10-QPeriod: Q3 FY2008

American Water Works Company, Inc. Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 6, 2008For Securities:AWK

Summary

American Water Works Company, Inc. (AWK) reported a net income of $88.2 million for the third quarter of 2008, a significant improvement from a net loss of $160.1 million in the same period of 2007. This turnaround was primarily driven by increased revenues, particularly in the Regulated Businesses segment, due to rate increases and higher volumes, and a substantial reduction in operating expenses, largely due to the absence of the significant impairment charge recorded in the prior year. However, for the nine-month period ended September 30, 2008, the company reported a substantial net loss of $598.8 million, compared to a net loss of $108.3 million in the prior year. This was heavily impacted by a $750 million goodwill impairment charge recorded in the first quarter of 2008, significantly outweighing the revenue growth and cost controls implemented throughout the year. Investors should note the large goodwill balance and the ongoing risks of future impairment charges, which could materially affect financial results and financing capabilities.

Key Highlights

  • 1Reported a net income of $88.2 million for Q3 2008, a significant improvement from a net loss of $160.1 million in Q3 2007, driven by revenue growth and cost controls.
  • 2Nine-month net loss of $598.8 million for 2008 was substantially impacted by a $750 million goodwill impairment charge, compared to a $108.3 million net loss in 2007 (which included a $243.3 million impairment charge).
  • 3Total assets decreased slightly to $12.78 billion as of September 30, 2008, from $12.93 billion as of December 31, 2007, with a notable decrease in Goodwill.
  • 4Operating revenues increased by 6.2% in Q3 2008 and 6.5% for the first nine months of 2008, attributed to rate increases in Regulated Businesses and growth in Non-Regulated Businesses.
  • 5Construction expenditures increased significantly to $714.6 million for the nine months ended September 30, 2008, up from $507.2 million in the prior year, indicating substantial ongoing investment in utility infrastructure.
  • 6The company experienced challenges in accessing short-term liquidity via the commercial paper market on September 15, 2008, due to adverse market conditions, relying instead on its revolving credit facility.
  • 7The company's common stock began trading on the NYSE in April 2008 following an Initial Public Offering (IPO), with RWE retaining approximately 60% ownership post-IPO.

Frequently Asked Questions

The primary driver for the improved net income of $88.2 million in Q3 2008, compared to a net loss of $160.1 million in Q3 2007, was a combination of increased operating revenues, largely from rate increases in the Regulated Businesses, and a significant decrease in operating expenses. This reduction in expenses was mainly due to the absence of a substantial goodwill impairment charge of $243.3 million recorded in the prior year's third quarter.

The company has recorded significant goodwill impairment charges. A $750 million charge was recorded in the first quarter of 2008, contributing to a substantial net loss of $598.8 million for the first nine months of 2008. The company holds a large goodwill balance ($1.7 billion as of September 30, 2008), and management acknowledges the risk of future impairments, which could materially affect reported results and the ability to secure financing.

The company relies on both internally generated cash flow and external financing. In September 2008, due to adverse market conditions, the company was unable to issue commercial paper and instead utilized its $800 million revolving credit facility to meet short-term liquidity needs. While lenders are currently meeting commitments, the company acknowledges the uncertainty of continued access to capital markets on favorable terms.

Operating revenues showed growth, increasing by 6.2% in Q3 2008 and 6.5% for the nine-month period of 2008, driven by rate increases and business expansion. Simultaneously, capital expenditures have increased substantially, with $714.6 million spent in the first nine months of 2008, up from $507.2 million in the prior year, indicating significant ongoing investment in utility infrastructure, including a new water treatment plant in Kentucky.