AWK

Business Context and Reporting Period

Company: American Water Works Company, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 and services).

Key Financial Metrics

Material Changes vs. Prior Period

• Net Loss Improvement: Net loss decreased by $319.4 million compared to Q1 2008. This improvement is primarily driven by a reduction in goodwill impairment charges ($450 million in 2009 vs. $750 million in 2008) and higher operating revenues.
• Revenue Growth: Operating revenues increased by $43.4 million (8.6%). Regulated Businesses revenues rose $47.8 million due to rate increases, while Non-Regulated Businesses revenues declined $3.6 million.
• Operating Expenses: Total operating expenses decreased by $291.6 million, largely due to the lower impairment charge. Excluding impairment, operating expenses increased by $8.3 million, driven by higher O&M costs in Regulated Businesses.
• Goodwill Impairment: The Company recognized a $450 million non-cash goodwill impairment charge in Q1 2009 due to a sustained decline in market capitalization below the carrying value of reporting units.
• Cash Flow: Net cash provided by operating activities increased to $142.5 million from $85.4 million, despite the net loss, due to significant non-cash adjustments (impairment and depreciation).

Guidance, Outlook, and Risks

• Rate Case Developments: The Company is awaiting final orders for general rate cases in five states filed in 2008 and one filed in 2009, requesting $120.6 million in additional annualized revenues. In April 2009, new cases were filed in four states requesting $115.2 million.
• Capital Expenditures: The Company anticipates investing approximately $800 million on construction and capital projects in 2009, including a $162 million water treatment plant in Kentucky.
• Liquidity and Financing: Despite credit market disruptions, the Company maintains sufficient liquidity with $433.5 million available under credit facilities as of April 30, 2009. It issued $75 million in senior notes in Q1 2009 and $80 million in tax-exempt bonds in April 2009.
• Dividends: A quarterly cash dividend of $0.20 per share was paid in March 2009 and declared for June 2009.
• Risks and Contingencies:
  • Goodwill Impairment Risk: Future declines in stock price or valuation multiples could trigger additional impairment charges.
  • Regulatory Lag: The Company is expensing increased pension and postretirement benefit costs ($13.1 million annual increase) while seeking regulatory approval to defer these costs.
  • Legal Proceedings: A pending court proceeding regarding a referendum on the acquisition of the City of Trenton's water system could delay the transaction.
  • Internal Controls: A material weakness in internal controls over financial reporting regarding the maintenance of contracts and agreements remains unremediated as of March 31, 2009.

Investor Verification Checklist

• Goodwill Valuation: Verify the assumptions used in the interim goodwill impairment test, specifically the market capitalization reconciliation and discount rates.
• Regulatory Recovery: Monitor the status of pending rate cases and the outcome of discussions regarding the deferral of pension and postretirement benefit costs.
• Internal Control Remediation: Track progress on the remediation plan for the material weakness in contract maintenance controls.
• Debt Covenants: Confirm continued compliance with the debt-to-capitalization ratio (currently 0.60 vs. 0.70 limit) and other covenants.
• Acquisition Status: Follow the legal proceedings regarding the Trenton, NJ water system acquisition and potential referendum.