American Water Works Company, Inc. — Q1 2014 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2014, compared with Q1 2013. American Water operates regulated water and wastewater utilities and market-based services. Results are seasonal; management cautions that interim performance is not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Operating revenue | $681.9 million | $636.1 million |
| Operating income | $186.1 million | $164.2 million |
| Net income | $68.1 million | $57.6 million |
| Diluted EPS | $0.38 | $0.32 |
| Operating cash flow | $244.9 million | $149.6 million |
| Capital expenditures | $192.5 million | $213.1 million |
| Cash and cash equivalents | $30.8 million | $27.0 million at Dec. 31, 2013 |
| Long-term debt | $5.21 billion | $5.21 billion at Dec. 31, 2013 |
| Short-term debt | $638.2 million | $630.3 million at Dec. 31, 2013 |
Operating margin was approximately 27.3% versus 25.8% a year earlier; net margin was approximately 10.0% versus 9.1%. The regulated-business O&M efficiency ratio, a non-GAAP measure, improved to 41.5% from 42.9%. The company reported $1.21 billion available under its $1.25 billion revolving credit facility, supporting commercial paper; it had $638.2 million outstanding commercial paper and no facility borrowings. The company reported compliance with debt covenants, including a 0.55 debt-to-capitalization ratio against a 0.70 maximum.
Material changes versus Q1 2013
- Revenue increased $45.8 million, or 7.2%; regulated revenue grew $34.4 million and market-based revenue grew $11.5 million.
- Regulated revenue benefited mainly from rate increases, surcharges and balancing-account amortization, higher consumption, and acquisitions. Market-based growth reflected military contract project activity and homeowner-services contract growth.
- Operating expenses rose $23.9 million, including higher O&M and depreciation. Regulated production costs increased, while pension and insurance costs declined; harsh winter conditions contributed to more main breaks and repair costs.
- Net income rose $10.5 million. Lower interest expense following 2013 refinancing helped, partly offset by higher income taxes; the prior-year tax rate benefited from a $3.3 million tax benefit.
- Operating cash flow increased by $95.2 million, reflecting higher earnings and noncash items, improved working-capital contribution, and lower pension and postretirement contributions.
Outlook, management commentary, and risks
- Management estimated a 2014 capital plan of approximately $1.1 billion, including $900 million to $1.0 billion for infrastructure and systems and about $100 million for acquisitions and strategic investments. Q1 capital investment was approximately $175.2 million, including acquisitions.
- Management planned to resolve three rate proceedings in 2014 and file up to four general rate cases. As of May 5, two cases remained awaiting final orders, seeking about $52 million in additional annualized revenue; requested increases are not assured. Several rate adjustments and infrastructure surcharges took effect or were approved during the period.
- Management’s stated priorities included addressing regulatory lag, improving regulated O&M efficiency, pursuing acquisitions and growth, and customer service. It anticipated savings from lower business-transformation costs, pension costs, and interest expense.
- Cash collections improved in Q1 after delays associated with the 2013 customer-information-system implementation, but management said there was no assurance collections would return to historical patterns. Operating cash flow is typically higher in the third quarter due to seasonal demand.
- The January 2014 Freedom Industries chemical spill reduced pretax income by $5.9 million. Fifty-eight lawsuits had been filed against West Virginia-American Water Company and related entities; the company intends to contest them, but an adverse outcome could materially affect financial condition, results, cash flows, liquidity, and reputation. Government investigations and possible legislative action remained unresolved.
- Other legal matters included approximately $3.3 million accrued for probable legal costs, with reasonably possible additional losses of up to $32.1 million; some matters could not be estimated. A California water-treatment-residuals matter was settled in April 2014 for $389,855, including penalties, costs, and an environmental project.
- The company had $3.3 million accrued for the NOAA conservation agreement, with annual payments of $1.1 million through 2016. It reported no material changes to previously disclosed risk factors or market risks.
- The board declared a $0.31-per-share quarterly dividend on April 29, payable June 2, 2014. The company paid $0.28 per share in March; the operations statement’s declared-dividend line shows $0.00, while the notes explain the Q1 payment.
Important facts for investors to verify
- Whether pending rate cases and infrastructure surcharges are approved, and how much requested revenue will be realized.
- Whether customer collections continue to normalize after the billing-system transition, and whether receivables and uncollectible-account expense improve.
- Progress against the $1.1 billion capital plan and the funding mix, including reliance on commercial paper and access to credit markets.
- Developments in the Freedom Industries litigation, government investigations, and related potential liabilities.
- Whether revenue growth and the improved O&M efficiency ratio persist despite winter-related repair costs, higher production costs, and seasonal variability.