AWK notes

Wachovia Report 6/2/08

• Capitalize on investment needs to meet water environmental standards and consolidation of municipally dominated water industry

• Estimate 8-10% EPS growth through 2011 (2008 through 2011 EPS 1.25, 1.48, 1.58, 1.67)

• RWE share overhang

• Previous management deteriorated regulatory relationships and internal controls

• Expect relatively easy time securing adequate rate relief

  • Water presents small portion of household expense, but softening economy could make it difficult for regulators to back rate increases

• 90% of revenues are regulated of which 60% are residential

• RWE (German multi-utility) purchased AWK in 2008 and poorly managed

  • Instated new management in preparation for divestiture in late 2005 and 2006

• AWK has invested $1.4b over last 2 years and plans another $3.5b over 2008-2011 period

• Fragmented market with municipalities facing costly regulations – ripe for consolidation

• Potential temptation to pursue unregulated business which historically has had low margins and represented losses

• Trend of foreign utilities purchasing US market companies at premiums seems to have ended.

• AWK IPO relieves some scarcity premium and may result in lower industry wide multiple

• Balance sheet weaker than most in the industry

• RWE has injected $1.2b since 2007 to maintain capitalization levels and credit ratings

• Estimate AWK will need $600m in 2009 and an increasing amount in subsequent years

• Octover 12, Moody’s downgraded debt to Baa2 from Baa1

• Initial annual dividend of $0.80 representing 3.8% yield

  • Expect annual dividend growth of 4-5%

Mer report 6/6/08

• AWK budgeting $4.0-4.5b of capital expenditures for 2007-2011

• Post IPO, RWE still owns 61% of stock – will sell as soon as practicable – cannot sell before late October

JP Morgan Report 6/4/08

• Trading at discount based on comparables but do not expect to close gap until first half of 2009 due to selling pressure

• Working with numerous regulatory agencies could stretch company’s resources

 

EPS Release 8/11/08

-          Operating revenue 589.4m (up 5.4%)

-          Net income 0.28 per share versus 0.31 last year

-          Change driven by higher operating and maintenance expense

-          Total volume of water sold decreased 2.7%

-          Achieved rate increases equivalent to 19.2m annualized revenue

o        Total for first half is 47.2m

o        Requested 39.7m additionally in Pennsylvania, Arizona, West Virginia and New Mexico

-          Non-regulated revenues increased by 11.6 million (20.8%)

-          Operating expenses increased 9.7% - mostly in regulated businesses related to customer enhancement efforts

-          Cash outflows related to construction expenditures increased 72% to $237.5m (prudent investments in regulated utility plant projects)

-          During quarter capital resource requirements were met with 1) internally generated cash, 2) commercial paper issuance, 3) issuance of $200m private placement debt and 4) $245m from RWE in conjunction with IPO

-          $4.7b long-term debt plus $2b “total regulatory & other long-term liabilities”

 

 

MER report 8/13/08

-          Wet weather hurt revenues more than expected

-          Expect attractive return on infrastructure investment but predicated on successful lobbying of rate increases

-          Stock still trades at discount to peers as RWE sale is pending – possibly as early as November

-          Volumes could remain weak into Q3 as rainfall has been heavier

-          Regulatory deadline for RWE to divest no later than April of 2010

-          RWE still owns 61% of AWK shares