American Water Works Company, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This annual filing also provides unaudited fourth-quarter results. Financial figures are in U.S. dollars; millions unless otherwise stated.
Business context
American Water is a regulated water and wastewater utility serving about 14 million people across 24 states. Its Regulated Businesses serve approximately 3.5 million active customers and generated 93% of 2023 revenue. Other operations primarily include long-term water and wastewater contracts at U.S. military installations and municipal facilities.
Key financial and operating metrics
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenue | $4.234 billion | $3.792 billion | +11.7% |
| Operating income | $1.504 billion | $1.273 billion | +18.1% |
| Net income attributable to common shareholders | $944 million | $820 million | +15.1% |
| Diluted EPS | $4.90 | $4.51 | +8.6% |
| Net cash from operating activities | $1.874 billion | $1.108 billion | +$766 million |
| Capital expenditures | $2.575 billion | $2.297 billion | +12.1% |
| Cash dividends declared per share | $2.83 | $2.62 | +8.0% |
Operating margin was approximately 35.5%, compared with 33.6% in 2022; net margin was approximately 22.3%, compared with 21.6%. These are calculated from reported results. The adjusted Regulated Businesses O&M efficiency ratio, a non-GAAP measure, improved to 32.8% from 33.7%.
At year-end, total assets were $30.298 billion, common shareholders’ equity was $9.797 billion, and long-term debt plus redeemable preferred stock was $11.718 billion. Including short-term debt and current long-term maturities, debt was approximately $12.372 billion. Cash was $330 million; reported available liquidity, including the revolving credit facility, was $2.825 billion. Current assets of $1.389 billion were below current liabilities of $2.151 billion, a working-capital deficit of approximately $762 million.
Fourth-quarter revenue was $1.032 billion versus $931 million; operating income was $299 million versus $261 million; net income was $171 million versus $147 million; and diluted EPS was $0.88 versus $0.81.
Material changes and drivers
- Regulated revenue increased $415 million, principally from $350 million of authorized rate increases and infrastructure surcharges, plus customer growth and acquisitions. Drier-than-normal weather contributed an estimated $19 million net revenue increase; lower customer demand partly offset growth.
- Net income growth reflected rate recovery on capital investment and acquisitions. Higher operating costs, particularly production costs and pension costs, and share dilution partly offset the benefit. Management estimated favorable weather added $0.13 to 2023 EPS, compared with $0.06 in 2022.
- O&M expense rose to $1.720 billion from $1.589 billion. Regulated production costs increased $51 million, largely due to inflation-related fuel, power and chemical costs and higher waste-disposal maintenance. Depreciation and amortization increased $55 million, reflecting assets placed in service and acquisitions.
- Operating cash flow increased substantially, in part because 2022 included significant estimated tax payments related to the HOS and New York sales. Investing cash outflow rose to $2.815 billion, including higher capital spending and no comparable New York sale proceeds.
- The company issued $1.688 billion of common stock and $1.035 billion of 3.625% exchangeable notes due 2026 during 2023. The equity issuance increased share count; management estimated its EPS dilution at $0.29, roughly offset by avoided interest expense for the year.
Outlook, risks and unusual items
- Investment plan: Management expects $3.1 billion of investment in 2024; $16–$17 billion over five years; and $34–$38 billion over ten years, including acquisitions. These are plans, not guaranteed spending or earnings outcomes. The company expects average annual rate increases across its footprint of 5%–6% over the next five years.
- PFAS and water quality: Based on proposed EPA rules, the company preliminarily estimates about $1 billion in treatment capital spending over three to five years and up to $50 million in annual testing and treatment operating expense. Estimates depend on final rules and system-level engineering. Separately, it estimates about $900 million in water-quality capital spending over five years, including $200 million in 2024.
- Rate recovery and financing: Results depend on timely regulatory approval and recovery of costs and investment. Inflation, interest rates, regulatory lag, capital-market access and debt refinancing could affect returns, cash flows and liquidity. Debt maturities and sinking-fund payments are $475 million in 2024, $619 million in 2025 and $1.478 billion in 2026. The company reported compliance with its 0.70 debt-to-capitalization covenant; its year-end ratio was 0.56.
- Water supply and major projects: California subsidiary Cal Am must develop alternative supply to meet Carmel River diversion requirements. The Monterey Peninsula Water Supply Project remains subject to permits, litigation and cost-recovery proceedings; $241 million had been incurred through year-end, including AFUDC. Project completion and recovery of all costs are not assured.
- Legal and contingency exposure: The Monterey system is subject to an eminent-domain lawsuit seeking condemnation. West Virginia subsidiaries face litigation and regulatory investigations following a 2023 water-main incident and related natural-gas outage; causation and potential losses were not estimable in the filing. Other water-main-break class actions also remain pending. The company reported $6 million of accrued probable loss contingencies and $3 million of reasonably possible losses that could be estimated, but said some matters could not be estimated.
- Other unusual items: The 2021 comparison includes a $748 million pre-tax gain on the HOS sale; 2022 included a $19 million gain from post-closing adjustments. In February 2024, the HOS seller note was amended from $720 million to $795 million, with its interest rate increased from 7% to 10% through maturity in December 2026; the amendment replaced the contingent $75 million payment and removed a conditional repayment right. The company said it expected to become subject to the Corporate Alternative Minimum Tax in 2024, subject to ongoing evaluation.
- Other risks: Severe weather, drought, aging infrastructure, water contamination, stricter environmental standards, cybersecurity incidents, supply-chain constraints, labor negotiations, insurance limitations and acquisition execution may materially affect operations or financial results. No cybersecurity incident had been determined to have a material impact through the filing date.
The filing does not provide a specific 2024 earnings or EPS forecast.
Important facts for investors to verify
- Progress and final decisions on pending rate cases, surcharges and recovery of infrastructure, PFAS and Monterey project costs.
- Actual 2024 capital spending, funding mix, liquidity and refinancing plans, particularly around the 2026 debt maturities and exchangeable notes.
- Final EPA PFAS requirements, affected systems, treatment costs, operating expense and customer-rate impacts.
- Developments in the Monterey condemnation action, alternative-water-supply permits and project schedule.
- Updates to West Virginia incident claims and investigations, and the company’s assessment of potential losses in pending litigation.
- Collection and repayment terms for the amended HOS seller note, and any effect on cash available for investment.