8-KRegulation FDOther EventsExhibits & Filings

American Water Works Company, Inc. 8-K Report, Regulation FD Disclosure (Sep 10, 2013)

Filed September 10, 2013For Securities:AWK

Summary

This 8-K filing by American Water Works Company, Inc. (AWK) primarily concerns actions taken by its wholly-owned finance subsidiary, American Water Works Capital Corp. (AWCC), related to its debt structure and financing facilities. The key takeaway for investors is the ongoing effort to manage and potentially reduce "parent company interest cost," which arises from intercompany loans from AWCC to the parent company and is not recoverable through regulated rates. AWCC has initiated a tender offer to repurchase up to $300 million of its 6.085% Senior Notes due 2017, aiming to reduce the principal amount of these notes and, consequently, the interest paid by the parent company to AWCC. This tender offer is expected to lead to an increase in total parent company borrowings, though the company anticipates a net decrease in interest obligations due to replacing higher-cost debt with potentially lower-cost short-term borrowings, with a plan to refinance these short-term obligations with term loans later. In conjunction with these debt management activities, AWK has also strengthened its liquidity position. The company's revolving credit facility has been increased in commitment from $1 billion to $1.25 billion, and its maturity has been extended by one year to October 2018. Additionally, the commercial paper program has been expanded from $700 million to $1 billion. These moves provide greater financial flexibility and support the company's operational and strategic financing needs during this period of debt restructuring. Investors should monitor the outcome of the tender offer and the subsequent refinancing strategies for their impact on the company's overall cost of debt and earnings.

Key Highlights

  • 1AWCC launched a tender offer to repurchase up to $300 million of its 6.085% Senior Notes due 2017.
  • 2The tender offer aims to reduce 'parent company interest cost' by retiring higher-interest debt.
  • 3Parent company borrowings are expected to increase overall, but net interest obligations are anticipated to decrease.
  • 4AWCC's revolving credit facility commitment was increased to $1.25 billion from $1 billion.
  • 5The maturity of $1.11 billion under the revolving credit facility was extended to October 2018.
  • 6The company's commercial paper program was increased to $1 billion from $700 million.
  • 7These actions are part of an effort to manage the company's debt structure and improve its cost of capital.

Frequently Asked Questions

The 'parent company interest cost' refers to the interest expenses incurred by American Water Works Company, Inc. (the parent company) on intercompany loans from its finance subsidiary, AWCC. This cost is significant because it cannot be recovered through regulated water and wastewater rates charged by the company's subsidiaries, thus directly impacting the parent company's profitability and return on equity.

The primary goal of the tender offer is to reduce the outstanding principal amount of AWCC's 6.085% Senior Notes due 2017. By repurchasing these notes, AWK aims to lower its overall interest expense related to these borrowings, which in turn is expected to reduce the 'parent company interest cost' that is not recoverable through regulated rates.

AWCC plans to fund the tender offer initially through commercial paper or its revolving credit facility. Subsequently, AWCC intends to secure term loans to refinance these short-term borrowings. Concurrently, the parent company will incur new intercompany loans from AWCC. While the tender offer reduces existing parent company borrowings indirectly, the new borrowings to fund the tender offer and related costs are expected to increase the total parent company borrowings.

American Water Works Company, Inc. has increased the commitment under its revolving credit facility from $1 billion to $1.25 billion and extended the maturity date for $1.11 billion of those commitments from October 2017 to October 2018. Additionally, the company has increased its commercial paper program size from $700 million to $1 billion and added another commercial paper dealer to enhance its liquidity and financing flexibility.