Business Context and Reporting Period
Company: American Water Works Company, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company is the largest investor-owned United States water and wastewater utility company. Operations are divided into two segments: Regulated Businesses (subject to state economic regulation) and Non-Regulated Businesses (contract operations, homeowner services, etc.).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Operating Revenues | $679.96 million | $1,842.87 million |
| Net Income (Loss) | $91.64 million | $(269.45) million |
| Diluted EPS | $0.52 | $(1.62) |
| Operating Cash Flow (9mo) | $471.55 million | |
| Capital Expenditures (9mo) | $592.89 million | |
| Total Assets | $13,345.71 million | |
| Total Debt (Long-term + Current) | $5,328.59 million | |
| Stockholders' Equity | $3,991.81 million |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 1.2% ($7.8 million) for the quarter and 4.2% ($74.5 million) for the nine months compared to 2008. This was driven primarily by rate increases in Regulated Businesses, partially offset by lower customer usage due to wet/cool weather and economic downturns.
- Profitability: Net income for the quarter increased to $91.6 million from $88.2 million in the prior year. However, the nine-month period resulted in a net loss of $269.5 million, a significant improvement from the $598.8 million loss in the same period of 2008.
- Impairment Charges: The Company recorded a goodwill impairment charge of $450.0 million in the first quarter of 2009 (triggered by stock price volatility). This compares to a $750.0 million charge in the first quarter of 2008. The reduction in impairment charges was the primary driver for the improved nine-month net loss.
- Operating Expenses: Total operating expenses increased slightly for the quarter but decreased significantly for the nine months (excluding impairment) due to lower contracted services and transportation costs.
Guidance, Outlook, and Risks
- Rate Case Developments: The Company is awaiting final orders for general rate cases in eight states requesting $256.7 million in additional annualized revenues. Recent approvals include increases in California, Maryland, Michigan, Pennsylvania, and Missouri.
- Capital Markets & Liquidity: The Company maintains an $850 million revolving credit facility with $802.9 million available as of November 5, 2009. It successfully issued long-term debt and equity (via a June 2009 offering) to refinance short-term obligations.
- Dividends: The Board increased the quarterly dividend to $0.21 per share in July 2009. A dividend of $0.21 per share was declared on October 30, 2009, payable December 1, 2009.
- Material Weakness in Internal Controls: The Company disclosed a material weakness in internal control over financial reporting regarding the maintenance of contracts and agreements. Management concluded disclosure controls were not effective as of September 30, 2009, though financial statements are considered fairly presented.
- Legal & Regulatory Risks: The Company is appealing a Cease and Desist Order from the California State Water Resources Control Board regarding unpermitted diversions from the Carmel River. Additionally, the acquisition of the City of Trenton's water system is pending resolution of court proceedings regarding a referendum.
Investor Verification Checklist
- Goodwill Impairment: Verify the methodology and assumptions used for the $450 million impairment charge and assess the risk of future impairments given market volatility.
- Rate Case Outcomes: Monitor the status of the $256.7 million in pending rate case requests, as regulatory lag could impact future revenue recovery.
- Internal Control Remediation: Review progress on remediation plans for the material weakness in contract maintenance controls.
- Debt Refinancing: Track the Company's ability to refinance variable-rate debt into fixed-rate instruments amidst credit market disruptions.
- California Litigation: Assess the potential financial impact of the Carmel River diversion order and the outcome of the appeal.