Business context and reporting period
American Water Works Company, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. It is the largest U.S. publicly traded investor-owned water and wastewater utility, serving about 15 million people across 47 states, the District of Columbia and Ontario. Its regulated utilities in 16 states generated 86.9% of 2016 operating revenue; the remainder came from market-based services.
The filing also provides unaudited fourth-quarter results. This is an annual report, not a standalone quarterly filing.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Operating revenue | $3.302 billion | $3.159 billion |
| Operating income | $1.080 billion | $1.075 billion |
| Net income attributable to common stockholders | $468 million | $476 million |
| Diluted EPS | $2.62 | $2.64 |
| Cash from operating activities | $1.276 billion | $1.179 billion |
| Capital expenditures | $1.311 billion | $1.160 billion |
- Operating margin was approximately 32.7% and net margin approximately 14.2% in 2016, calculated from reported figures.
- Regulated revenue rose 4.7% to $2.871 billion; market-based revenue rose 3.9% to $451 million. The regulated segment reported $472 million of net income attributable to common stockholders, versus $473 million in 2015; market-based businesses reported $39 million, versus $42 million.
- Year-end assets were $18.482 billion and common stockholders’ equity was $5.218 billion. Long-term debt and redeemable preferred stock were $5.759 billion; short-term debt was $849 million and current maturities of long-term debt were $574 million. The filing describes aggregate short- and long-term debt, including redeemable preferred stock, as approximately $7.2 billion.
- Cash and cash equivalents were $75 million. Working capital was in deficit; the filing does not state a clear deficit amount in the cited discussion. The $1.75 billion revolving credit facility supported $849 million of commercial paper; the company reported compliance with its debt-to-capitalization covenant at 0.58 versus a 0.70 maximum.
- Dividends declared were $1.50 per share, up from $1.36 in 2015. Cash dividends paid totaled $261 million.
- Fourth-quarter 2016 revenue was $802 million, operating income $248 million, net income $101 million and diluted EPS $0.57; fourth-quarter 2015 figures were $783 million, $232 million, $99 million and $0.55, respectively.
Material changes versus the prior comparable period
- Revenue increased 4.5%, principally from regulated rate increases, infrastructure surcharges, acquisitions and organic growth. Regulated billed water sales volume declined 0.4%.
- Operating expenses, net increased 6.6%, faster than revenue; operating income was nearly flat. O&M expense rose 7.1%, including a $65 million charge related to the Freedom Industries settlement agreement in principle. Interest expense also increased.
- Reported diluted EPS fell from $2.64 to $2.62. Excluding the settlement charge’s $0.22 per-share after-tax impact, adjusted diluted EPS was $2.84, up about 7.6% from 2015; this is a non-GAAP measure.
- Cash from operations increased $97 million, while capital expenditures rose $151 million. The company completed 15 regulated acquisitions for $199 million, adding about 42,000 customers. Its 2015 Keystone acquisition contributed to market-based revenue and expenses.
Outlook, commentary, risks and unusual items
- Management expects $6.7–$7.3 billion of investment over 2017–2021, including $1.5 billion in 2017. The plan includes $5.9 billion for regulated infrastructure and $600 million–$1.2 billion for regulated acquisitions. Management targets an adjusted O&M efficiency ratio at or below 32.5% by 2021; this is non-GAAP, and the filing does not provide a quantitative reconciliation.
- Lead service lines were estimated at about 5% of the company’s lines. Replacement over approximately 10 years was estimated to cost $600 million–$1.2 billion. Environmental-control capital spending was projected at $83 million for 2017 and $78 million for 2018.
- The proposed $126 million global Freedom Industries settlement remains subject to final court approval. The company recorded a $65 million pre-tax charge, net of insurance receivables; WVAWC’s proposed contribution is $65 million. Two insurers with $50 million of aggregate coverage had not agreed to participate, and recovery remains uncertain. WVAWC agreed not to seek rate recovery for settlement payments or approximately $4 million of direct response costs.
- Other notable matters include pending Monterey Peninsula water-supply project approvals and litigation, including the Carmel River diversion deadline extended to December 31, 2021; and Missouri litigation over infrastructure surcharge authority, with a reasonably possible loss range of zero to $26 million.
- Principal risks include regulatory rate decisions and lag, water availability and drought, increasingly stringent water-quality and environmental requirements, infrastructure reliability and project execution, contamination, cyber or physical attacks, debt and refinancing needs, interest rates, pension funding, and market-based contract and Keystone exposure. The company also cites a $1.2 billion estimated lead-line replacement program and substantial dependence on continued rate recovery and capital-market access.
- Management reported drinking-water compliance above 99% and 2016 performance 21 times better than the industry average, while noting continuing investment and customer-affordability priorities. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Final approval, funding allocation and insurance recoveries for the Freedom Industries settlement, including any claims by parties that opt out.
- Progress, cost, permitting and rate recovery for the Monterey water-supply project, and compliance with the 2021 Carmel River diversion deadline.
- Whether planned capital investment and acquisitions are funded without weakening liquidity, credit metrics or dividend capacity; monitor the 2017 debt maturities and commercial-paper reliance.
- Actual lead-service-line inventory, replacement schedule and cost allocation between company- and customer-owned lines.
- Rate-case outcomes, surcharge recoveries and the pace of operating-cost growth relative to revenue; assess progress against the non-GAAP efficiency target.