.212 billion of available revolving credit capacity and no facility borrowings.
- Common stockholders’ equity was $4.993 billion. The company reported a debt-to-capitalization covenant ratio of 0.55 to 1.00, within its 0.70 maximum.
- Operating cash flow was below capital expenditures, resulting in approximately $27.8 million of negative operating cash flow after capital expenditures. Cash flows from operations declined mainly because of working-capital timing and higher benefit contributions. Q1 dividends paid were $55.6 million.
Material changes and explanations
- Diluted EPS from continuing operations increased to $0.44 from $0.39. Management attributed the improvement primarily to stronger regulated results from higher revenues, lower operating costs, and the California rate case; the prior-year period also included costs associated with the Freedom Industries chemical spill.
- Market-Based Operations revenue growth reflected military construction activity, two military base additions in the second half of 2014, and Homeowner Services contract growth. Associated operating costs also rose, leaving segment pretax income essentially unchanged.
- Regulated results benefited from approximately $9 million of rate increases and infrastructure surcharges, partly offset by lower demand. Utility production costs declined, including lower fuel and power costs and a prior-year winter-weather comparison.
- The company adopted service-concession accounting guidance in 2015, recording an $8.4 million after-tax cumulative reduction to opening accumulated deficit. Terratec, sold in 2014, is presented as discontinued operations; its Q1 2014 after-tax loss was $1.0 million.
Outlook, management commentary, risks and contingencies
- Management described 2015 priorities as customers, safety, people, growth, and operational efficiency. Its 2015 capital plan was $1.2 billion, principally for regulated infrastructure, with a further $0.1 billion allocated to acquisitions and strategic investments.
- Rate approvals effective in Q1 represented $10.3 million of annualized general-rate-case revenue and $15.8 million of annualized infrastructure charges. Pending requests included $102.4 million of annualized revenue in four states and $4.4 million of infrastructure charges in three states; approval is not assured.
- On April 9, 2015, California regulators approved a settlement with rates retroactive to January 1. The settlement permitted recovery of certain prior costs and a sharing mechanism for contamination proceeds; finalization increased pretax earnings by $9 million, reflected in Q1 results.
- California’s severe drought prompted a state-mandated 25% water-use reduction versus 2013 levels. Management said the subsidiary’s water revenue adjustment mechanism should limit significant earnings impact, although related customer surcharges or credits may affect cash flows as they are collected or refunded over 12–36 months.
- On April 30, the company announced an agreement to acquire Environmental Disposal Corporation, serving more than 5,300 New Jersey customer accounts, subject to regulatory approval. The company also began a share repurchase program in April to offset dilution; 84,400 shares had been repurchased through May 4.
- Moody’s reaffirmed the company’s Baa1 corporate credit rating and P2 commercial-paper rating on April 22, revising its outlook to positive from stable. Management cautioned that access to capital markets and commercial paper depends on financial conditions and ratings.
- Legal matters include ongoing Freedom Industries spill litigation and a shareholder demand letter. The company accrued approximately $4.8 million for legal matters and said reasonably possible additional losses could reach $29.9 million; some exposures cannot be estimated. It stated that outcomes it currently expects would not materially affect results, financial position, or cash flows.
- A March 2015 diesel fuel overflow at a Virginia facility led to EPA-directed removal work and a state notice of violation; the filing gives no penalty amount. Separately, a California court issued a tentative decision finding four agreements related to a proposed desalination project void; a final decision was pending, and another party sought rehearing of a related regulatory approval.
- Quarterly results are seasonal and not necessarily indicative of full-year results. Management reported no material change in previously disclosed risk factors or market risk, and stated that disclosure controls were effective at a reasonable level of assurance.
Most important facts for investors to verify
- Whether regulated rate requests and infrastructure surcharges are approved, and how rate recovery translates into earnings and cash collections.
- Whether the California drought and consumption trends affect revenues or working capital despite the revenue adjustment mechanism.
- Whether operating cash flow can support the $1.2 billion capital plan, dividends, and debt obligations without materially increasing borrowing.
- Progress and potential exposure from the Freedom Industries litigation, Virginia environmental incident, and California desalination-related proceedings.
- Completion and regulatory approval of the Environmental Disposal Corporation acquisition, and the returns from planned infrastructure investment.