American Water Works Company, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Financial amounts are in U.S. dollars.
Business context
American Water is a regulated water and wastewater utility and provider of market-based water services. It serves an estimated 14 million people across more than 40 U.S. states and two Canadian provinces. Its Regulated Businesses generated 89.4% of 2013 consolidated operating revenue; Market-Based Operations generated 11.2%, with the percentages differing slightly from 100% due to intersegment and other eliminations.
Key financial results
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $2,901.9 million | $2,876.9 million | +0.9% |
| Operating income | $945.8 million | $925.0 million | +2.3% |
| Income from continuing operations | $369.3 million | $374.3 million | -1.3% |
| Net income | $369.3 million | $358.1 million | +3.1% |
| Diluted EPS, continuing operations | $2.06 | $2.11 | -2.4% |
| Cash from operating activities | $896.2 million | $955.6 million | -6.2% |
| Capital expenditures | $980.3 million | $928.6 million | +5.6% |
Operating margin was approximately 32.6% in 2013, versus 32.2% in 2012. The 2013 operating-revenue increase came mainly from rate increases, partly offset by lower consumption. Net income exceeded 2012 partly because 2012 included a loss from discontinued operations; continuing-operations income declined.
Regulated Businesses revenue rose 1.1% to $2,593.9 million, while Market-Based Operations revenue fell 1.5% to $325.5 million. The regulated operation and maintenance efficiency ratio improved to 38.7% from 40.1% (a company-defined non-GAAP measure).
For the fourth quarter, revenue was $712.3 million, operating income $215.9 million, net income $59.7 million and diluted EPS $0.33. In fourth-quarter 2012, the corresponding figures were $680.9 million, $167.0 million, $55.5 million and $0.31.
Debt, liquidity and capital
- At year-end, short- and long-term debt was $5,855.7 million; including redeemable preferred stock, debt and redeemable preferred stock totaled $5,874.5 million. Total debt and redeemable preferred stock increased from $5,595.3 million in 2012.
- Cash and cash equivalents were $27.0 million. Current assets of $550.4 million compared with current liabilities of $1,235.5 million, implying working capital of approximately negative $685.1 million.
- Commercial paper outstanding was $630.3 million. The revolving credit facility was increased to $1.25 billion, with $1.18 billion of commitments extended to October 2018. The company reported compliance with its debt covenants; its debt-to-capitalization ratio was 0.55 against a 0.70 maximum.
- Operating cash flow decreased as billing and collections slowed during implementation of the new customer information system, affecting working capital. Management characterized the collection slowdown as temporary and expected a similar near-term effect at additional operating companies.
- The company spent approximately $950 million in Company-funded capital improvements in 2013. It paid $149.5 million in common dividends; dividends declared were $1.12 per share.
Material changes and unusual items
- A $40.6 million pretax loss on extinguishment of debt was recorded in connection with the tender offer and retirement of $225.8 million of 6.085% notes due 2017. The after-tax charge was $24.8 million, or $0.14 per diluted share. The filing said the refinancing was expected to reduce 2014 pretax interest expense by approximately $13.1 million if funded through commercial paper and short-term rates remained unchanged.
- Rate authorizations in 2013 provided $41.4 million in additional annualized revenue from general rate cases and $36.1 million from infrastructure charges, assuming constant sales volume.
- Regulated billed water volume fell 4.7% year over year. Management attributed the revenue-volume pattern to weather and, in part, delayed billing and scrutiny of invoices during customer-system implementation; unbilled revenue rose to $217.1 million from $180.6 million.
- O&M expense declined 2.8% consolidated, while depreciation and amortization rose 6.9%, reflecting plant placed in service, including business-transformation assets.
- The company acquired 15 regulated water and wastewater systems, adding approximately 30,000 customers. Market-Based revenue was lower, largely reflecting terminated municipal and industrial contracts and reduced military construction activity; growth in homeowner services partly offset the declines.
Outlook, risks and contingencies
- Management estimated a 2014–2018 capital plan of approximately $5.8 billion, including $5.1 billion for infrastructure and systems, $400 million for acquisitions and $300 million for strategic investment. The 2014 plan was approximately $1.1 billion. Management targeted a regulated O&M efficiency ratio at or below 35% by 2018.
- Key growth priorities include regulated infrastructure investment and acquisitions, Market-Based expansion, and potential water services for the shale industry. The company also planned to file up to five general rate cases in 2014 and continue pursuing infrastructure surcharges and other mechanisms to reduce regulatory lag.
- The January 2014 Elk River chemical spill near the West Virginia-American Water treatment plant led to a temporary “Do Not Use” order affecting approximately 300,000 people. The order was lifted by January 18; the company reported MCHM below the interagency team’s 10-ppb non-detect level at all tested system points on February 21. Approximately 50 lawsuits and government investigations were reported; the company stated it could not predict their outcomes or related costs and recovery.
- California American Water faced a December 31, 2016 deadline to end unpermitted Carmel River diversions, while its proposed alternative water-supply project was not expected to be completed before mid-to-late 2018. The deadline extension, project approvals, costs and related disputes remained uncertain.
- Other disclosed exposures include potential enforcement action over arsenic-bearing treatment residual disposal in California; a labor dispute with a potential estimated cash impact of $3.5–$4.5 million per year if an administrative ruling is upheld; condemnation proceedings or threats involving certain systems; and risks from drought, weather, water-quality regulation, infrastructure failures, rate-case delays, pension assumptions and access to capital.
- Management reported that the independent auditor found the financial statements fairly presented in all material respects and internal control over financial reporting effective as of December 31, 2013.
Important facts for investors to verify
- Whether billing and collections normalized after the customer information system rollout, and whether unbilled revenue and receivables converted to cash.
- Actual rate-case and surcharge outcomes, timing of recovery, and the effect of lower water usage on regulated revenue and earnings.
- Final cost, approval, schedule and deadline relief for the Monterey water-supply project.
- Developments in Elk River spill litigation and investigations, potential liability, insurance coverage and recoverability through rates.
- Funding of the large capital plan, commercial-paper reliance, debt maturities and the effect of interest-rate changes on liquidity and financing costs.
- Whether management achieved the stated efficiency and growth goals without compromising service quality or required infrastructure investment.