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Water utility is charting calmer seas

American Water Works Co. Inc. is like a ship emerging from an eight-year storm. Smoother sailing is forecast. But the company is still emptying its bilge after taking on some water in the tempest.

American Water CEO Don Correll poses by a fountain outside their corporate offices. (Tom Gralish / Staff Photographer)
American Water CEO Don Correll poses by a fountain outside their corporate offices. (Tom Gralish / Staff Photographer)Read more

American Water Works Co. Inc. is like a ship emerging from an eight-year storm. Smoother sailing is forecast. But the company is still emptying its bilge after taking on some water in the tempest.

The Voorhees company, the nation's largest investor-owned water utility, has weathered quite a corporate adventure since German utility giant RWE AG initiated a $7.6 billion buyout in 2001.

RWE paid a 36.5 percent premium to acquire American and merge it with its British water utility, investing two years getting regulatory approval for the deal. Then it abruptly reversed course in 2005 under new RWE leadership and decided to get out.

Four years later, the German company is still unwinding its investment, at a loss. It sold part of its American stake last year in an initial public offering, and more this year, but it still owns 23.5 percent. RWE has promised to exit completely by April.

"What really excites us is the opportunity to reintroduce the company and reemerge as an industry leader," said chief executive officer Donald L. Correll, a 58-year-old water-utility veteran.

Correll acknowledged that RWE's attempt to create a multinational, multi-utility company distracted American from growing its core business, operating municipal water and wastewater systems. The 123-year-old company has operations in 32 states and Ontario. More than 40 percent of its business is in Pennsylvania and New Jersey.

"We weren't growing as much," Correll said.

But before American can pick up speed, it must sort through some of the legacy of RWE's ownership.

The company, which reported $2.3 billion in revenue last year, spent $58.4 million to reestablish internal financial-reporting systems, which had disappeared under five years of foreign ownership.

And Correll, an accountant by training, finds himself spending a good deal of time explaining to regulators and to investors about the hefty "impairment charges" associated with RWE's ownership that have caused operating losses.

Since 2006, American has taken more than $2 billion in charges to reduce the value of the goodwill on its balance sheet - "goodwill" being the premium that RWE paid above American's book value. It still carries about $1.2 billion of goodwill on its books.

Correll said the impairment charges, the term for writing off worthless goodwill, were only an accounting function to sync the company's balance sheet with its market value. The charges do not affect cash flow or the ability to invest in infrastructure, he said.

"It has absolutely nothing, zero, to do with the way the company is operated, or its performance," he said.

The impending sale of RWE's remaining shares also acts like an anchor on the company's price on the New York Stock Exchange. Some analysts, while bullish on American's long-term prospects, encourage investors to stay on the sidelines until the market absorbs the "overhang" of RWE's shares.

"I think we're getting closer to equilibrium now, but we are still trading at a discount to some of our peers," Correll said.

RWE had hoped to exit by 2007. But poor market conditions and regulatory hurdles - the sale required approval by 13 state utility commissions - dragged on.

If the glacial process has worn on Correll, he does not show it. He is evenhanded and diplomatic, useful traits in the water industry, where Correll was the chief executive of two other companies before coming to American in 2006.

"You don't develop a water supply overnight," he said. "Pipes last a long time. When you make investments in this business, you're not thinking about getting a return in 24 hours or a month. You have to have a long-term view, and you need to have some patience for that. This is not a business that hedge funds are interested in."

For Correll, the water business remains ripe for consolidation. Eighty-five percent of the nation's water systems are owned by public agencies. Correll says American can offer its experience and economies of scale to municipalities that may be struggling in a stressful economy.

"It doesn't need to be through acquisition, but it does mean we need to be out there talking to those municipalities," he said.

The water world can be very political, working with regulators and some inevitable local resistance.

"With water, it makes people very nervous to talk about private ownership," said Wenonah Hauter, executive director of Food & Water Watch, a nonprofit advocacy group that has campaigned against private water systems, including some American operations.

"Rates go up, service goes down, there are layoffs," she said. "We've just seen it again and again and again."

Political brush fires in the franchise areas are par for the course.

Last year, the city of Felton, Calif., successfully wrested back control of its system after rates went up under American's tenure. Taxes and rates have since gone up even more.

"We can only go so far beating our heads against the wall," Correll said. "If that's what a local governing board wants to do, they have the power of eminent domain."

American is also embroiled in a two-year effort to buy the suburban water system from the cash-strapped city of Trenton for $75 million, which would add 40,000 customers. Though regulators have approved the sale, a Trenton citizens' group has tied the sale up in court.

"We're still hopeful - knock on wood - that sometime in our lifetime we'll close this transaction," Correll said.

But Correll dismisses the local battles as minor events in the company's century-long development. These are exciting times, he said.

"Despite the historical perception that the business is old and stodgy and taken for granted, there's just a lot of opportunities today," he said.