American Water Works Company, Inc. (NYSE:AWK) Q4 2017 Earnings Conference Call Transcript
Feb 21, 2018 • 09:00 am ET
We will now begin the question-and-answer session. (Operator Instructions) The question today comes from Shahriar Pourreza with Guggenheim Partners. Please go ahead.
Good morning, guys.
Good morning, Shahriar.
So just two questions. First, there has obviously have been a lot of analysis on tax reform and so much of the focus is centered on cash flow metrics like FFO to debt. In light of you guys not needing any equity and looking at debt to sort of offset the near-term cash drag from tax reform can we talk a little bit about what other metrics the agencies could be looking at especially as we think about the water industry. I have to imagine that looking at cash flow metrics in isolation sort of misses the bigger picture, especially in this industry?
Yeah. Shahriar, this is Linda, and you're right there has been a real heavy focus on FFO to debt metric for utilities due to the lower cash flow from the loss of bonus depreciation, the passing back of the tax benefits to customers and especially for those that are in a federal net operating loss position like us, and you're right, FFO to debt is an important element of our rating.
It represents 12.5% of our rating under Moody's methodology, but it is also important to note that the largest component of our ratings is based on our business risk profile, which generally represents about half of our rating. And the business risk profile is based on a more qualitative risk specific to the water industry and to the unique size and scale of American Water.
So, for example, the types of things that are looked at there are items such as the absolute essential service of providing water, the smooth deployment of our small capital projects like Susan talked about earlier, and the regulatory environments across our diverse 14 jurisdictions that really support our ability to grow to invest and to generate cash flow going forward. So, this strong business risk profile is not changing with tax reform.
The other thing that's really important to note is that the business risk profile of the water industry and American Water is unique to us. So, our FFO to debt metrics generally will fall in a broader range than what you see with other utilities, so a strict comparison of the numbers of FFO to debt with other utilities is really not a good comparison.
So, all that said as I mentioned in my comments, with tax reform, we do expect our FFO to debt metrics to drift lower and we very carefully evaluated the right mix of capital investment needed for our customers, dividends for our shareholders and then we believe will be able to carry the tax reform impact without issuing additional equity.
So, the tradeoff is a lower FFO to debt ratio and our starting point as I mentioned is a very strong balance sheet that provided us with that optionality as we work through the