AWK

Business Context and Reporting Period

Company: American Water Works Company, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Overview: The Company is the largest investor-owned water and wastewater utility in the United States, serving approximately 16 million people across 35 states and two Canadian provinces. Operations are divided into two segments: Regulated Businesses (90.4% of revenue) and Non-Regulated Businesses (10.6% of revenue). In 2009, the Company completed the full divestiture of its former parent, RWE Aktiengesellschaft, becoming a fully independent public company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 4.4% to $2,440.7 million. Regulated revenue rose 6.0% driven by rate increases ($187.3 million) and surcharges, partially offset by a $93.6 million decrease in consumption due to wet/cool weather and economic downturns.
• Profitability Improvement: Operating income improved from a loss of $186.9 million in 2008 to a profit of $173.6 million in 2009. This was primarily due to a $300 million reduction in goodwill impairment charges ($450 million in 2009 vs. $750 million in 2008).
• Net Loss Reduction: Net loss narrowed significantly to $233.1 million from $562.4 million, reflecting lower impairment charges and improved operating performance.
• Capital Spending: Company-funded capital expenditures decreased 22.2% to $785.3 million, a strategic decision to address credit market disruptions.
• Divestiture: RWE completed the sale of its remaining shares in November 2009, fully divesting its interest in the Company.

Guidance, Outlook, and Risks

• Capital Investment Outlook: The Company estimates annual Company-funded capital investment will total between $800 million and $1 billion for 2010 and the foreseeable future.
• Dividend Policy: The Board declared a quarterly dividend of $0.21 per share for Q1 2010. The policy targets distributing 50% to 70% of net income annually.
• Regulatory Lag: Management continues to face "regulatory lag," the delay between incurring costs and recovering them through rates. The Company is pursuing infrastructure surcharges and forward-looking test years to mitigate this.
• Key Risks:
  • Goodwill Impairment: Significant goodwill ($1.25 billion) remains on the balance sheet; future market volatility could trigger additional non-cash impairment charges.
  • Weather & Consumption: Declining per-customer water usage and weather-dependent demand (e.g., wet summers) negatively impact revenue.
  • Capital Markets: Access to debt and equity markets remains critical for funding growth and debt maturities, though the Company maintains $850 million in credit facilities.
  • Legal Proceedings: Ongoing litigation regarding the Trenton, NJ water system acquisition and environmental compliance (e.g., Carmel River steelhead trout habitat) pose potential financial and operational risks.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the 2009 goodwill impairment test, specifically the control premium applied, given the Company's fair value was only ~6% above carrying value.
• Rate Case Status: Confirm the status of pending rate cases in eight states requesting $217.6 million in additional annualized revenues, as approval is not guaranteed.
• Debt Covenants: Review compliance with the debt-to-capitalization covenant (0.70:1.00); the ratio was 0.58:1.00 at year-end.
• Pension Funding: Assess the impact of market volatility on pension plan assets and the projected funding requirements of ~$120 million for 2010.
• Trenton Acquisition: Monitor the outcome of the New Jersey Supreme Court appeal regarding the $75 million Trenton water system acquisition.