In-Line Earnings at American Water Works

Zacks

American Water Works Company, Inc. (AWK) reported fourth-quarter 2013 adjusted earnings of 47 cents per share, in line with the Zacks Consensus Estimate. Quarterly earnings were 56.7% higher than the year-ago figure.

GAAP earnings during the quarter were 33 cents per share compared with 31 cents a year ago.

American Water Works’ adjusted earnings were $2.20 per share in 2013, same as the Zacks Consensus Estimate. Annual earnings increased 4.3% from the year-ago level.

On a GAAP basis, annual earnings were $2.06 per share, up from $2.01 per share a year ago. The variance between GAAP and adjusted earnings was due to a one-time, after-tax charge 14 cents related to the completion of a debt tender offer by American Water Works’ finance subsidiary, American Water Capital Corp.

Operational Highlights

American Water Works’ operating revenues in the reported quarter were $712.3 million, missing the Zacks Consensus Estimate by 8.4%. On a year-over-year basis, revenues jumped 4.6% from $680.9 million.

For 2013, the company posted operating revenues of $2,901.9 million, up 0.9% from the prior year. The marginal improvement in the top line was primarily due to a 1.1% year-over-year gain in sales under the company’s Regulated Business segment due to rate-hike approvals and a rise in infrastructure surcharges and acquisitions. This was partially offset by a $4.9 million decline in Market-Based Business segment’s revenues as a result of decreased sales from termination of some contracts in the Contract Services Group.

In the quarter under review, American Water Works’ total operating expenses edged down 3.4% year over year to $496.4 million due to lower operations and maintenance expenses. This was partially offset by increases in depreciation expenses and general taxes.
    
Quarterly operating margin expanded to 30.3% in the fourth quarter from 24.5% in the prior year, primarily on the back of lower operating expenses.

Net interest expenses inched up marginally to $74.9 million, mainly due to higher short- and long-term debt levels.

Financial Update

As of Dec 31, 2013, American Water Works’ cash and cash equivalents were $27 million versus $24.4 million as of Dec 31, 2012.

Long-term debt as of Dec 31, 2013, was $5,230.1 million compared with $5,209.4 million as of Dec 31, 2012.

For 2013, American Water Works’ capital expenditures were around $950 million, down from $983 million a year ago.

Dividend Update

American Water Works will distribute a quarterly cash dividend of 28 cents per common share on Mar 3, 2014, to shareholders of record as of Feb 3.

Guidance

American Water Works reiterated its 2014 ongoing earnings in the range of $2.35 - $2.45 per share, excluding the effect of the chemical spill at Freedom Industries in West Virginia.

Other Company Releases

American States Water Company (AWR) posted fourth-quarter 2013 earnings of 30 cents per share, beating the Zacks Consensus Estimate of 19 cents by 57.9%.

SJW Corp.’s (SJW) fourth-quarter 2013 operating earnings per share of 23 cents were in line with the Zacks Consensus Estimate.

California Water Service Group (CWT) announced fourth-quarter 2013 operating earnings of 12 cents per share, surpassing the Zacks Consensus Estimate by 7 cents.

Our View

Despite reporting in line earnings, American Water Works’ quarterly bottom line improved year over year primarily on the back of higher revenues and lower operation and maintenance expenses.

The company continues to increase its customer base. In 2013, American Water Works added around 30,000 customers, including roughly 20,000 under the wastewater operations.

Currently, American Water Works is expanding its operations through both organic and inorganic growth strategies to cope with increased service demand. Over the next five years, the company plans to invest $5.8 billion at its water and wastewater systems. Existing infrastructure upgrades along with the acquisition of new assets will enable American Water Works to increase its scale of operation and provide reliable services to its customers.

However, stringent government regulations and capital intensive operations are our cause of concern.

American Water Works currently has a Zacks Rank #4 (Sell).

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