American Water Works Company, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with the three months ended March 31, 2022. The company provides regulated water and wastewater services, alongside military and other contract services. Interim results are seasonal and are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $938 million | $842 million | +11.4% |
| Operating income | $295 million | $246 million | +19.9% |
| Net income attributable to common shareholders | $170 million | $158 million | +7.6% |
| Diluted EPS | $0.91 | $0.87 | +$0.04 |
| Cash from operating activities | $285 million | $154 million | +$131 million |
| Capital expenditures | $526 million | $424 million | +$102 million |
Operating margin was approximately 31.4%, up from 29.2%; net margin was approximately 18.1%, down from 18.8%. Operating cash flow less capital expenditures was negative $241 million, compared with negative $270 million a year earlier. Management attributed the operating cash-flow improvement mainly to deferred taxes and working-capital changes, including the prior-year settlement of a deferred tax liability related to sold New York operations.
At March 31, 2023, cash and cash equivalents were $213 million. Available liquidity was $2.885 billion, including $2.672 billion of remaining revolving-facility availability. Short-term debt was zero, versus $1.175 billion at year-end 2022. Long-term debt was $10.485 billion, with $727 million classified as current; combined carrying debt was approximately $11.2 billion. The debt-to-capitalization covenant ratio was 0.54 against a maximum of 0.70.
Material changes and drivers
- Regulated revenue rose $82 million, driven primarily by $71 million from authorized rate increases and infrastructure surcharges and $11 million from acquisitions and organic growth. Other-business revenue increased $14 million, primarily from military-services projects.
- Regulated O&M expense increased $15 million, mainly from inflation-related fuel, power and chemical costs. Depreciation and amortization increased $14 million, reflecting infrastructure investment and acquisitions.
- Interest expense increased $15 million year over year, reflecting the May 2022 debt issuance and higher short-term borrowing costs; non-operating benefit costs also increased.
- The company issued 12.65 million common shares in March, generating approximately $1.688 billion of net proceeds before offering expenses. Proceeds repaid commercial paper and supported general corporate purposes. The offering contributed to the increase in shareholders’ equity and reduced short-term debt.
Outlook, regulation and risks
- Management plans approximately $2.9 billion of capital investment in 2023. It expects investment over the next several years to exceed operating cash flow and plans to fund the difference through debt and equity issuance and remaining Homeowner Services Group sale proceeds; it may delay some investment if needed to preserve liquidity.
- Rate authorizations effective in 2023 represent $229 million of annualized incremental revenue, and infrastructure surcharge authorizations represent $50 million annualized. These amounts assume constant sales volume and customer count and are not reported-quarter revenue.
- Pending rate matters include Indiana’s $87 million annualized request, a Missouri settlement proposal for a $44 million increase, and California’s multi-year rate case. Outcomes and timing remain subject to regulatory decisions.
- The proposed federal PFAS drinking-water rules could require additional treatment investment and operating costs. The company was assessing the impact; the filing does not provide a clear cost estimate.
- The Monterey Peninsula Water Supply Project faces permitting, litigation, schedule and cost-recovery uncertainty. Cal Am had incurred $218 million, including AFUDC, by March 31, 2023, and cautioned that recovery of all costs is not assured. Drought and compliance with Carmel River diversion limits also pose risks.
- Other contingencies include class-action litigation related to water-main breaks and a potential condemnation of Monterey system assets. The company said it could not estimate potential losses for certain proceedings. It reported approximately $6 million of accrued probable loss contingencies and up to $5 million of reasonably possible losses that could be estimated.
- The company reported no material changes to previously disclosed risk factors and no significant change in market-risk exposure. Management said disclosure controls were effective at a reasonable level of assurance.
Guidance: The filing gives a 2023 capital-investment plan but does not provide a clear full-year earnings or EPS forecast.
Most important facts for investors to verify
- Progress and final outcomes of rate cases and infrastructure-surcharge filings, including how much requested revenue is approved and when rates take effect.
- PFAS rule requirements, expected treatment costs, and prospects for regulatory recovery or manufacturer contributions.
- Monterey project permitting, construction costs, rate recovery, and compliance with Carmel River diversion requirements.
- Execution of the $2.9 billion capital plan and the resulting need for debt or additional equity financing.
- Collection of the $720 million Homeowner Services Group seller note and satisfaction of conditions for the contingent payment, valued at $72 million and potentially payable by December 31, 2023.