AWK

American Water Works Company, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. American Water Works Company, Inc. is the largest investor-owned water and wastewater utility in the United States. The company operates through two primary segments: Regulated Businesses (water and wastewater utilities subject to state economic regulation) and Non-Regulated Businesses (contract operations and homeowner services).

Key Financial Metrics

Note: Working capital is defined as current assets less current liabilities. The company operates with a net deficit in working capital due to the capital-intensive nature of the utility business and regulatory lag in rate recovery.

Material Changes vs. Prior Period

• Profitability Turnaround: The company reported a net income of $30.8 million in Q1 2010, a stark contrast to the $413.1 million net loss in Q1 2009. The 2009 loss was primarily driven by a $450.0 million goodwill impairment charge recorded in the prior year due to stock price volatility. No impairment charge was recorded in Q1 2010.
• Revenue Growth: Operating revenues increased by $37.9 million (6.9%). This was driven by a $22.1 million increase in Regulated Businesses (due to rate increases) and a $17.0 million increase in Non-Regulated Businesses (driven by an industrial O&M acquisition in late 2009 and increased military contract revenues).
• Expense Management: Excluding the 2009 impairment charge, operating expenses increased by $26.5 million year-over-year. This increase was attributed to higher employee-related costs (salaries and wages) and production costs, partially offset by lower insurance expenses and uncollectible accounts.
• Capital Spending: Capital expenditures decreased by $53.5 million to $142.7 million, attributed to severe weather delays and the completion of certain water treatment plant projects that were active in Q1 2009.

Guidance, Outlook, and Risks

• Capital Investment Outlook: Management estimates company-funded capital investment for 2010 will range between $800 million and $1 billion. This includes infrastructure renewal and a major IT system upgrade initiative estimated to cost up to $280 million over five years.
• Rate Case Activity: The company is awaiting final orders for general rate cases filed in 2009 and 2010 requesting an aggregate of $294.1 million in additional annualized revenues. Recent approvals include cases in Illinois ($41.4 million), Indiana ($31.5 million), and New Mexico ($0.5 million).
• Health Care Reform Impact: The enactment of the Patient Protection and Affordable Care Act (PPACA) resulted in a $27.1 million reduction in deferred tax assets and a corresponding increase in regulatory assets. Management does not expect a material future impact on operations or cash flows due to the ability to recover costs through rates.
• Liquidity and Credit: The company maintains $850.0 million in aggregate bank commitments. As of April 30, 2010, $807.1 million was available. Credit ratings remain stable (Moody's Baa2, S&P BBB+).
• Contingencies: A potential acquisition of the City of Trenton, NJ water system (adding ~40,000 customers) is subject to a referendum scheduled for June 15, 2010. The outcome is uncertain.

Investor Verification Checklist

• Verify the status and outcome of the Trenton, NJ water system referendum scheduled for June 2010.
• Monitor the approval status of pending rate cases totaling $294.1 million in requested annualized revenue increases.
• Review the company's ability to access capital markets given the net working capital deficit and reliance on external financing for capital expenditures.
• Assess the impact of the IT system upgrade initiative on future capital spending and operational efficiency.
• Confirm compliance with debt covenants, specifically the debt-to-capitalization ratio (currently 0.58, well below the 0.70 limit).