American Water Works Company, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. American Water is a regulated water and wastewater utility serving about 15 million people; its regulated businesses generated 86.8% of 2015 revenue.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $3.159 billion | $3.011 billion | +4.9% |
| Operating income | $1.075 billion | $1.003 billion | +7.2% |
| Income from continuing operations | $476 million | $430 million | +10.7% |
| Net income attributable to common stockholders | $476 million | $423 million | +12.5% |
| Diluted EPS from continuing operations | $2.64 | $2.39 | +10.5% |
| Cash from operating activities | $1.179 billion | $1.097 billion | +7.5% |
| Capital expenditures | $1.160 billion | $956 million | +21.3% |
Operating margin was approximately 34.0%; net margin was approximately 15.1%. The adjusted regulated O&M efficiency ratio, a non-GAAP measure, improved to 35.9% from 36.7%. Interest expense was $308 million, compared with $299 million in 2014. The effective income tax rate was 39.1%.
Fourth quarter: Revenue was $783 million versus $731 million in 2014; operating income was $232 million versus $224 million; and net income was $99 million versus $94 million. Diluted EPS was $0.55, compared with $0.52.
Cash, debt and liquidity: Year-end cash was $45 million. Total debt was approximately $6.543 billion, with $13 million of redeemable preferred stock. Working capital was in deficit; balance-sheet current assets of $657 million were below current liabilities of $1.533 billion. Commercial paper outstanding was $626 million, supported by a $1.25 billion revolving facility extended to June 2020; $1.182 billion of aggregate credit-facility capacity was reported available. The company was in compliance with its debt-to-capitalization covenant at 0.56 against a maximum of 0.70. Operating cash flow less capital expenditures was approximately $19 million, before acquisitions and other investing items.
Material changes versus prior year
- Revenue rose $148 million, reflecting rate increases and infrastructure charges, growth in market-based businesses, and the Keystone acquisition. Regulated revenue increased $69 million; market-based revenue rose $79 million, or 22.3%.
- Net income increased $53 million. Management noted that 2014 included Freedom Industries spill costs of $10 million, or $0.04 per diluted share; excluding that EPS impact, continuing-operations EPS growth was about 8.8%.
- Regulated O&M expense declined $17 million, while total company O&M increased $54 million, largely from market-based activity and Keystone.
- Capital expenditures increased by $204 million, principally for infrastructure renewal. The company invested $1.2 billion in regulated infrastructure and spent $133 million to acquire a 95% interest in Keystone Clearwater Solutions. It also spent $64 million on regulated system acquisitions that added approximately 24,000 customers.
- Debt increased from $5.936 billion to $6.543 billion. Cash dividends paid rose to $239 million from $216 million; dividends declared were $1.36 per share versus $1.24.
Outlook, risks and contingencies
- Investment plans: Management expects $6.4 billion of investment over 2016–2020, including $5.5 billion in regulated infrastructure and $600 million for regulated acquisitions. Estimated 2016 capital expenditures and other investments are $1.3 billion, including $1.2 billion for regulated infrastructure. The company targets an adjusted O&M efficiency ratio of 34% or less by 2020. No specific earnings guidance is provided in the supplied filing text.
- Rate recovery: As of February 24, 2016, the company was awaiting decisions on five general rate cases seeking $123 million in annualized revenue and infrastructure-charge requests seeking $5 million. Approval and timing are uncertain. Monterey subsidiary Cal Am sought recovery of approximately $51 million in under-collected revenue; the regulator’s consumer advocate recommended disallowing $17 million and opposed parts of the request.
- Water supply and project exposure: Cal Am’s Monterey Peninsula Water Supply Project faces regulatory, permitting and litigation hurdles. Its estimated earliest completion is 2018, later than the December 31, 2016 deadline to end unpermitted Carmel River diversions. Cal Am sought an extension to 2020; approval was not assured, and the filing warns of possible penalties and additional costs.
- Freedom Industries litigation: Sixty-eight cases were pending at year-end concerning the 2014 Elk River chemical spill, with further filings and regulatory investigations noted in the filing. Class treatment was allowed on certain liability issues, but class damages were not certified. The company says it cannot reasonably estimate potential losses; an adverse result could materially affect financial results, liquidity and reputation.
- Other risks: Extensive rate and environmental regulation; drought, weather volatility and water contamination; infrastructure failures; financing needs and interest-rate exposure; pension funding; cybersecurity and operational technology; labor relations; and market-based contract and Keystone exposure to natural-gas industry conditions. Keystone-related goodwill of $91 million had estimated fair value less than 3% above carrying value, leaving it sensitive to adverse developments.
- The company reported $5 million of accrued probable loss contingencies and up to $36 million of reasonably possible losses that could be estimated, excluding matters for which loss estimates were unavailable. A Virginia diesel spill was resolved with a $20,000 civil charge.
Important facts for investors to verify
- Whether pending rate cases and infrastructure surcharges are approved, and the timing and amount of resulting revenue recovery.
- Developments in the Monterey water-supply project, Carmel River diversion deadline extension, and related litigation and permitting.
- Progress and possible financial exposure in the Freedom Industries litigation and government investigations.
- Funding of the planned capital program, refinancing of debt maturities—including $573 million in 2017—and preservation of liquidity and dividend capacity.
- Keystone’s operating performance and goodwill valuation, particularly under prolonged low natural-gas prices.
- Whether the company achieves its efficiency target while maintaining service quality and absorbing pension and infrastructure costs.