American Water Works Company, Inc. (NYSE: AWK) today reported results
for the quarter ended June 30, 2018.
“American Water employees delivered a strong second quarter with 2018
adjusted earnings per share up 13.7 percent compared to last year. Our
second quarter results demonstrate that we continue to grow our business
through the consistent execution of our strategies,” said Susan Story,
president and chief executive officer of American Water.
“We saw strong growth in both our Regulated and Market-Based Businesses
in the second quarter. We invested a total of $1.1 billion, with $713
million invested in our Regulated Businesses to ensure safe and reliable
service, and $363 million to close on the Pivotal Home Solutions
addition to our legacy Homeowner Services Group in our Market-Based
Businesses.
“Our Regulated Businesses added 10,300 customers to date through closed
acquisitions and organic growth. We also recently announced an agreement
to acquire the Exeter Township Wastewater System in Pennsylvania with
9,000 customer connections, as well as the Roxbury Water System in New
Jersey with 3,900 customer connections. We look forward to welcoming and
serving these new customers in the coming months. Notably, we received
the final approval of our global settlement for Freedom Industries by
the U.S. District Court, and settled with our final insurance carrier.
“In addition to the acquisition of Pivotal Home Solutions, we announced
on July 5 that we had entered into an agreement for the majority of our
Contract Services Group to be sold to Veolia North America. We have
already closed on 17 of the 23 contracts, with the remainder to close by
the end of the year. These efforts reflect the continued optimization of
our Market-Based Businesses segment.
“We remain on track to meet our long term compound annual earnings
growth outlook in the top half of the 7-10 percent range and we are
affirming our 2018 earnings guidance to a non-GAAP range of
$3.22 to $3.32 per diluted share,” added Story.
Consolidated Results
The Company’s three and six months ended results are included in the
table below.
In the second quarter 2018, the global settlement related to the Freedom
Industries chemical spill class action litigation in West Virginia
received final court approval and the Company settled with its remaining
general liability insurance carrier relating to this matter resulting in
a benefit to the Company of $20 million, or $0.08 per diluted share.
Consistent with all other elements of the global settlement, this
benefit is shown as a non-GAAP adjustment.
Adjusted earnings were $0.83 per diluted share (a non-GAAP measure) for
the second quarter 2018, an increase of $0.10 per diluted share, or 13.7
percent, over the same period in 2017. This increase was from growth in
our Regulated and Market-Based Businesses. Net income from the Regulated
Businesses increased $0.08 per diluted share or 10.3 percent from
increases in authorized revenue driven by capital investments,
acquisitions and organic growth. Net income from the Market-Based
Businesses increased $0.02 per diluted share, primarily from stronger
results in the Homeowner Services Group.
For the first six months of 2018, adjusted earnings were $1.42 per
diluted share, an increase of $0.16 per diluted share, or 12.7 percent,
over the same period in 2017. Net income from the Regulated Businesses
increased $0.13 per diluted share or 9.9 percent from increases in
authorized revenue driven by capital investments, acquisitions and
organic growth. Net income from the Market-Based Businesses increased
$0.05 per diluted share, primarily from stronger results in the
Homeowner Services Group and lower taxes and the parent company
decreased $0.02 primarily from the lower tax shield on interest expense.
For the first six months of 2018, the company made capital investments
of approximately $1.1 billion, including $713 million dedicated
primarily to improving infrastructure in the Regulated Businesses, $363
million for the Pivotal acquisition, and $14 million for regulated
acquisitions. American Water plans to invest in the range of $2.0
billion to $2.1 billion, including the acquisition of Pivotal Home
Solutions (“Pivotal”), across its footprint in 2018.
Regulated Businesses
In the second quarter of 2018, GAAP net income in the Regulated
Businesses was $167 million, compared to $140 million for the same
period in 2017.
The 2018 GAAP net income includes an after-tax benefit of $15 million
from the insurance settlement related to the Freedom Industries chemical
spill discussed above and is reflected as a non-GAAP adjustment.
In the second quarter of 2018, adjusted net income in the Regulated
Businesses was $152 million, compared to $140 million for the same
period in 2017. Regulated revenue decreased approximately $2 million
driven by a $35 million increase from additional authorized revenue and
surcharges to support infrastructure investments, acquisitions, and
organic growth that was more than offset by the $38 million impact of
the lower federal tax rate under the Tax Cut and Jobs Act (the “TCJA”)
expected to benefit customers. The company had higher production expense
of $3 million due mainly to purchased water price and usage increases in
our California subsidiary and higher O&M expense of $8 million to
support regulated growth. In addition, depreciation expense increased $4
million from infrastructure investment growth. Income taxes were lower
by $31 million from the lower federal tax rate under the TCJA.
For the first six months of 2018, adjusted net income in the Regulated
Businesses was $256 million, compared to $234 million for the same
period in 2017. Regulated revenue increased $5 million driven by a $75
million increase from additional authorized revenue and surcharges to
support infrastructure investments, acquisitions, and organic growth;
largely offset by $70 million resulting from the lower federal tax rate
under the TCJA that is expected to benefit customers. The Company had
higher production expense of $9 million due mainly to purchased water
price and usage increases in our California subsidiary and O&M increased
$23 million to support regulated acquisition and other growth, as well
as higher main breaks from the harsh frigid weather conditions across
several regulated states during the first quarter of 2018. In addition,
depreciation expense increased $9 million from infrastructure investment
growth. Income taxes were lower by $53 million as a result of the lower
federal tax rate under the TCJA.
Through June 30, 2018, the company received additional annualized
revenues of approximately $95 million from general rate cases and
approximately $15 million from infrastructure surcharges. The company is
awaiting final orders for general rate cases in four states and filed
infrastructure surcharge in one, for a total annualized revenue request
of approximately $169 million, adjusted for certain impacts of the TCJA.
The extent to which requested rate increases will be granted by the
applicable regulatory agencies will vary.
For the 12-month period ended June 30, 2018, the company’s adjusted
regulated O&M efficiency ratio (a non-GAAP financial measure) improved
to 35.3 percent, compared to 36.3 percent for the 12-month period ended
June 30, 2017. For period-to-period comparability purposes, both of
these ratios present the estimated impact of the TCJA on operating
revenues for the Regulated Businesses on a pro forma basis, as if the
lower federal corporate income tax rate had been in effect for these
periods. By reducing O&M expense as a proportion of revenue, American
Water is able to make investments in needed capital improvements without
significantly impacting customer bills.
Market-Based Businesses
On June 4, 2018, American Water completed the acquisition of Pivotal,
for $363 million, including estimated working capital.
In the second quarter of 2018, net income in the Market-Based Businesses
was $13 million, compared to $9 million for the same period in 2017. The
increase was primarily driven by growth in the Homeowner Services Group
through customer growth and cost management and the impact of the lower
federal income tax rate under the TCJA.
For the first six months of 2018, net income in the Market-Based
Businesses was $25 million, compared to $15 million for the same period
in 2017. The increase was primarily driven by growth in the Homeowner
Services Group through customer growth and cost management and the
impact of the lower federal income tax rate under the TCJA.
On July 5, 2018, the Company entered into an agreement for the sale of
the majority of our Contract Services Group to subsidiaries of Veolia
Environment for $27 million. The sale agreement includes the transfer of
23 of our Contract Services Group’s 33 O&M contracts, of which 17 have
closed and the remainder are expected to close by year end.
Dividends
On July 27, 2018, American Water’s board of directors declared a
quarterly cash dividend payment of $0.455 per share of common stock,
payable on September 4, 2018, to all stockholders of record as of
August 10, 2018.
2018 Earnings Guidance
American Water is providing its 2018 earnings guidance GAAP range of
$3.30 – $3.40 per diluted share , which includes an $0.08 per diluted
share benefit of the company’s settlement with its general liability
insurance carrier relating the Freedom Industries chemical spill class
action litigation in West Virginia. Excluding this benefit, the company
affirms its 2018 earnings guidance to a non-GAAP range of $3.22 – $3.32
per diluted share. The company’s earnings forecasts are subject to
numerous risks and uncertainties, including, without limitation, those
described under “Forward-Looking Statements” below and under “Risk
Factors” in its annual and quarterly reports filed with the Securities
and Exchange Commission (“SEC”).
Non-GAAP Financial Measures
This press release includes presentations of adjusted net income, as
well as adjusted earnings per diluted share both as historical financial
information and as earnings guidance (“Adjusted EPS”). These items
constitute “non-GAAP financial measures” under SEC rules. These non-GAAP
financial measures are derived from American Water’s consolidated
financial information but are not presented in its financial statements
prepared in accordance with GAAP. Each of adjusted net income and
Adjusted EPS is defined as GAAP net income and earnings per diluted
common share, respectively, excluding the impact in the second quarter
of 2018 of the insurance settlement related to the Freedom Industries
chemical spill. These non-GAAP financial measures supplement the
company’s GAAP disclosures and should not be considered as an
alternative to the GAAP measure.
Management believes that the presentation of these non-GAAP financial
measures are useful to American Water’s investors because they provide
an indication of its baseline performance excluding items that are not
considered by management to be reflective of ongoing operating results.
Although management uses these non-GAAP financial measures internally to
evaluate American Water’s results of operations, management does not
intend results excluding the adjustment to represent results as defined
by GAAP, and the reader should not consider them as indicators of
performance. The company’s definition of adjusted net income or Adjusted
EPS may not be comparable to the same or similar measures used by other
companies, and, accordingly, these non-GAAP financial measures may have
significant limitations on their use.
Set forth in this release is a table that reconciles adjusted net
income, as well as Adjusted EPS, both for historical and guidance
purposes, to the most directly comparable GAAP financial measure.
This press release also includes a presentation of adjusted Regulated
O&M efficiency ratio, which, in addition to the pro forma adjustment for
the impact of the TCJA, excludes from its calculation estimated
purchased water revenues and purchased water expenses, the impact of
certain Freedom Industries, Inc. chemical spill settlement activities
recognized in 2016, 2017 and 2018, and the allocable portion of non-O&M
support services costs, mainly depreciation and general taxes. This item
constitutes a “non-GAAP financial measure” under SEC rules. This item is
derived from American Water’s consolidated financial information but is
not presented in its financial statements prepared in accordance with
GAAP. This non-GAAP financial measure supplements and should be read in
conjunction with the company’s GAAP disclosures and should not be
considered as an alternative to any GAAP measure.
Management believes that the presentation of this measure is useful to
investors because it provides a means of evaluating the company’s
operating performance without giving effect to items that are not
reflective of management’s ability to increase efficiency of the
company’s regulated operations. In preparing operating plans, budgets
and forecasts, and in assessing historical performance, management
relies, in part, on trends in the company’s historical results,
exclusive of estimated revenues and expenses related to purchased water,
the Freedom Industries chemical spill settlement activities and the
allocable portion of non-O&M support services costs. The company’s
definition of this metric may not be comparable to the same or similar
measures used by other companies, and, accordingly, this non-GAAP
financial measure may have significant limitations on its use.
Set forth in this release is a table that reconciles each of the
components used to calculate adjusted O&M efficiency ratio to the most
directly comparable GAAP financial measure.
Second Quarter 2018 Earnings Conference Call
The second quarter 2018 earnings conference call will take place on
Thursday, August 2, 2018, at 9 a.m. Eastern Daylight Time. Interested
parties may listen to an audio webcast on the Investor Relations
homepage at ir.amwater.com.
Presentation slides that will be used in conjunction with the earnings
conference call will also be made available online. The company
recognizes its website as a key channel of distribution to reach public
investors and as a means of disclosing material non-public information
to comply with its obligations under SEC Regulation FD.
Following the earnings conference call, an audio archive of the call
will be available through August 9, 2018. U.S. callers may access the
audio archive toll-free by dialing 1-877-344-7529. International callers
may listen by dialing 1-412-317-0088. The access code for replay is
10122331. The audio webcast will be available on American Water’s
investor relations homepage at ir.amwater.com
through September 2, 2018. After that, the archived webcast will be
available for one year at ir.amwater.com/event-replays.
About American Water
With a history dating back to 1886, American Water is the largest and
most geographically diverse U.S. publicly-traded water and wastewater
utility company. The company employs more than 7,100 dedicated
professionals who provide regulated and market-based drinking water,
wastewater and other related services to over 14 million people in 45
states and Ontario, Canada. More information can be found by visiting amwater.com
and follow American Water on Twitter, Facebook and LinkedIn.
Cautionary Statement Concerning Forward-Looking Statements
Certain statements in this press release including, without limitation,
2018 earnings guidance, the outcome of pending acquisition activity and
estimated revenues from rate cases and other government agency
authorizations, are forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995 and the Federal securities laws. In some cases, these
forward-looking statements can be identified by words with prospective
meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,”
“expect,” “predict,” “project,” “propose,” “assume,” “forecast,”
“outlook,” “future,” “pending,” “goal,” “objective,” “potential,”
“continue,” “seek to,” “may,” “can,” “will,” “should” and “could” and or
the negative of such terms or other variations or similar expressions.
These forward-looking statements are predictions based on American
Water’s current expectations and assumptions regarding future events.
They are not guarantees or assurances of any outcomes, financial results
of levels of activity, performance or achievements, and readers are
cautioned not to place undue reliance upon them. The forward-looking
statements are subject to a number of estimates and assumptions, and
known and unknown risks, uncertainties and other factors. Actual results
may differ materially from those discussed in the forward-looking
statements included in this press release as a result of the factors
discussed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017, and subsequent filings with the SEC, and because of
factors such as: the decisions of governmental and regulatory bodies,
including decisions to raise or lower rates; the timeliness and outcome
of regulatory commissions’ actions concerning rates, capital structure,
authorized return on equity, capital investment, permitting, and other
decisions; changes in laws, governmental regulations and policies,
including environmental, health and safety, water quality, and public
utility and tax regulations and policies, and impacts resulting from
U.S., state and local elections; potential costs and liabilities of
American Water for environmental laws and similar matters resulting
from, among other things, water and wastewater service provided to
customers, including, for example, water management solutions focused on
customers in the shale natural gas exploration and production market;
the outcome of litigation and similar government actions, including
matters related to the Freedom Industries chemical spill in West
Virginia and the approved global class action settlement agreement
related to this chemical spill; weather conditions, and events, climate
change patterns, and natural disasters, including drought or abnormally
high rainfall, strong winds, coastal and intercoastal flooding,
earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical
storms and solar flares; changes in customer demand for, and patterns of
use of, water, such as may result from conservation efforts; its ability
to appropriately maintain current infrastructure, including its
operational and information technology (“IT”) systems, and manage the
expansion of its business; its ability to obtain permits and other
approvals for projects; changes in its capital requirements; its ability
to control operating expenses and to achieve efficiencies in its
operations; the intentional or unintentional acts of a third party,
including contamination of its water supplies or water provided to its
customers; exposure or infiltration of its critical infrastructure,
operational technology and IT systems, including the disclosure of
sensitive or confidential information contained therein, through
physical or cyber-attacks or other disruptions; its ability to obtain
adequate and cost-effective supplies of chemicals, electricity, fuel,
water and other raw materials that are needed for its operations; its
ability to successfully meet growth projections and capitalize on growth
opportunities, including its ability to, among other things, acquire,
close and successfully integrate regulated operations and Market-based
businesses, enter into contracts and other agreements with, or otherwise
obtain, new customers in the Market-based businesses, and realize
anticipated benefits and synergies from new acquisitions; cost overruns
relating to improvements in or the expansion of its operations; its
ability to maintain safe work sites; risks and uncertainties associated
with contracting with the U.S. government, including ongoing compliance
with applicable government procurement and security regulations; changes
in general economic, political, business and financial market
conditions; access to sufficient capital on satisfactory terms and when
and as needed to support operations and capital expenditures;
fluctuations in interest rates; restrictive covenants in or changes to
the credit ratings on its current or future debt that could increase its
financing costs or funding requirements or affect its ability to borrow,
make payments on debt or pay dividends; fluctuations in the value of
benefit plan assets and liabilities that could increase its financing
costs and funding requirements; changes in Federal or state income,
general and other tax laws, including tax reform, the availability of
tax credits and tax abatement programs, and the ability to utilize its
U.S. and state net operating loss carryforwards; migration of customers
into or out of its service territories; the use by municipalities of the
power of eminent domain or other authority to condemn its systems;
difficulty in obtaining, or the inability to obtain, insurance at
acceptable rates and on acceptable terms and conditions; its ability to
retain and attract qualified employees; labor actions including work
stoppages and strikes; the incurrence of impairment charges related to
American Water’s goodwill or other assets; civil disturbances, terrorist
threats or acts, or public apprehension about future disturbances or
terrorist threats or acts; and the impact of new accounting standards or
changes to existing standards.
These forward-looking statements are qualified by, and should be read
together with, the risks and uncertainties set forth above and the risk
factors included in the company’s annual and quarterly SEC filings, and
readers should refer to such risks, uncertainties and risk factors in
evaluating such forward-looking statements. Any forward-looking
statements speak only as of the date of this press release. The company
does not have or undertake any obligation or intention to update or
revise any forward-looking statement, whether as a result of new
information, future events, changed circumstances or otherwise, except
as otherwise required by the Federal securities laws. Furthermore, it
may not be possible to assess the impact of any such factor on the
company’s businesses, either viewed independently or together, or the
extent to which any factor, or combination of factors, may cause results
to differ materially from those contained in any forward-looking
statement. The foregoing factors should not be construed as exhaustive.
(In millions, except per share data)
(In millions, except share and per share data)
(In millions, except share and per share data)
In millions
Includes the impact of the Company’s adoption of ASU 2017-07, Compensation
– Retirement Benefits (Topic 715): Improving the Presentation of
Net Periodic Pension Cost and Net Periodic Post-retirement Benefit,
on January 1, 2018.
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