10-KPeriod: FY2010

American Water Works Company, Inc. Annual Report, Year Ended Dec 31, 2010

Filed February 28, 2011For Securities:AWK

Summary

American Water Works Company, Inc. (AWK) operates as the largest investor-owned water and wastewater utility in the United States, serving approximately 15 million people across more than 30 states and two Canadian provinces. The company's primary business revolves around its regulated utilities, which are subject to extensive economic regulation by state public utility commissions. In 2010, AWK demonstrated a significant financial recovery, reporting net income of $267.8 million, a substantial improvement from a net loss of $233.1 million in 2009, which was impacted by a $450 million goodwill impairment charge. The company continues to invest heavily in infrastructure, with approximately $766 million in capital improvements in 2010, and plans to invest between $800 million and $1 billion annually in the coming years. Key strategic initiatives include portfolio optimization through acquisitions and divestitures, enhancing operational efficiencies, and maintaining constructive regulatory frameworks to ensure recovery of investments and achieve appropriate rates of return. The filing also highlights various risks, including the impact of extensive economic regulation, environmental compliance costs, fluctuating water usage, capital expenditure needs, and potential disruptions in capital markets. The company's financial health is supported by strong liquidity and a stable credit rating outlook, though it navigates a complex regulatory environment and ongoing infrastructure investment requirements.

Financial Highlights

50 data points
Beta

Revenue

$2.56B

Net Income

$267.83M

10.5% Net Margin

EPS (Diluted)

$1.53

Total Assets

$14.09B

Cash & Equivalents

$13.11M

Free Cash Flow

$9.30M

Financial Statements
Beta
Revenue$2.56B
Operating Expenses$1.83B
Operating Income$728.12M
Interest Expense$313.76M
Net Income$267.83M
EPS (Basic)$1.53
EPS (Diluted)$1.53
Shares Outstanding (Basic)174.83M
Shares Outstanding (Diluted)175.12M

Key Highlights

  • 1American Water Works Company (AWK) reported a significant financial turnaround in 2010, achieving net income of $267.8 million, a notable recovery from a net loss of $233.1 million in 2009.
  • 2The company invested approximately $766 million in capital improvements in 2010, reflecting its ongoing commitment to infrastructure renewal and expansion, with plans for $800 million to $1 billion in annual capital expenditures going forward.
  • 3AWK continues to focus on strategic portfolio optimization, including the acquisition of smaller water and wastewater systems and the planned divestiture of operations in Texas.
  • 4The company's regulated businesses, which constitute the vast majority of its revenue, are heavily influenced by rate increase authorizations from state regulatory agencies, with $201.2 million in additional annualized revenues authorized in 2010.
  • 5While the company benefits from a stable credit rating outlook (BBB+ and A2 from S&P, Baa2 and P2 from Moody's), it faces inherent risks related to regulatory lag, environmental compliance, declining per-customer water usage, and potential disruptions in capital markets.
  • 6Employee-related costs, including salaries, pensions, and group insurance, saw an increase of 11.7% in 2010 compared to 2009, largely driven by acquisitions and increased wage costs.
  • 7The company's financial statements show a substantial goodwill balance of $1.25 billion as of December 31, 2010, a significant portion of which relates to prior acquisitions.

Frequently Asked Questions

American Water's improved financial performance in 2010 was primarily driven by a substantial increase in operating revenues, which grew by 11.1% to $2.71 billion. This growth was fueled by rate increases authorized by state regulatory agencies and higher water consumption across residential, commercial, and industrial customer classes. The company also benefited from the absence of the significant goodwill impairment charge of $450 million recorded in 2009. Increased revenues in Market-Based Operations, particularly from the Contract Operations' Acquisition and military contracts, also contributed to the positive results.

The filing identifies several key risks for American Water. Foremost among these is the extensive economic regulation it operates under, where decisions by state Public Utility Commissions (PUCs) can significantly impact rates and profitability. Other significant risks include compliance with increasingly stringent environmental laws and regulations, potential fluctuations in water supply due to natural hazards and weather conditions, declining water usage per customer, the need for substantial capital expenditures for infrastructure maintenance and upgrades, and potential disruptions in capital and credit markets impacting its ability to secure funding. Additionally, the company faces risks related to its business transformation initiative and the cost of essential materials and utilities.

American Water employs a multi-faceted approach to manage its capital expenditures and long-term financial obligations. The company prioritizes significant capital investments in infrastructure renewal and expansion, funding these through a combination of internally generated cash flows from operations, borrowings under its revolving credit facility and commercial paper programs, and the issuance of long-term debt and equity securities. In 2010, capital expenditures totaled approximately $766 million, with annual investments expected to range between $800 million and $1 billion. The company also manages its financial structure by issuing long-term debt, often through its financing subsidiary AWCC, and aims to maintain a healthy capital structure. It actively monitors its liquidity and access to capital markets, utilizing credit facilities and commercial paper programs to meet short-term needs. The company also manages its debt through refinancing and potential redemptions when market conditions are favorable.

As of December 31, 2010, American Water had $1.25 billion in goodwill, primarily related to past acquisitions. The company performs annual goodwill impairment reviews. While no impairment charge was recorded in 2010, the company did record significant goodwill impairment charges in 2009 ($450 million) and 2008 ($750 million) due to market volatility and the sustained decline in its stock price below its carrying value. The company acknowledges that future impairments could occur if market conditions or its own performance deteriorates, which could negatively impact its reported results and financial position.