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Rating Action:

Moody's assigns P-2 short-term rating to American Water Capital

17 Oct 2006
Moody's assigns P-2 short-term rating to American Water Capital

Approximately $700 million of debt securities affected

New York, October 17, 2006 -- Moody's Investors Service assigned a Prime-2 short term rating to American Water Capital Corp. (Capital) in connection with its new $700 million commercial paper (CP) program. At the same time, Moody's affirmed Capital's existing Baa1 long-term senior unsecured rating and VMIG-2 short term rating. The outlook remains negative.

The P-2 rating considers Capital's position as a financial conduit of American Water Works Company, Inc. (Water Works), and reflects the understanding that the existing support agreement between the two entities will continue to be maintained. Water Works has committed to ensure that a positive tangible net worth at Capital will be maintained at all times. In addition, if Capital is unable to make timely payment of interest, principal, or premium on any debt issued and outstanding, Water Works has committed to provide immediate and timely funds to Capital.

Capital's commercial paper program is fully backstopped by an $800 million five-year committed revolving credit facility. Use of proceeds under the program includes general corporate purposes and refinancing of existing credit lines. The backstop facility, which was signed on September 15, 2006, terminates in five years (2011), has same-day borrowing availability and one financial covenant permitting a maximum level of debt to capitalization at Water Works of 70%. The credit agreement contains a material adverse change clause only at the initial extension of credit; an event that occurred at the closing of the facility with the issuance of L/C's.

Moody's long-term rating of Baa1 for Capital's existing senior unsecured obligations reflects the relatively stable nature of the cash flows expected from Water Works' regulated water utility businesses. Also considered in the rating is Water Work's plan to be divested, via initial public offering, from its current owner, RWE AG (A1 stable), of Germany. Moody's anticipates the company's capital structure following the spin-off, expected by mid-2007, will reflect a partial refinancing of Water Works' existing debt that should not result in a material increase in leverage but will require a significant amount of refinancing of inter-company debt with RWE.

At this time, the long-term rating is constrained by the uncertainty surrounding the liquidity and capital structure of American Water Works post IPO. Although RWE has no obligation to guarantee payments on securities issued by Capital or other subsidiaries of Water Works, Moody's has historically considered the financial strength of RWE and its ownership of Water Works in Capital's rating. The elimination of this relationship will likely be viewed negatively with respect to the company's overall credit profile which could possibly result in a reassessment of the long and short term ratings, following the planned change of ownership. Apart from the anticipated IPO transaction, the negative outlook also reflects the continuing uncertainty surrounding prospects for rate recovery and the ability of Water Works to strengthen credit ratios over time. We note as well that Water Works will soon be operating as a stand alone entity following its spin-off from RWE, with all the financial and operating responsibilities attached thereto as a publicly traded company.

Headquartered in Voorhees, New Jersey, American Water Works Company, Inc. is an indirect wholly-owned subsidiary of RWE AG and is the largest investor-owned provider of water, wastewater and related services in North America. It is the parent company of numerous water utilities in the United States and reported revenue in 2005 of $2.0 billion.

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

James O'Shaughnessy
Analyst
Corporate Finance Group

No Related Data.
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