American Water Works Company, Inc. annual report, FY2021

American Water Works Company, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021; filed February 16, 2022. This is an annual report, not a standalone fourth-quarter filing. American Water provides regulated water and wastewater services across 14 states and operates market-based businesses, principally military installation contracts. Regulated operations generated 86% of 2021 revenue.

Financial performance and liquidity

Metric	2021	2020
Operating revenue	$3.930 billion	$3.777 billion
Operating income	$1.196 billion	$1.248 billion
Net income attributable to common shareholders	$1.263 billion	$709 million
Diluted EPS	$6.95	$3.91
Cash provided by operating activities	$1.441 billion	$1.426 billion
Capital expenditures	$1.764 billion	$1.822 billion
Cash dividends declared per share	$2.41	$2.20

Operating margin was approximately 30.4%, versus 33.0% in 2020; net margin was approximately 32.1%, versus 18.8%. The adjusted regulated O&M efficiency ratio, a company-defined non-GAAP measure, improved to 34.1% from 34.3%.

At year-end, total assets were $26.075 billion and common shareholders’ equity was $7.298 billion. Long-term debt and redeemable preferred stock totaled $10.344 billion; short-term debt was $584 million and current long-term debt was $57 million. Cash was $116 million, and available liquidity including the revolving facility was $1.706 billion. Current assets of $1.554 billion were below current liabilities of $2.141 billion. The company reported compliance with its debt-to-capitalization covenant at 0.60 against a 0.70 maximum.

Material changes and notable items

• Revenue increased 4.1%, mainly from authorized rate increases and infrastructure surcharges, acquisitions and organic growth. Regulated revenue rose to $3.384 billion from $3.255 billion.
• Operating income declined despite revenue growth, as operating and maintenance expense rose to $1.777 billion from $1.622 billion, alongside higher depreciation and taxes.
• Net income and EPS rose sharply, principally because the December 2021 sale of Homeowner Services Group (HOS) generated a $748 million pretax gain. The gain and $45 million charitable foundation contribution together had a reported net income benefit of $491 million, or $2.70 per share. Accordingly, reported earnings growth substantially overstates underlying operating growth.
• HOS was sold for approximately $1.275 billion of total consideration: $480 million cash, a $720 million five-year seller note bearing 7% interest, and a contingent $75 million payment subject to conditions. The company also retains specified revenue-share rights.
• The New York utility sale closed January 1, 2022 for $608 million cash; the Michigan operations sale closed February 4, 2022 for approximately $6 million. New York assets and liabilities were classified as held for sale at year-end.
• Operating cash flow increased modestly, while investing cash outflow fell to $1.536 billion, partly reflecting HOS sale proceeds. Financing activities used $345 million, including repayment of the $500 million term loan and higher debt repayments and dividends.

Outlook, risks and contingencies

• Management expects $13–$14 billion of investment over five years and $28–$32 billion over ten years, including acquisitions. The 2022 plan is $2.5 billion: $2 billion for regulated infrastructure and $500 million for acquisitions. Management expects capital investment to exceed operating cash flow over the next several years and plans to use debt, equity and divestiture proceeds to fund the difference.
• The company plans to replace nearly 2,200 miles of mains and collection pipes during 2022–2026. It estimates $600 million–$1.2 billion to replace a significant majority of currently known lead service lines in most service areas by 2030, subject to local policy and other factors.
• California’s Monterey Peninsula water-supply project remains subject to permits, litigation and regulatory review. Cal Am had incurred $186 million through year-end, including $47 million of AFUDC; recovery beyond previously approved amounts is not assured. The project and alternative supplies are important to meeting Carmel River diversion requirements.
• Key risks include regulatory decisions and lag in recovering costs, rising financing and operating costs, aging infrastructure, drought and water availability, severe weather, emerging contaminants, cyber incidents, supply-chain disruption, and condemnation proceedings. Monterey acquisition/condemnation efforts and Chicago-area pipeline condemnation litigation remain relevant. Certain class actions arising from prior water-main failures also remain pending.
• The company accrued approximately $7 million for probable loss contingencies and estimated up to $2 million for reasonably possible losses that could be reasonably estimated; it could not estimate losses for certain matters. These amounts do not capture every potential exposure.
• COVID-19 effects included foregone fees, incremental operating costs, higher uncollectible accounts and financing costs. At year-end, the company recorded $36 million of related regulatory assets and $6 million of regulatory liabilities; recovery differs by jurisdiction.
• No formal consolidated earnings or EPS guidance is provided in the filing text summarized here. Management’s investment plans and expectations are forward-looking and depend on regulatory approvals, financing access and project execution.

Most important facts for investors to verify

• How much of 2021 earnings growth is repeatable after excluding the HOS gain and related tax effects.
• Collection and repayment prospects for the $720 million seller note and the conditions for the contingent $75 million payment.
• Actual funding mix, debt costs and rate-base recovery supporting the $13–$14 billion five-year investment plan.
• Progress, permitting, cost recovery and water-supply implications of the Monterey project and Carmel River compliance.
• Regulatory outcomes for pending rate cases, COVID-19 cost recovery and lead-service-line funding.
• Developments in the disclosed condemnation matters, water-main litigation and other contingencies.