American Water Reports Fourth Quarter and Year-End Earnings; Growth Achieved Through Investment and Rates

American Water Works Company, Inc. (NYSE: AWK), the largest investor-owned U.S. water and wastewater utility company, today reported results for the quarter and the year ending December 31, 2008.

Revenues for the quarter ending December 31, 2008 rose 2.7 percent as compared to the same quarter in 2007, from $553.8 million to $568.6 million. For the year, the company reported operating revenues of $2.3 billion, a 5.5 percent increase over 2007 revenues of $2.2 billion.

Net income during the fourth quarter totaled $36.4 million, or $0.23 per basic and diluted common share, compared with a 2007 fourth quarter loss of $234.6 million, or $1.47 per basic and diluted common share. The net loss for the fourth quarter 2007 reflected the effect of a goodwill impairment charge of $261.9 million, or $1.64 per basic and diluted common share. The company did not report a goodwill impairment charge in the fourth quarter of 2008. For the year, including goodwill impairment charges, the company reported a net loss of $562.4 million, or $3.52 per basic and diluted common share, compared with a loss of $342.8 million, or $2.14 per basic and diluted common share in 2007. Excluding goodwill impairment charges, net income for 2008 would have been $176.1 million, or $1.10 per basic and diluted common share, compared with $158.7 million, or $0.99 per basic and diluted share in 2007, an 11 percent year-over-year increase.

“We are pleased with the results for the quarter and for the year,” said Don Correll, president and CEO of American Water. “The increase in revenues reflects our continued progress in regulatory filings, commitment to prudent infrastructure investment, and our ability to achieve an appropriate rate of return on those investments.”

For the fourth quarter, the company was awarded additional annualized revenues from general rate case activity and infrastructure surcharges of approximately $120.1 million. For the year, American Water received annualized rate increases of approximately $206.3 million. As of December 31, 2008, the company has general rate cases awaiting final order in seven states that would provide $104.0 million of additional revenues, if approved as filed. The extent to which these rate increase requests will be granted by the applicable regulatory agencies will vary.

For the company as a whole, primarily due to weather, total volume of water sold decreased 6.7 percent for the quarter, resulting in an estimated reduction of $27.3 million in revenues for the quarter, approximately $16.1 million in net income, or $0.10 per basic and diluted common share. For the year, the total volume of water sold decreased 4.4 percent from 2007, resulting in an estimated reduction of $52.3 million in revenues, approximately $30.8 million in net income, or $0.19 per basic and diluted common share. The increase in annual operating revenues from the company’s Regulated Business was $95.2 million, or a 4.8 percent increase over 2007 and was achieved through investment and rates, despite very wet weather in the Midwest.

The company’s Non-regulated Businesses’ revenues increased by $2.6 million, or 3.9 percent, for the fourth quarter of 2008 as compared to the prior year’s fourth quarter and $29.5 million, or 12.2 percent, for the year compared to 2007. The increase was primarily attributable to higher revenues in the Contract Operations Group and the Homeowner Services Group, which expanded its customer count to more than 680,000 customer contracts in 15 states.

For the fourth quarter ended December 31, 2008, operating expenses totaled $439.5 million, compared to $708.9 million in 2007. The decrease in expense in 2008 is primarily attributable to an impairment and decreases in non-recurring Sarbanes-Oxley readiness and other divestiture-related expenses. The decrease was off-set in part by higher depreciation and amortization, general taxes, and production costs. Operating expenses for the year increased $324.7 million compared to 2007. Excluding for the 2008 and 2007 goodwill impairment charges of $750.0 million and $509.3 million, respectively, operating expenses increased by approximately $84.1 million. A good portion of this increase includes employee expenses related to the company’s commitment to continuously improve the service it provides its customers. The Non-regulated Businesses segment’s expenses decreased by $3.4 million for the quarter and increased by $22.8 million for 2008. The increase in Non-Regulated expenses for the year directly relate to the increase in revenue in the Non-Regulated Businesses in 2008.

In terms of growing the business in 2008, American Water’s Regulated Business completed 10 tuck-in acquisitions adding approximately 5,000 water and 1,600 wastewater customers. Growth in American Water’s Non-regulated Businesses for the year included awarded contracts for the water and wastewater distribution systems at Fort Hood and Fort Polk Army Installations, which commence in 2009. The awards of these contracts include estimated total revenue of approximately $329.0 million and $348.0 million, respectively, over a 50-year period.

“During 2008, we had solid successes in delivering our strategy to grow our business through acquisitions and in our pursuit of regulated-like opportunities that complement our capabilities,” added Correll. “Whether we are taking on systems through tuck-in acquisitions that are under financial or physical stress or partnering with the public sector like the pending $80 million agreement with the city of Trenton; American Water is flexible in its approach to bring forward water resource solutions to communities in need.”

The company also continued to invest and make improvements to its existing service areas. American Water invested approximately $294.2 million in the fourth quarter and $1.0 billion for the year on infrastructure improvements to enable the continued provision of reliable service to its customers. For the fourth quarter of 2008, construction expenditures increased $50.6 million from $243.6 million during the same period in the prior year, and increased $258.0 million for the year from $750.8 million in 2007. The capital investment includes infrastructure renewal programs, replacement of existing infrastructure as needed, and construction of new facilities to meet new customer growth.

“Our commitment to ensuring viable water sources for future generations can be seen in some of our major projects in 2008. We began construction of a 20 million-gallon-a-day water treatment plant and a 31-mile water transmission line in Kentucky, and completed a $44.5 million plant upgrade in Missouri and a $48.5 million plant expansion in New Jersey,” said Correll.

Net cash provided by operating activities for the fourth quarter 2008 increased approximately $15.5 million, or about 10.8 percent, to $159.3 million, from $143.8 million during the same period in the prior year. Net cash provided by operating activities for the year increased approximately $78.5 million, or about 16.6 percent, to $552.2 million from $473.7 million in the prior year.

For the fourth quarter 2008 and the year, capital resource requirements were met with internally generated cash, commercial paper issuance and access to bank credit lines. In November of 2008, the company successfully completed its debt offering of $75.0 million aggregate principal amount of 10% Senior Monthly Notes. It recently closed a similar debt offering of $75.0 million aggregate principal amount of 8.25% Senior Monthly Notes this month. American Water has access to unsecured revolving credit facilities with aggregate bank commitments of $850 million. As of December 31, 2008, American Water had approximately $369.1 million available capacity under its credit facility.

In 2008, American Water reinstituted a policy of paying quarterly dividends, which was a long-standing tradition of the company’s prior public history. On December 1, 2008, the company’s Board of Directors paid a quarterly cash dividend of $0.20 per common share. Dividends paid totaled $0.40 per common share for the year.

Non-GAAP Financial Measures

This press release includes a presentation of “Net income excluding impairment charges,” “Basic income per common share excluding impairment charges," “Diluted net income per common share” and “Operating expenses excluding impairment charge.” Each of these items are derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). The items constitute “non-GAAP financial measures” under Securities and Exchange Commission rules. These non-GAAP financial measures supplement our GAAP disclosures and should not be considered an alternative to the GAAP measure.

Management believes that the presentation of these adjusted measures is useful to investors because it provides a means of evaluating the company’s operating performance without giving effect to impairment charges, which have been triggered principally by market factors that are largely out of the control of management and do not reflect the day-to-day operations of the company. Moreover, management believes that this presentation facilitates comparisons between the company and other companies in its industry. In preparing operating plans, budgets and forecasts, and in assessing historical performance, management relies, in part, on trends in the company’s historical results, exclusive of impairment charges.

Set forth below are tables that reconcile the non-GAAP financial measures to the most directly comparable GAAP financial measure.

Fourth Quarter and Year-End Earnings Conference Call

The fourth quarter and year-end earnings conference call will take place Thursday, February 26, 2009, at 9:00 a.m. Eastern Standard Time. Interested parties may listen over the Internet by logging on to the Investor Relations page of the company’s Web site at www.amwater.com.

Following the earnings conference call, an audio archive of the call will be available through March 6, 2009, by dialing (800) 475-6701 (U.S.) and (320) 365-3844 (for international callers). The pass code for replay participants is 982411. The online archive of the webcast will be available through March 6, 2009, by accessing the Investor Relations page of the company’s Web site located at www.amwater.com.

About American Water

Founded in 1886, American Water is the largest investor-owned U.S. water and wastewater utility company. With headquarters in Voorhees, N.J., the company employs more than 7,000 dedicated professionals who provide drinking water, wastewater and other related services to approximately 15 million people in 32 states and Ontario, Canada.

Cautionary Statement Concerning Forward-Looking Statements

Statements in this release that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as weather conditions, patterns or events, including drought or abnormally high rainfall, changes in general economic, business and financial market conditions, fluctuations in the value of benefit plan assets and liabilities that could increase our cost and funding requirements, changes in laws, governmental regulations and policies, including environmental, health and water quality and public utility regulations and policies, the decisions of governmental and regulatory bodies, including decisions to raise or lower rates, the timeliness of regulatory commissions’ actions concerning rates, migration into or out of our service territories, our ability to obtain permits for expansion projects, changes in customer demand for, and patterns of use of, water, such as may result from conservation efforts, the availability of adequate and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our operations, our ability to successfully acquire and integrate water and wastewater systems that are complementary to our operations and the growth of our business, our ability to manage the expansion of our business, our ability to control operating expenses and to achieve efficiencies in our operations, access to sufficient capital on satisfactory terms, fluctuations in interest rates, restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends, changes in our credit rating, changes in capital requirements, the incurrence of impairment charges, difficulty in obtaining insurance at acceptable rates and on acceptable terms and conditions, ability to retain and attract qualified employees, cost overruns relating to improvements or the expansion of our operations, and civil disturbance or terrorist threats or acts or public apprehension about future disturbances or terrorist threats or acts.

For further information regarding risks and uncertainties associated with American Water’s business, please refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of American Water’s SEC filings, including, but not limited to, the company’s Rule 424(b)(4) prospectuses filed April 24, 2008. We undertake no obligation to publicly update or revise any forward-looking statement.