American Water Works Company, Inc. — 2010 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; filed November 3, 2010. Dollar amounts below are in millions unless stated otherwise. The company operates regulated water and wastewater utilities and non-regulated service businesses. Interim results are seasonal and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $786.9 | $680.0 | $2,046.2 | $1,842.9 |
| Operating income | $274.0 | $214.4 | $596.0 | $36.2 |
| Net income (loss) | $124.1 | $91.6 | $227.7 | $(269.5) |
| Diluted earnings (loss) per share | $0.71 | $0.52 | $1.30 | $(1.62) |
| Operating margin | 34.8% | 31.5% | 29.1% | 2.0% |
- Q3 revenue rose 15.7%; operating income increased $59.5 million and net income increased $32.5 million year over year. Revenue growth reflected rate increases and higher water demand, including warmer, drier weather in the Mid-Atlantic.
- Nine-month revenue rose 11.0%. The 2009 comparison includes a $450 million goodwill impairment charge, which drove the prior-period loss; no impairment was recorded in 2010. The filing reports the 2009 impairment’s after-tax impact as $443 million.
- Nine-month 2010 regulated revenue was $1,834.9 million and non-regulated revenue was $230.2 million. Segment adjusted EBIT was $573.4 million and $18.5 million, respectively. Adjusted EBIT is a company-defined non-GAAP measure, not cash flow.
- Operating expenses were $513.0 million in Q3, up $47.4 million. Nine-month expenses were $1,450.2 million; excluding the prior-year impairment, 2009 expenses were $1,356.6 million, making 2010 expenses higher by $93.6 million. Cost increases included labor, production, maintenance, depreciation and taxes.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $587.0 million, versus $471.6 million a year earlier. Investing cash outflow was $506.0 million, including $522.1 million of capital expenditures; financing cash outflow was $79.8 million. Cash ended the period at $23.5 million.
- At September 30, total assets were $14.0 billion and stockholders’ equity was $4.1 billion. Reported long-term debt was $5.372 billion, current maturities were $44.0 million, and short-term debt was $181.8 million. Short-term debt rose from $119.5 million at December 31, 2009. Restricted funds totaled $126.3 million and should not be treated as unrestricted cash.
- Working capital was a deficit of $114.0 million. The company reported $814.0 million of available capacity under its revolving credit facilities and no revolving-credit borrowings at September 30. It reported compliance with its principal credit-facility debt-to-capitalization covenant; two subsidiaries did not meet a separate interest-coverage test for issuing new secured debt.
- Company-funded 2010 capital investment was estimated at $800 million to $1 billion, with management expecting to be near the lower end. The company noted that capital investment is expected to remain at or above operating cash generation, and it had no plans to significantly reduce debt.
Changes, outlook and material matters
- Regulated revenue benefited from rate authorizations; the company said the nine-month impact of 2010 rate increases was about $107.7 million. As of October 29, it was awaiting final decisions in nine states on requests for $216.7 million of annualized revenue. Some Kentucky and Virginia rates were interim and subject to refund; requested increases are not assured.
- Non-regulated revenue growth included the December 2009 Contract Operations acquisition, higher military contract work, and growth in Homeowner Services. Acquisition-related reorganization and transition costs contributed to expense increases.
- The company estimated 2010 capital investment at $800 million to $1 billion. Its business transformation program, including an enterprise SAP system, could cost up to $280 million, with implementation targeted by the end of 2014.
- In July, the company entered a $100 million interest-rate swap converting fixed-rate debt to a variable rate. Management described the swap as intended to mitigate interest costs; a hypothetical 1% rate increase on variable-rate debt and commercial paper would reduce 2010 pretax earnings by $0.4 million.
- Management identified seasonality, regulatory decisions and lag, customer usage and payment patterns, weather, operating costs, environmental requirements, access to capital markets, interest rates, and pension investment performance as risks. The filing gives no earnings-per-share or revenue guidance for the full year.
- Labor negotiations with most regulated-business unions were at an impasse after the agreement expired July 31, 2010. The company had begun implementing its final offer, prepared contingency plans, and did not expect a system-wide work stoppage to materially affect results.
- Legal matters included approximately $4.3 million accrued for probable costs, with reasonably possible additional losses of up to $12.9 million. Environmental remediation accruals were $6.7 million. A new Ontario drinking-water proceeding was disclosed; the company expected any penalties to be immaterial.
- The company declared a $0.22-per-share dividend payable December 1, 2010. A California regulatory rule change concerning affiliate transactions and regulated utility assets was under review.
Most important facts for investors to verify
- Whether pending rate cases are approved, particularly interim rates subject to refund, and how much of the $216.7 million of requested annualized revenue is ultimately authorized.
- Whether capital spending stays within the estimated range and how the company funds investment, debt maturities and dividends while working capital is negative.
- Whether higher operating, labor, pension and acquisition-related costs persist, and how much revenue growth reflects rates versus weather-driven consumption.
- Progress on union negotiations, the SAP transformation program and the California affiliate-transaction rule review.
- Developments in legal and environmental matters, covenant capacity at subsidiaries, and any changes in credit ratings or access to commercial-paper and credit markets.