Business Context and Reporting Period
Company: American Water Works Company, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The largest investor-owned U.S. water and wastewater utility company, operating through Regulated and Non-Regulated business segments. The company provides water and wastewater services to residential, commercial, industrial, and municipal customers.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Operating Revenues | $612.7 million | $1,162.9 million |
| Net Income (Loss) | $52.0 million | $(361.1) million |
| Diluted EPS | $0.32 | $(2.23) |
| Operating Cash Flow | N/A | $228.7 million |
| Capital Expenditures | $204.0 million | $400.2 million |
| Total Assets | $13.19 billion | $13.19 billion |
| Total Debt (Long-term + Current) | $5.35 billion | $5.35 billion |
| Stockholders' Equity | $3.93 billion | $3.93 billion |
Note: Figures are in millions unless otherwise noted. The six-month net loss is significantly impacted by a non-cash goodwill impairment charge.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 4.0% ($23.4 million) for the quarter and 6.1% ($66.7 million) for the six months compared to the prior year. This was driven primarily by rate increases in Regulated Businesses, partially offset by lower water sales volumes due to wet weather and economic slowdowns affecting industrial customers.
- Profitability: Net income for the quarter improved to $52.0 million from $45.5 million in the prior year. However, the six-month period resulted in a net loss of $361.1 million, compared to a loss of $687.0 million in the prior year. The improvement in the six-month loss is largely due to a reduction in goodwill impairment charges ($450 million in 2009 vs. $750 million in 2008).
- Operating Expenses: Total operating expenses increased $8.8 million for the quarter and decreased $282.8 million for the six months (excluding impairment). Excluding impairment, operating expenses rose due to higher depreciation, general taxes, and pension costs, partially offset by lower contracted services and transportation costs.
- Debt and Liquidity: The company completed a public offering of 14.5 million shares in June 2009, raising $242.3 million in net proceeds, which were used to repay short-term debt. RWE, a major shareholder, also sold shares, reducing its ownership from approximately 60% to 47%.
Guidance, Outlook, and Risks
- Goodwill Impairment: The company recognized a $450 million goodwill impairment charge in the first quarter of 2009 due to sustained declines in market capitalization. Management warns that further declines in stock price or valuation multiples could trigger additional impairment charges.
- Rate Case Developments: The company has received authorizations for additional annualized revenues of $12.5 million in the second quarter. As of June 30, 2009, the company is awaiting final orders for rate cases requesting an additional $279.9 million in annualized revenues. There is no assurance these requests will be granted.
- Regulatory Lag on Pension Costs: Increased pension and postretirement benefit costs due to market conditions are being expensed immediately. The company is seeking regulatory approval to defer $7.5 million of these costs to future rate cases.
- Capital Markets: Despite credit market disruptions, the company maintains access to $850 million in revolving credit facilities and commercial paper markets. It expects to fund future debt maturities through external debt and operating cash flows.
- Internal Controls: A material weakness in internal controls over financial reporting regarding the maintenance of contracts and agreements remains unremediated as of June 30, 2009, though management believes the financial statements are fairly presented.
Investor Verification Checklist
- Impairment Sensitivity: Verify the assumptions used in the goodwill impairment test and the potential for future charges given stock price volatility.
- Rate Case Outcomes: Monitor the status of pending rate cases totaling $279.9 million in requested annualized revenue increases, particularly in California and other major jurisdictions.
- Debt Covenants: Confirm continued compliance with the debt-to-capitalization ratio covenant (currently 0.58, limit 0.70) and the impact of potential credit rating downgrades on borrowing costs.
- Internal Control Remediation: Track progress on remediation of the material weakness regarding contract maintenance controls.
- Water Sales Volume: Assess the impact of weather patterns and economic conditions on industrial and residential water consumption, which directly affects revenue in regulated markets.