10-QPeriod: Q2 FY2008

American Water Works Company, Inc. Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 12, 2008For Securities:AWK

Summary

American Water Works Company, Inc. (AWK) reported a significant net loss of $687 million for the first six months of 2008, primarily driven by a substantial goodwill impairment charge of $750 million. This charge reflects the impact of market conditions and the company's initial public offering (IPO) price on the valuation of its goodwill, which was acquired in previous years. Excluding this impairment, the company's continuing operations showed a loss of $687 million for the six-month period, a sharp contrast to the profit generated in the same period of the prior year. Despite the net loss, the company's operating revenues saw an increase of 6.7% year-over-year for the six-month period, driven by rate increases in its Regulated Businesses and growth in its Non-regulated Businesses. The company continues to invest heavily in its infrastructure, with capital expenditures increasing significantly. Management is actively working to address internal control weaknesses identified in previous periods, incurring substantial costs for remediation. The company also successfully completed its IPO, transitioning from a wholly-owned subsidiary to a publicly traded entity, with RWE retaining a majority stake.

Key Highlights

  • 1Significant goodwill impairment charge of $750 million recorded in the first six months of 2008, resulting in a net loss of $687 million for the period.
  • 2Operating revenues increased by 6.7% year-over-year to $1,096 million for the six months ended June 30, 2008, driven by rate increases and non-regulated business growth.
  • 3Capital expenditures increased to $426 million for the six months ended June 30, 2008, reflecting continued investment in infrastructure.
  • 4Completed Initial Public Offering (IPO) in April 2008, with common stock now trading on the New York Stock Exchange.
  • 5RWE contributed $245 million in capital in Q2 2008 following the goodwill impairment charge.
  • 6Active remediation of material weaknesses in internal controls over financial reporting is underway, with significant costs incurred.
  • 7Quarterly cash dividend declared at $0.20 per share, payable in September 2008.

Frequently Asked Questions

The substantial net loss of $687 million for the six months ended June 30, 2008, was primarily due to a significant goodwill impairment charge of $750 million. This charge was recognized because the carrying value of goodwill exceeded its fair value, largely influenced by the market price of the company's common stock after its initial public offering and increased market interest rates.

Operating revenues increased by 6.7% to $1,096 million for the six months ended June 30, 2008, compared to the same period in 2007. This growth was driven by rate increases authorized in the Regulated Businesses and increased revenues from the Non-regulated Businesses.

The company identified material weaknesses in internal controls over financial reporting and is actively engaged in a remediation process. Significant costs have been incurred to enhance staffing, processes, and systems. While progress has been made, the company is continuing its efforts and expects to complete remediation during 2008, but cannot guarantee its success.

The IPO, completed in April 2008, marked American Water Works Company's transition to a publicly traded company on the New York Stock Exchange. This event provides increased liquidity for shareholders and allows for broader market participation. However, the IPO price also played a role in the subsequent goodwill impairment charge. RWE retained a majority ownership stake after the offering.