American Water Works Company, Inc. (AWK-NYSE)
November 13, 2009 Issue
The Most Powerful Name In Corporate News and Information
No Longer A Foreign Owned Company With Multiple-Utilities, American Water Works Company, Inc. Is Again Focused On Being The Premiere National Water Service Provider In The United States
Donald L. Correll
President and Chief Executive Officer
Donald L. Correll is president and chief executive officer (CEO) of American Water, the largest investor-owned U.S. water and wastewater utility company. For more than 30 years, Mr. Correll has held leadership roles in the water industry and is known for developing a high-quality, customer-oriented culture in the companies he manages, resulting in outstanding service and improved stakeholder value.
Mr. Correll leads a team of 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. He is responsible for developing the overall strategy and vision of American Water and directing its key business development initiatives.
Prior to joining American Water on April 17, 2006, Mr. Correll served as president and CEO of Pennichuck Corp., a New Hampshire-based water utility holding company. During his tenure, Pennichuck reported solid financial performance and growth in market value and customer service.
Mr. Correll spent 25 years with United Water Resources, a leading investor-owned water services company, where he served as chairman, president and CEO from 1991 through 2001. Under his direction, the company’s market capitalization increased from $400 million to $1.8 billion and its revenue base grew from $150 million to $500 million. He is also credited with expanding the United Water customer base from 1 million in two states to 7.5 million in 19 states.
Mr. Correll was the President of the National Association of Water Companies (NAWC) this past year, and he currently serves on the boards of a variety of civic, professional and business organizations, including the U.S. Chamber of Commerce, the Environmental Financial Advisory Board of the U.S. Environmental Protection Agency and the National Association of Water Companies. In addition, he is a member of the board of directors of HealthSouth Corporation and New Jersey Resources.
Mr. Correll is a graduate of The Pennsylvania State University and New York University, where he earned a bachelor’s degree in accounting, and master’s in business administration in finance, respectively. He is also a certified public accountant in New York. He resides in Franklin Lakes, N.J., with his wife, Chris.
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.
Interview conducted by: Lynn
Fosse, Senior Editor, CEOCFOinterviews.com, Published – November 13, 2009
Mr. Correll: That is a terrific question given where we were four years ago. There was a vision that the owners of the company at the time were going to be a multinational, multi-utility and that vision never quite had a chance to be put in place. Shortly after they acquired American Water in 2003, which was when it was consummated, the parent company RWE had a change of leadership and vision. They decided that they would focus more on just the electric, core business that they had in Germany and in Europe. Then they began to examine how to change the strategy and what it meant in terms of the acquisitions that they made, including American Water. For several years of their ownership, the vision that they once had began to change. It changed several times during that ownership as it was implemented by the then senior management team, which was almost all from Thames Water, a London based utility also owned by RWE. It’s fair to say that we’ve had some challenges here and we’ve had to refocus the company vision. Today, and since we’ve taken the reigns and started this course of having the divestiture in place, we have a vision of being the premiere water service provider in the United States. We want to build on the strengths that we have, given our size, geographic diversity and our history. We’re focused on being a national, American company, but with a very local focus because the services that we provide are very locally oriented. All of those things are what has changed as we’ve tried to transform the company, not only in terms of its ownership from a foreign based electric company, to one that’s focused on the challenges and the opportunities in water that reside here domestically in the US.
CEOCFO: Why are you in the areas that you are in and what is the common thread?
Mr. Correll: The common thread is water. We have 50% of our operations, in terms of our customers and largely our revenues, in two states, Pennsylvania and New Jersey, which is really where the company got its start, as a Pennsylvania-based organization. It grew through acquisitions. It grew into West Virginia and New Jersey. Over time, we’ve grown throughout the mid-west and all the way to the west coast, but the common thread was to always be a water utility and later a water service business.
CEOCFO: Is there much change in the water industry; are there always a lot of acquisitions?
Mr. Correll: If you were to look at this business 5 years ago or you looked at a snapshot of it from 20 years ago, I’m not sure compared to what’s going on with technology, the economy or a host of other things that you would necessarily say there has been a lot of change. If you look at it over the history of the country, one common thing that we always had and needed was access to water. It is not a mystery that the original colonies were all around water. They were in Philadelphia, Manhattan, Boston, and Baltimore, and there were ports that the ships came in, but they were also there on the water because there was access to the water. If you think about change in our industry and you go back to our nation’s founding, in the late 1700s, to today, you would see some change. Two hundred years ago, almost all of the water systems were entities just like American Water is today. They were private and investor-owned and that’s the way things got done back then. Today, 85% of the population is served by government municipal entities and only 15% gets their water from investor-owned systems. In wastewater services, it’s almost always publicly owned. That is a change, but it’s not a change that began over the last 5 or 20 years, it’s over the last century.
CEOCFO: What are the different segments of your business?
Mr. Correll: We have operations in 32 states, and 20 of those states are what we call our regulated water utilities, which is the preponderance of our business, or 90% of our business. We also have some operations in Canada, but across the footprint in the US, it is coast to coast plus Hawaii. We provide service to 15 million people, which is roughly 5% of the population in the US. We have around 7,000 employees and as I said, 90% of our business is regulated utility business, where we have franchise utilities.
CEOCFO: Aging infrastructure is a concern,: what’s the status in the areas that you are in and what do you do to keep up?
Mr. Correll: We’re spending anywhere from $800 million to $1 billion a year and probably more than half of that is to just deal with replacement, renewal and/or upgrading of existing infrastructure. We would like to think that we are up to date and ahead of the curve in most cases vs. some of the larger and older municipal services, but we have old pipe too. We just like to believe that we’re on top of it in terms of having a regularly scheduled program to go ahead and replace it. It is indeed a broader water industry over the next 20 years. Twenty years ago, the challenge immediately for the business was to deal with water quality, to meet the new standards set by the EPA, which was relatively new 20 years ago, and to meet the requirements of the safe drinking water act and the clean water act. As an industry, we’ve spent hundreds of billions of dollars over the last 20 years to introduce water filtration, to upgrade water filtration and to upgrade wastewater facilities. While it can always be clean to another higher level, the real challenge today isn’t as much water quality as it is to transport it, distribute it and get it to the customer. That is classically what is called the infrastructure, the pipes in the ground that you do not see, and replacing tanks and valves that are in the ground along with the pipes. I think that the EPA’s estimate of up to 350 billion dollars over the next 20 years is an indication of that. That is double the number they estimated just 5 or 6 years ago. With wastewater, they have a comparable number, and you often hear that there is upwards to a trillion dollars that needs to be spent over the next 20 years. So that is truly the challenge that we have as an industry over the next two decades.
CEOCFO: Would you tell us about your relationship with the regulators?
Mr. Correll: We spend an awful lot of time with all of the regulators to help explain what our business is about, the challenges of the infrastructure investment, the value of the service that we are providing and the basic necessity of the service that we’re providing. However, we also point out that water service isn’t free. Particularly when you are spending all of this money on infrastructure, it has a cost associated with it. The basic nature and health aspects of our business vs. electric or gas or telephone is different; you do not ingest electric and you can survive without electric or gas, but you can’t survive without water for very long. I think that as long as we are doing our job in explaining the value of our services, it is fair to say that we get a fair hearing with the regulators in terms of what they need to do to adjust our rates over time.
CEOCFO: Are bottled water companies still a challenge for water companies?
Mr. Correll: It was a psychological challenge 20 years ago when Perrier showed up on the scene and started promoting its service. I know that there was a lot of angst, push back and concern, but less than 1% of our water that we deliver to a household is really used for human consumption and not even all of that is drunk, as some of it is used for cooking. Even if everyone started only using bottled water instead of tap water, it would only be 1% of the water that we provide. People aren’t going to start taking showers with Perrier, they’re not going to start washing their clothes with Aquafina, and they’re not going to be watering their lawns with bottled water. It was more of a psychological challenge because when it first surfaced and particularly when bottled water began to really explode in terms of its prevalence in the last decade, part of it was on a perception of a concern about the quality of the water coming from the tap. However, there have been enough recent studies to show that tap water in many cases is better than some of the stuff that you get in the bottle and it’s clearly a whole lot cheaper. It really has become more of a convenience thing that people use the bottled water just because they have the little plastic bottle that they can keep next to them and it’s easier than trying to fill up a glass. But those little plastic containers have created their own problems as well and I think that you’re starting to see a push back on the usage and liberation of bottled water. It is an entirely different industry than what we’re in.
CEOCFO: How is business these days?
Mr. Correll: I wouldn’t say that we are necessarily immune from economic and financial cycles, but a good part of our customer base is residential usage. Residential usage doesn’t change that much based on the economic cycle. We don’t have a great deal of industrial or large commercial customers. In a few places where we had some commercial accounts, particularly in the mid-west, we’ve seen a little down turn because some of them are suffering from the auto industry fall-out. The basic usage of the individual household hasn’t changed that much and it’s really impacted more by the weather. When you have a very cool and wet summer as we had in the northeast, or a year ago when we had a very wet summer in the mid-west where I believe the Mississippi was at its banks a good part of the summer, it does have an impact. However, our core business is strong, we continue to have access to capital, and we continue to make the necessary investments.
CEOCFO: What is the financial picture like for the company?
Mr. Correll: We continue to rebuild after the acquisition a few years ago when some areas of the business had suffered as a result, and some had agreements not to have rate increases in certain jurisdictions. Our financial profile declined somewhat. You can’t continue to be in this business and invest hundreds of millions of dollars a year on pipe and other infrastructure and not have the appropriate adjustments to your rates to cover it. We’ve spent the last 3 or 4 years trying to rebuild.
CEOCFO: You mentioned wanting to be a premier water company. What does that mean for you and how do you get there?
Mr. Correll: One, it means that our customers know who we are. That was the first step, and we had too many customers that didn’t know, and still to this day, some customers in our industry don’t know who provides their water service. You can’t be a premiere company if your customers don’t even know that you exist. We needed to ratchet up our outreach, not only to our community leaders and regulators, but to our customers as well. Ultimately, we would like to be known as ‘the go to water company’; that not only our existing customers know who we are and give us high marks for our performance, reliability, customer service and safety, but when others who have water issues, whether they are water quality, quantity or service, we are the organization that they call and ask if we can help them do x, y, or z. It may be improving their water service, building a wastewater facility, promoting water reuse, conservation, or just improving customer service. Then we would be recognized as a premiere water service company. We’ve taken some steps in that regard already and our surveys show that our customers know who we are. Increasingly, our customers are coming to our website and finding out more about us. Our surveys show from two years ago that once they’ve learned something about the company, their opinion is better rather than worse. So were getting higher marks for that. It was recognized earlier this year when an organization called Global Water Intelligence gave us the Water Company of the Year award, which was something that we’re very proud of.
CEOCFO: What’s ahead for American Water Works?
Mr. Correll: The immediate next step is to at some point have the final divestiture act by our exiting shareholder. It’s taken them a little longer than I think they initially expected and hoped for, but I don’t think anyone necessarily expected what happened in the financial market the last year. They have gone from owning the company to now after an IPO and two subsequent tranches being down to 23 percent. So we may be one tranche away from just being a totally listed US company. We’re listed on the New York Stock Exchange, but we still have a large exiting shareholder at 23 ½ percent. Continuing to improve our financial performance, and continuing to rebuild and recover from where we were several years ago is the plan for the next 3 years. We are also continuing to provide earnings growth and we continue to tell the market is 7% to 10% a year in earnings per share growth and continuing to grow our customer base population that we serve. There is no one else and no one even in the large municipal systems that can say that they serve 5% of the population in the country.
CEOCFO: Is the investment community paying attention?
Mr. Correll: Certainly 4 years ago, there were some in the investment community that didn’t even know who we were. There were some that had a vague recollection of our company, but the investment community at large kind of loses focus once you go private and you’re not there talking to them. They are moving on to other things. It is fair to say that in the last 2 years since the IPO, we did have some restrictions on what we could say to the financial community in the run up to the IPO. It was a bit of a dilemma to try to promote your company and reengage with your customers and regulators and have restrictions on what you could say publicly when you were planning an IPO. However, since the IPO, we have been operating on almost all cylinders and with the amount of investment coverage that we have today, the diversity of investors that we’ve attracted, and the performance of our shares, I think that is safe to say that the company is being recognized again.
CEOCFO: Final thoughts, why should potential investors pay attention to American Water Works?
If you’re interested in an infrastructure investment, interested in the
water field, the utility sector, and something that is “green” as a company,
there’s probably no other company that you should look at first before
American Water Works. Why you should look at us specifically is because we
have a history, a track record and we are building it again. This is a
business that will be around for a long time. It’s been around since before
the Romans, and the fundamental nature of the business hasn’t changed. If
you’re looking for safer investments, I think that it meets that criteria as
well. Given our size, geography, the history in our experience, the
opportunities that we see in our infrastructure, and in the challenges
facing the water sector, this is absolutely the right time to be looking at
a company like American Water Works.
Today, and since we’ve taken the reigns and started this course of having the divestiture in place, we have a vision of being the premiere water service provider in the United States. We want to build on the strengths that we have, given our size, geographic diversity and our history. We’re focused on being a national, American company, but with a very local focus because the services that we provide are very locally oriented. All of those things are what has changed as we’ve tried to transform the company, not only in terms of its ownership from a foreign based electric company, to one that’s focused on the challenges and the opportunities in water that reside here domestically in the US. - Donald L. Correll
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