CONFORMED COPY
Page 1 of 2022
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001March 31, 2002
--------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -------------
Commission File Number 1-3437-2
------------------------------------------
AMERICAN WATER WORKS COMPANY, INC.
- --------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0063696
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1025 Laurel Oak Road, Voorhees, New Jersey 08043
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(856) 346-8200
- ---------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ -----
At NovemberMay 1, 2001,2002, the number of shares of common stock, $1.25 par value,
outstanding was 99,983,686100,032,346 shares.
Page 2 FORM 10-Q
PART I FINANCIAL INFORMATION
----------------------------
Item 1. Financial Statements
-----------------------------
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
September 30,March 31,
2002 2001 2000
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $394,956 $364,125$384,740 $316,427
-------- --------
Operating expenses
Operation and maintenance 166,890 154,400209,252 150,823
Depreciation and amortization 46,819 41,64855,027 44,360
General taxes 33,049 31,94234,758 33,311
-------- --------
Total operating expenses 246,758 227,990299,037 228,494
-------- --------
Operating income 148,198 136,13585,703 87,933
-------- --------
Other income (deductions)
Interest (47,512) (48,556)(57,412) (48,597)
Allowance for other funds used during
construction 1,098 1,2411,620 1,081
Allowance for borrowed funds used
during construction 968 9311,026 979
Amortization of debt expense (694) (691)(673) (678)
Preferred dividends of subsidiaries (750) (789)
RWE/AG acquisition expense (9,860) -
Gain from sale of operating system 4,820(713) (783)
Merger expenses (947) -
Other, net 1,481 (4,052)(934) (671)
-------- --------
Total other income (deductions) (50,449) (51,916)(58,033) (48,669)
-------- --------
Income before income taxes 97,749 84,21927,670 39,264
Provision for income taxes 41,972 33,48812,457 15,803
-------- --------
Income before cumulative effect of change in
accounting principle 15,213 23,461
Cumulative effect of change in accounting principle 2,679 -
-------- --------
Net income 55,777 50,73117,892 23,461
Dividends on preferred stocks 146 996146
-------- --------
Net income to common stock 55,631 49,73517,746 23,315
-------- -------- Page 3 FORM 10-Q
Three Months Ended
March 31,
2002 2001
---------- ----------
Other comprehensive loss, net of tax
Unrealized loss on securities (12,181) (23,856)
Reclassification(2,926) (1,994)
Foreign currency translation adjustment for gain included
in net income (1,104)708 -
-------- --------
Other comprehensive loss, net of tax (13,285) (23,856)
-------- ------------------ ----------
Comprehensive income $ 42,34615,528 $ 25,879
======== ========
Page 3 FORM 10-Q
Three Months Ended
September 30,
2001 2000
---------- ----------
21,321
========== ==========
Average shares of basic common stock outstanding 99,723 98,139
Basic and diluted earnings100,027 98,873
Earnings per average common share on
average shares outstanding
Income before cumulative effect of change
in accounting principle $ 0.560.15 $ 0.510.24
Cumulative effect of change in accounting
principle $ 0.03 -
---------- --------
Basic $ 0.18 $ 0.24
========== ==========
Income before cumulative effect of change
in accounting principle $ 0.15 $ 0.24
Cumulative effect of change in accounting
principle $ 0.03 -
---------- ---------
Diluted $ 0.18 $ 0.24
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at JulyJanuary 1 $1,096,271 $1,026,417$1,137,772 $1,069,486
Add - net income 55,777 50,73117,892 23,461
Preferred stock redemption premium (25) -
Gain (loss) on treasury stock 57 (15)- 338
---------- ----------
1,152,105 1,077,1331,155,639 1,093,285
---------- -------------------
Deduct - dividends paid
Preferred stock 32 88232
Preference stock 114 114
Common stock - $.245 per share in 2002;
$.235 per share in 2001;
$.225 per share in 2000 23,409 22,0622001 24,505 23,212
---------- ----------
23,555 23,05824,651 23,358
---------- ----------
Balance at September 30 $1,128,550 $1,054,075March 31 $1,130,988 $1,069,927
========== ==========
The accompanying information and notes are an integral part of these
financial statements.
Page 4 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income
and of Retained EarningsBalance Sheet (Unaudited)
(In thousands, except per share amounts)thousands)
Nine Months Ended
September 30,March 31, December 31,
2002 2001
2000
---------- ---------------------- -----------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $1,075,261 $1,018,293
---------- ----------
Operating expenses
OperationASSETS
Property, plant and maintenance 478,189 453,028
Depreciationequipment
Utility plant - at original cost less
accumulated depreciation $ 6,152,285 $ 5,458,909
Utility plant acquisition adjustments, net 215,338 68,916
Non-utility property, net of accumulated
depreciation 95,874 94,149
----------- -----------
Total property, plant and amortization 136,248 122,061
General taxes 98,825 96,610
---------- ----------
Total operating expenses 713,262 671,699
---------- ----------
Operating income 361,999 346,594
---------- ----------
Other income(deductions)
Interest (144,653) (143,030)equipment 6,463,497 5,621,974
----------- -----------
Current assets
Cash and cash equivalents 15,511 19,691
Customer accounts receivable 164,048 153,142
Allowance for uncollectible accounts (8,412) (7,660)
Unbilled revenues 90,966 86,065
Miscellaneous receivables 20,335 16,483
Materials and supplies 32,861 32,281
Deferred vacation pay 13,935 11,422
Restricted funds 224 224
Other 19,216 18,940
----------- -----------
Total current assets 348,684 330,588
----------- -----------
Regulatory and other funds used during
construction 3,364 5,747
Allowance for borrowed funds used
during construction 3,035 4,210
Amortization of debt expense (2,082) (2,081)
Preferred dividends of subsidiaries (2,275) (2,382)
RWE/AG acquisition expense (9,860)long-term assets
Regulatory asset -
Gain from sale of operating system 4,820 -
Other, net 3,876 (5,126)
---------- ---------
Total other income (deductions) (143,775) (142,662)
---------- ---------
Income before income taxes
218,224 203,932
Provision for income taxes 89,605 80,979
---------- ---------
Net income 128,619 122,953
Dividends onrecoverable through rates 219,293 217,330
Other investments 37,881 39,956
Debt and preferred stocks 438 2,988
---------- ---------
Net income to common stock 128,181 119,965
---------- ---------expense 48,183 45,882
Deferred pension expense 33,724 30,712
Deferred postretirement benefit expense 9,115 9,318
Deferred security costs 11,609 7,058
Deferred business services project expenses 40,109 36,311
Deferred tank painting costs 16,225 16,585
Restricted funds 9,397 8,570
Goodwill 285,326 136,488
Intangible assets 21,778 23,400
Other comprehensive loss, net of tax
Unrealized loss on securities (16,636) (47,062)
Reclassification adjustment for gain included
in net income (3,158) -
---------- ---------
Other comprehensive loss, net of tax (19,794) (47,062)
---------- ---------
Comprehensive income $108,38798,262 82,927
----------- -----------
Total regulatory and other long-term assets 830,902 654,537
----------- -----------
TOTAL ASSETS $ 72,903
========== =========7,643,083 $ 6,607,099
=========== ===========
Page 5 FORM 10-Q
Nine Months Ended
September 30,March 31, December 31,
2002 2001
2000
---------- ---------------------- -----------
Average sharesCAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,748,674 $ 1,758,018
Preferred stocks without mandatory
redemption requirements - 11,673
Preferred stocks of basic common stock outstanding 99,287 97,944
Basicsubsidiaries with
mandatory redemption requirements 30,099 30,474
Preferred stocks of subsidiaries without
mandatory redemption requirements 7,268 7,268
Long-term debt
American Water Works Company, Inc. 297,000 297,000
Subsidiaries 3,221,601 2,253,019
----------- -----------
Total capitalization 5,304,642 4,357,452
----------- -----------
Current liabilities
Short-term debt 416,596 414,083
Current portion of long-term debt 170,314 166,087
Accounts payable 45,657 67,996
Taxes accrued, including federal income 42,890 21,756
Interest accrued 59,466 43,015
Accrued vacation pay 14,086 11,577
Other 119,065 100,220
----------- -----------
Total current liabilities 868,074 824,734
----------- -----------
Regulatory and diluted earnings per common share on
average shares outstandingother long-term liabilities
Advances for construction 262,141 230,801
Deferred income taxes 627,077 624,449
Deferred investment tax credits 38,272 38,633
Accrued pension expense 68,636 62,355
Accrued postretirement benefit expense 19,168 13,808
Other 40,329 41,007
----------- -----------
Total regulatory and other long-term
liabilities 1,055,623 1,011,053
----------- -----------
Contributions in aid of construction 414,744 413,860
----------- -----------
Commitments and contingencies -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 1.297,643,083 $ 1.22
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,069,486 $1,001,029
Add - net income 128,619 122,953
- gain (loss) on treasury stock 801 (959)
---------- ----------
1,198,906 1,123,023
---------- ----------
Deduct - dividends paid
Preferred stock 96 2,646
Preference stock 342 342
Common stock - $.705 per share in 2001;
$.675 per share in 2000 69,918 65,960
---------- ----------
70,356 68,948
---------- ----------
Balance at September 30 $1,128,550 $1,054,075
========== ==========6,607,099
=========== ===========
The accompanying information and notes are an integral part of these
financial statements.
Page 6 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Balance SheetStatement of Cash Flows (Unaudited)
(In thousands)
September 30 DecemberThree Months Ended
March 31,
2002 2001
2000
------------ ------------------- --------
ASSETS
Property, plantCASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,892 $23,461
Adjustments
Depreciation and equipment
Utility plantamortization 55,027 44,360
Cumulative effect of change in accounting principle (2,679) -
at original cost less
accumulated depreciation $ 5,358,174 $ 5,202,833
Utility plant acquisition adjustments,Provision for deferred income taxes 4,288 3,165
Provision for losses on accounts receivable 2,840 1,943
Allowance for other funds used during
construction (1,620) (1,081)
Employee benefit expenses greater
than funding 7,441 3,876
Employee stock plan expenses 813 1,212
Deferred regulatory costs (9,247) (9,969)
Amortization of deferred charges 4,431 3,684
Other, net 72,881 75,294
Non-utility property,(11,890) (8,735)
Changes in assets and liabilities, net
of accumulated
depreciation 47,236 37,831
Excesseffects from acquisitions
Accounts receivable (2,995) 16,081
Unbilled revenues (154) 2,370
Other current assets (61) (350)
Accounts payable (24,077) (18,164)
Taxes accrued, including federal income 19,870 23,808
Interest accrued 16,442 5,143
Other current liabilities 16,935 (4,486)
-------- --------
Net cash from operating activities 93,256 86,318
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (65,242) (62,523)
Allowance for other funds used during
construction 1,620 1,081
Acquisitions (883,064) (48,575)
Proceeds from the sale of cost of investments in
subsidiaries over book equity at
acquisition, net 59,142 55,590
----------- -----------
Totalassets 197 410
Removal costs from property, plant and
equipment 5,537,433 5,371,548
----------- -----------
Current assets
Cash and cash equivalents 43,357 28,571
Customer accounts receivable 134,232 103,975
Allowance for uncollectible accounts (3,316) (2,575)
Unbilled revenues 94,168 83,878
Miscellaneous receivables 12,911 15,117
Materials and supplies 23,154 20,683
Deferred vacation pay 12,818 10,923retirements (1,394) (1,880)
Restricted funds 224 224
Other 17,820 16,900
----------- -----------
Total current assets 335,368 277,696
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 216,376 216,652
Other investments 39,196 73,997
Debt and preferred stock expense 46,571 47,630
Deferred pension expense 28,755 23,479
Deferred postretirement benefit expense 9,521 10,129
Deferred business services project costs 32,559 4,796
Deferred tank painting costs 16,005 16,829
Restricted funds 8,590 8,343
Other 88,301 83,699
----------- -----------
Total regulatory and other long-term assets 485,874 485,554
----------- -----------
TOTAL ASSETS $ 6,358,675 $ 6,134,798
=========== ===========(827) (247)
-------- --------
Net cash used in investing activities (948,710) (111,734)
-------- --------
Page 7 FORM 10-Q
September 30 DecemberThree Months Ended
March 31,
2002 2001
2000
------------ ------------------- --------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,746,520 $ 1,669,677
Preferred stocks without mandatory
redemption requirements 11,673 11,673
Preferred stocksCASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $926,097 $143,788
Proceeds from common stock 691 9,269
Purchase of subsidiaries with
mandatory redemption requirements 30,698 32,902
Preferred stockscommon stock for treasury (36) (63)
Net borrowings (repayments) under
short-term debt agreements 2,513 (60,138)
Advances and contributions for construction,
net of subsidiaries without
mandatory redemption requirements 8,118 8,118
Long-term debt
American Water Works Company, Inc. 147,000 159,000
Subsidiaries 2,234,916 2,112,165
----------- -----------
Total capitalization 4,178,925 3,993,535
----------- -----------
Current liabilities
Short-term debt 447,556 412,179
Current portionrefunds 5,490 6,506
Debt issuance costs (3,021) (780)
Repayment of long-term debt 79,661 161,395
Accounts payable 46,344 52,447
Taxes accrued, including federal income 86,402 25,960
Interest accrued 49,153 42,641
Accrued vacation pay 13,060 11,564
Other 66,758 67,865
----------- -----------
Total current liabilities 788,934 774,051
----------- -----------
Regulatory(43,736) (57,828)
Redemption of preferred stocks (12,073) (319)
Dividends paid (24,651) (23,358)
-------- --------
Net cash from financing activities 851,274 17,077
-------- --------
Net decrease in cash and
other long-term liabilities
Advancescash equivalents (4,180) (8,339)
Cash and cash equivalents at January 1 19,691 28,571
-------- --------
Cash and cash equivalents at March 31 $15,511 $20,232
======== ========
Common stock placed into treasury in connection with the Employees Stock
Ownership Plan, the Savings Plan for construction 224,741 216,125
Deferred income taxes 603,051 605,343
Deferred investment tax credits 38,889 40,098
Accrued pension expense 61,231 50,414
Accrued postretirement benefit expense 13,394 13,930
Other 37,263 37,823
----------- -----------
Total regulatoryEmployees, and other long-term
liabilities 978,569 963,733
----------- -----------
Contributions2000 Stock Award and
Incentive Plan totaled $983 in aid of construction 412,247 403,479
----------- -----------
Commitments2002 and contingencies -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 6,358,675 $ 6,134,798
=========== ===========$890 in 2001.
The accompanying information and notes are an integral part of these
financial statements.
Page 8 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $128,619 $122,953
Adjustments
Depreciation and amortization 136,248 122,061
Provision for deferred income taxes 10,148 13,757
Provision for losses on accounts receivable 7,266 6,334
Allowance for other funds used during
construction (3,364) (5,747)
Gain from sale of telecommunications
company investments (5,177) -
Gain from sale of operating system (4,820) -
Employee benefit expenses greater
than funding 525 4,946
Employee stock plan expenses 3,745 (2)
Deferred business services project expenses (27,763) -
Deferred tank painting costs (2,184) (1,591)
Deferred rate case expense (2,095) (1,322)
Amortization of deferred charges 12,332 8,266
Other, net (2,683) (7,047)
Changes in assets and liabilities, net
Accounts receivable (34,576) (29,458)
Unbilled revenues (10,290) (7,489)
Other current assets (3,391) (4,226)
Accounts payable (6,103) (26,480)
Taxes accrued, including federal income 60,442 21,206
Interest accrued 6,512 4,679
Other current liabilities (1,107) (19,778)
-------- --------
Net cash from operating activities 262,284 201,062
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (251,225) (253,011)
Allowance for other funds used during
construction 3,364 5,747
Acquisitions (55,859) (48,951)
Proceeds from the disposition of property,
plant and equipment 19,359 2,342
Removal costs from property, plant and
equipment retirements (9,633) (4,500)
Restricted funds (247) 12,540
-------- --------
Net cash used in investing activities (294,241) (285,833)
-------- --------
Page 9 FORM 10-Q
Nine Months Ended
September 30,
2001 2000
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $148,321 $ 46,014
Proceeds from common stock 34,736 25,455
Purchase of common stock for treasury (932) (3,426)
Net borrowings under
short-term debt agreements 35,377 73,583
Advances and contributions for construction,
net of refunds 22,109 21,243
Debt issuance costs (1,004) (1,782)
Repayment of long-term debt (119,304) (26,796)
Redemption of preferred stocks (2,204) (926)
Dividends paid (70,356) (68,948)
-------- --------
Net cash from financing activities 46,743 64,417
-------- --------
Net increase (decrease) in cash and
cash equivalents 14,786 (20,354)
Cash and cash equivalents at January 1 28,571 43,100
-------- --------
Cash and cash equivalents at September 30 $43,357 $ 22,746
======== ========
Common stock issued in lieu of cash in connection with the Employees' Stock
Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award and
Incentive Plan totaled $1,488 in 2000.
Common stock placed into treasury in connection with the Employees Stock
Ownership Plan, the Savings Plan for Employees, and 2000 Stock Award and
Incentive Plan totaled $1,774 in 2001 and $4,871 in 2000.
The accompanying information and notes are an integral part of these
financial statements.
Page 10 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Information Accompanying Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
September 30March 31, December 31,
2002 2001
2000
---------- ------------------- ------------
Preferred stocks without mandatory redemption requirements
(All shares redeemed March 1, 2002)
Cumulative preferred stock - $25 par value
5% series (one-tenth of a vote per share)
- 101,777 shares outstanding in 2001 $ 2,544-- $ 2,544
Cumulative preference stock - $25 par value
Authorized - 750,000 shares
5% series (non-voting) - 365,158 shares
outstanding 9,129in 2001 -- 9,129
Cumulative preferential stock - $35 par value
Authorized - 3,000,000 shares
(one-tenth of a vote per share)-
no outstanding shares -- --
---------- -------------------- ------------
$ -- $ 11,673
$ 11,673
========== =================== ============
Common stockholders' equity
Common stock - $1.25 par value
Authorized - 300,000,000 shares
Issued - 100,006,273100,048,457 shares in 2001;
98,819,8452002;
100,016,273 shares in 20002001 $ 125,008125,060 $ 123,525125,020
Paid-in capital 489,257 454,568489,568 489,868
Retained earnings 1,128,550 1,069,4861,130,988 1,137,772
Accumulated other comprehensive income 5,509 25,3033,740 5,958
Unearned compensation (778) (359)-- (539)
Treasury stock at cost - 34,73116,111 shares in
2001; 129,2162002; 1,891 shares in 2000 (1,026) (2,846)2001 (682) (61)
---------- ----------
$1,746,520 $1,669,677------------
$1,748,674 $ 1,758,018
========== ======================
At September 30, 2001,March 31, 2002, common shares reserved for issuance in connection with the
Company's stock plans were 80,865,863 shares for the Stockholder Rights Plan,
1,641,852 shares for the Dividend Reinvestment and Stock Purchase Plan,
565,493 shares for the Employees' Stock Ownership Plan and 532,381 shares for
the Savings Plan for Employees. Up to 4,254,3674,234,367 shares of common stock may
be issued under the 2000 Stock Award and Incentive Plan, of which
approximately 3,300,000 shares were available to be granted at September 30,
2001.March 31,
2002.
Page 119 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 -- Financial Statement Presentation
The information presented in this Form 10-Q is unaudited. In the opinion
of management the information reported reflects all adjustments,
consisting of both normal recurring as well as any non-recurring
adjustments, which were necessary to a fair statement of the results for
the periods reported. Certain reclassifications have been made to conform
previously reported data to the current presentation.
NOTE 2 -- RWE/AG AcquisitionMerger Agreement with RWE
On September 16, 2001 the Company entered into a merger agreement with RWE
Aktiengesellschaft and Thames Water Aqua Holdings GmbH, which is RWE's
holding company for its global water business, to merge with a subsidiary
of RWE and become a wholly owned indirect subsidiary of RWE. Under the
terms of the merger agreement RWE will purchase all the outstanding shares
of American Water Works On September 17, 2001 the Company announced that it had entered into a
definitive agreement under which an indirect wholly owned subsidiary of
RWE Aktiengesellschaft (RWE/AG) will merge with and into the Company, with
each outstanding share of the Company's common stock converted in the
merger into the right to receiveat a price of $46.00 per
share in cash.
RWE/AGRWE is a global multi-utility company that does business through its
subsidiaries and affiliates in over 120 countries. Its core businesses
are electricity, gas, water, and wastewater management services.
RWE/AG's all-cash proposal represents a 37.2% premium over the average
closing price per share of the Company's shares over the 30 trading days
prior to September 10, 2001,waste and a 29.5% premium over the highest closing
share price the Company's stock ever obtained prior to the public
announcement of the agreement. The proposed transaction has a total value
of $7.6 billion, including the assumption of approximately $3.0 billion in
debt the Company had outstanding as of June 30, 2001.recycling. Upon completion of
the transaction, American Water will be combined with the Company will join withU.S. operations
of Thames Water RWE/AG'sPlc, RWE's London-based international water services
business. The
American Water brand will continue, and its management team headquartered
in Voorhees, New Jersey is expected to leadmanage the RWE/AG-Thames water
businessjoint operations in North,
Central and South America.
The transaction is expected to takewas approved at least a year to complete, followingspecial meeting of the stockholders of
American Water Works Company on January 17, 2002. Before the transaction
can be completed, state and federal regulatory approvals are required. As
of the end of January 2002, all of the applications for approval were
filed where required by the Company's shareholders and appropriate state regulatory agencies.authorities. The Company has identified fourteen states that it believes are
required to approve the transaction. Those stateswhere
applications for approval have been filed are Arizona, California, Connecticut,Hawaii,
Illinois, Kentucky, Maryland, New Hampshire, New Jersey, New Mexico, New York,
Ohio, Pennsylvania, Tennessee, Virginia and West Virginia. ApprovalThe states of
Georgia and Michigan do not regulate the Company's utility operations, and
the states of Indiana, Iowa, Missouri, Ohio and Texas have determined they
have no statutory jurisdiction over the RWE transaction. Regulatory
approval has not been requested in Connecticut, Massachusetts and New
Hampshire will likely not be
required whensince these operations have been sold. As of April 1, 2002 the
sale of those properties to Kelda Group (See Note 3)Company is completed. In five states only advisory letter filings are required.still awaiting approval in ten states. Those states are
Hawaii, Iowa, Missouri, Tennessee,Arizona, California, Illinois, Kentucky, Maryland, New Jersey, New Mexico,
New York, Pennsylvania and Texas.West Virginia. The Company anticipates making
a Hart-Scott-Rodino filing with the Federal Trade Commission in the second
quarter of 2002. As a result of the time required to complete the
approval process by the various regulatory agencies, the Company does not
believe filings will be necessary in Georgia, Indiana,
Massachusetts, and Michigan.
NOTE 3 -Sales of Operating Systems
TOWN OF SALISBURY MASSACHUSETTS
On September 28, 2001 the Company completed the sale of its Salisbury
Water Supply Company's operating system to the Town of Salisbury,
Massachusetts for $11.5 million in cash plus outstanding accounts
receivable. The Salisbury system serves 3,000 customers and had revenues
of $1.9 million in 2000.
Page 12 FORM 10-Q
KELDA GROUP ACQUISITION OF NEW ENGLAND OPERATIONS
Kelda Group Plc and the Company jointly announced on August 30, 2001 that
they had reached an agreement whereby Kelda Group would acquire the
Company's New England operations. The transaction price is approximately
$118 million in cash plus the assumption of $115 million in debt.
The utility operations being acquired by Kelda Group serve a total of
64,000 customers and had revenues of $47.3 million in 2000. Massachusetts
Capital Resources Company, a finance subsidiaryanticipate completion of the Company, which owns
and leases certain assets to Massachusetts-American, will also be acquired
as part of the transaction.
The Public Utility Commissions in Connecticut, New York, and New Hampshire
must approve the Kelda Group transaction, which is expected to be
consummated by the end ofmerger until the first half of 2002. The transaction is also
subject to review by2003. One
condition of the Federal Trade Commission.
Note 4 -- Pending Acquisition
WATER AND WASTEWATER ASSETS OF CITIZENS COMMUNICATIONS
On October 15, 1999,agreement requires the Company entered into an agreement to acquire all
of the water and wastewater utility assets of Citizens Communications
Company (formerly Citizens Utilities Company) (NYSE:CZN) for $835 million
in cash and debt. Citizens provides water and wastewater serviceredeem its publicly
traded preferred stock prior to 305,000 customers in Arizona, California, Illinois, Indiana, Ohio and
Pennsylvania. For the latest fiscal year ended December 31, 2000, the
operations being acquired had revenues of approximately $110 million.
The Company now has approval from state regulatory agencies in all six
states covered by the purchase agreement. The California Public Utility
Commission approved the Company's acquisition of Citizens' water and
wastewater assets in that state on September 30, 2001, but the Company is
awaiting a possible rehearing before that commission and a possible
appellate proceeding before closing the acquisition.
Note 5-- Acquisition
AZURIX NORTH AMERICA AND AZURIX INDUSTRIALS
On August 6, 2001 the Company entered into an agreement to acquire Azurix
North America Corp. and Azurix Industrials Corp. for approximately $150
million in cash and debt. Azurix North America and Azurix Industrials are
wholly-owned subsidiaries of Azurix Corp. and provide a range of water and
wastewater services, including operations and maintenance, engineering,
carbon regeneration, underground infrastructure rehabilitation and
residuals management.
Azurix North America and Azurix Industrials, which had revenues totaling
approximately $157 million in 2000, have approximately 1,050 employees and
operate facilities serving an end-user population of approximately 2
million people across North America.
This acquisition, whichclosing. That redemption was completed on
November 7, 2001, strengthensMarch 1, 2002.
Page 10 FORM 10-Q
During the Company's position asfirst three months of 2002 the Company recorded a premier providercharge of
water resource management
services$0.9 million, reflecting costs incurred in connection with the merger.
The merger related costs have been reported on a separate line in the
United Statesconsolidated statement of income and Canada.
Page 13 FORM 10-Q
Note 6-- Security Issues
In the aftermath of the tragic events of September 11, 2001, all aspects
of how the Company secures its facilities in order to protect the safety
of its customers and associates are being reviewed and additional security
measures are being implemented. Itcomprehensive income. No tax benefit
was recognized for these legal fees because it is anticipatednot probable that these
additional
measures will result in a significant increase in spending on security.
The regulated utility subsidiaries are seeking recognition of these
increased security costs in the rates charged for utility service. At
this time the Company plans to defer these additional costs because it
believes that it is probable that they will be recovered in rates, and
therefore expects no significant impact on the Company's financial
position or results of operations.
NOTE 7 -- New Accounting Standards
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accountingdeductible for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended. The statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS 133 was issued by the Financial Accounting Standards Board in June
of 1998 and requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value.
This new accounting standard did not have any effect on the Company's
financial position or results of operations. The Company's contracts that
meet the definition of a derivative are for normal purchases and normal
sales, are expected to result in a physical delivery, and are of
quantities expected to be used or sold over a reasonable period in the
normal course of business. The Company has no hedging activities.
In June of 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under
SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets
that are not deemed to have indefinite lives will continue to be amortized
over their useful lives. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS 142 effective January 1, 2002. The
Company is currently evaluating the effect that adoption of the provisions
of SFAS 142 that are effective January 1, 2002 will have on its results of
operations and financial position.
Also in June of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset.
Page 14 FORM 10-Q
The asset will be depreciable in accordance with normal depreciation
policy and the liability will be increased, with a charge to the income
statement, until the obligation is settled. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company is currently
evaluating the effect that adoption of the provisions of SFAS 143 will
have on its results of operations and financial position.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the effect that adoption of the provisions
of SFAS 144 will have on its results of operations and financial position.
Note 8 - Subsequent Eventtax purposes.
On November 6, 2001 the Company and its financing subsidiary, American
Water Capital Corp., executed a Note Purchase Agreement with RWE for up to $1.2
billion in senior unsecured notes at an interest rate of 4.92%. The notes
will bewere purchased at par by RWE/AGRWE and mature on November 6, 2006.2002.
The Company and its subsidiaries are usingused the proceeds from the sale of the
notes to acquire the common stock of Azurix North America and Azurix
Industrials, to fund the acquisition of the water and wastewater assets of
Citizens CommunicationCommunications Company and to reduce outstanding short-term debt.
Closing will occuroccurred in two or more tranches the first of which took placewith one on November 6, 2001 in the
amount of $298.5 million.
Page 15 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussionmillion and Analysis of Financial Condition
and Results of Operations
- ----------------------------------------------------------------------
Results of Operations
- ---------------------
Operating revenues for the third quarter and the first nine months of 2001
were higher than for the same periods of 2000 by 8% and 6%, respectively.
Increased revenues were the result of water sales to 40,000 new
customers, authorized increases in rates charged for service and modest
weather pattern improvements.
Water sales volume during the third quarter of 2001 increased 3% to 102.0
billion gallons from 99.5 billion gallonsanother on January 14, 2002 in the third quarteramount of
2000.$900 million.
NOTE 3 -- Acquisition of Water and Wastewater Assets of Citizens
Communications Company
On January 15, 2002 the Company and its subsidiaries completed their
acquisition of all of the water and wastewater assets of Citizens
Communications Company (NYSE:CZN) for $859 million in cash and $120
million of assumed liabilities. The 260.7 billion gallonspurchase price is subject to
adjustment upon the completion of sales volume foran audited closing statement of net
assets. The acquired operations provide water and wastewater service to
approximately 284,000 regulated customers in Arizona, California,
Illinois, Indiana, Ohio and Pennsylvania. Citizens also had developed a
water supply project in Illinois with the first nine monthspossibility of 2001 was 1% greater thanadditional
wholesale customers along the 258.0 billion gallons soldpipeline.
The Company is in the same periodprocess of 2000.
During 2001, ten utility subsidiaries have received rate decisions, which
are expected to provide approximately $23.5 million in additional annual
revenues. Four subsidiaries have rate increase applications on file
before regulatory agencies, which, if granted in full, would provide
approximately $55.4 million in additional annual revenues. The largest
portion of this total is from two separate requests filed by Pennsylvania-
American and Indiana-American at $39 million and $13 million,
respectively. Decisions inmaking the Pennsylvania and Indiana cases are
expected in the first and third quarters of 2002, respectively.
Operating expenses in the third quarter and the first nine months of 2001
were 8% and 6% higher compareddeterminations as to the
same periods in 2000. Operationamounts to be assigned to intangible assets and maintenance expenses increased by 8%goodwill, and 6% inthus has not
finalized the third quarter and the
first nine months when compared to the same periods in 2000 primarily
because of increased production costs such as power, purchased water and
chemicals. A portionallocation of the expense increase was associated with customer
growth. The increases in depreciation expense for the quarter and first
nine months were related to the Company's ongoing program of utility plant
construction.
Interest expense decreased by 2% in the third quarter and increased 1% in
the first nine months of 2001 compared to the same periods in 2000,
reflecting declining interest rates in 2001. The total allowance for
funds used (equity and borrowed) during construction ("AFUDC")purchase price. At March 31, 2002, $137.9
million has been recorded in
the third quarter of 2001 was $2.1 million, compared to $2.2 million in
the third quarter of 2000. AFUDC for the first nine months of 2001 was
$6.4 million compared to $10.0 million for the same period in 2000. The
utility subsidiaries record AFUDC to the extent permitted by the
regulatory authorities. During the third quarter and first nine months of
2001 the Company soldas goodwill on a portion of its telecommunication company
investments and realized pre-tax gains of $1.8 million and $5.2 million in
other income.
Income taxes increased in the third quarter and first nine months of 2001
when compared to the comparable periods in 2000, as a result of increased
earnings in 2001.
Page 16 FORM 10-Q
Net income to common stock was $55.6 million for the third quarter of 2001
compared with $49.7 million for the same period in 2000. Net income to
common stock for the first nine months of 2001 was $128.2 million compared
with $120.0 million for the first nine months of 2000.
Other comprehensive loss was $13.3 million and $19.8 million in the third
quarter and first nine months of 2001, respectively, compared to other
comprehensive loss of $23.9 million and $47.1 million in the same periods
in 2000. The Company's other comprehensive loss represents the unrealized
loss on passive investments in publicly traded securities.
Earnings per share of common stock in 2001 were $.63 for the quarter and
$1.36 for the nine months ended September 30, 2001 prior to one-time
transactions. Earnings per share in 2000 were $.51 for the third quarter
and $1.22 for the nine months year-to-date. In 2001 a $.10 per share
charge resulted from expenses incurred for the RWE/AG transaction and a
$.03 per share net gain was recorded for the sale of the operating system
in Salisbury Massachusetts. After these one-time transactions, per share
earnings in 2001 were $.56 for the third quarter and $1.29 for the year-
to-date.
Capital Resources and Liquidity
- -------------------------------
During the first nine months of 2001, 1,154,244 shares of common stock
were issuedpreliminary basis in connection
with the Dividend Reinvestment and Stock
Purchase Plan, and 32,184 shares were issuedthis transaction.
The purchase price for non-qualified stock
options that were exercised. Also, 163,892 non-qualified stock options
were granted in connectionthese assets was consistent with the 2000 Stock Awardmultiples paid
in other similar transactions. Regulatory and Inventive Plan
duringstrategic considerations
contributed to a purchase price that resulted in the first nine monthsrecognition of
2001.goodwill. The assets reside in progressive regulatory environments where
the Company issued 153,648 sharescurrently operates and broadens the geographic diversity of
common stock outthe Company's total operations. The inclusion of treasury during
the first nine monthsacquired customers
in California and Arizona increases the Company's customers in the Western
United States to 10% of 2001its total customer base. With the acquisition,
the Company becomes one of the principal water purveyors in connection with the Employees' Stock
Ownership Plan,Phoenix
area and strengthens its competitive position for the Savings Plan for Employeesprivatization
opportunities in this rapidly growing region and the 2000 Stock Awardother states included
in the acquisition footprint.
The unaudited pro forma results listed below were prepared as if the
acquisition occurred on January 1, 2001 and Incentive Plan.
Oninclude the historical results
of the Company and of the acquired operations. The unaudited pro forma
information is not necessarily indicative of the results of operations
Page 11 FORM 10-Q
that might have occurred had the acquisition actually taken place on the
date indicated, or of future results of operations of the combined
entities:
Quarter ended March 29,31, 2002 2001
Revenues $389,564 $340,300
Income before cumulative effect of change
in accounting principle 13,767 18,826
Net income 16,446 18,826
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $.13 $.19
Cumulative effect of change in accounting
principle $.03 $ -
Basic $.16 $.19
Income before cumulative effect of change
in accounting principle $.13 $.19
Cumulative effect of change in accounting
principle $.03 $ -
Diluted $.16 $.19
NOTE 4 -- Segment Information
The following table presents information about the Company's financing subsidiary,reportable
segments.
Regulated
Utility
Services
Unregulated
Services
Other
Items
Consolidated
Three months ended
March 31, 2002
Revenues from external
customers
$338,361
$46,379
$ -
$384,740
Intersegment revenues
1,558
(1,558)
- -
Income before
cumulative effect
of change in
accounting principle
25,350
(2,060)
(8,077)
15,213
Net income
28,029
(2,060)
(8,077)
17,892
Total assets
7,346,079
318,454
(21,450)
7,643,083
Three months ended
March 31, 2001
Revenues from external
customers
$306,142
$10,285
$ -
$316,427
Intersegment revenues
1,350
(1,350)
- -
Income before
cumulative effect
of change in
accounting principle
30,220
(741)
(6,018)
23,461
Net income
30,220
(741)
(6,018)
23,461
Total assets
6,084,757
98,687
6,494
6,189,938
Page 12 FORM 10-Q
The "other items" include corporate costs of American Water Capital Corp. (AWCC) closed on its inaugural long-term debt financing of
$140 million. The securities issued are senior unsecured notes carrying an
interest rate of 6.87% maturing on March 29, 2011. TheWorks Company
loaned the
proceeds of that financing to nine utility subsidiaries to repay short-
term debt. In the first nine months of 2001, the Company invested $7.2
million in the common stock of two subsidiaries.and intersegment eliminations.
NOTE 5 -- New Accounting Standards
- ------------------------
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended. The statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS 133 was issued by the Financial Accounting Standards Board in June of
1998 and requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value.
Page 17 FORM 10-Q
This new accounting standard did not have any effect on the Company's
financial position or results of operations. The Company's contracts that
meet the definition of a derivative are for normal purchases and normal
sales, are expected to result in a physical delivery, and are of
quantities expected to be used or sold over a reasonable period in the
normal course of business. The Company has no hedging activities.
In June of 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).,
collectively referred to as the "Standards." SFAS 141 requiressupersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, to(2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be accountedwritten off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for usingfiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the purchase method. Under
SFAS 142,accounting for goodwill and
intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets
that are not deemedsubsequent to have indefinite lives will continue to be amortized
over their useful lives.initial recognition. The amortization provisions
of SFAS 142 apply to(1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, acquired after June 30, 2001. With respect
to(2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
limitation on the amortization period of intangible assets that have
finite lives. The Company adopted the provisions of the Standards on
January 1, 2002.
The Standards require the excess of the fair values of acquired priornet assets
over cost recorded in the statement of financial position to July 1, 2001,be recognized
as the effect of a change in accounting principle as of the date SFAS 141
is initially applied in its entirety. In compliance with this transition
requirement the Company is required to adopt SFAS 142 effectiverecognized a $2.7 million gain on January 1, 2002.
The Company is currently evaluatingin the effectprocess of making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. The
Company is no longer recording $1.7 million of annual tax deductible
amortization relating to its existing goodwill associated with the 1999
acquisition of its joint venture partner's interest in AmericanAnglian
Environmental Technologies.
SFAS 142 requires that adoptiongoodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the provisionsbeginning of SFAS 142the
fiscal year. However, a company has six months from the date of adoption
to complete the first step. The Company expects to complete that are effective January 1, 2002first
step of the goodwill impairment test during the second quarter of 2002.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will Page 13 FORM 10-Q
have on its results of
operationsthe Company's earnings and financial position.
Also inIn June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting StandardStandards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effecteffects that adoption of the provisions of SFAS 143 will have on its
results of operations and financial position.position but does not expect them to
be material.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting StandardStandards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting StandardStandards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company does not expect that the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
NOTE 6 -- Subsequent Events
SALE OF INVESTMENT IN ITC HOLDING COMPANY
On April 2, 2002 the Company tendered approximately 2.2 million shares of
the 3.5 million shares of ITC Holding Company's common stock it acquired
as part of the acquisition of National Enterprises Inc. The sale, which
was carried out through ITC Holding Company's repurchase program, resulted
in proceeds of $26.2 million, including a $13 million after-tax gain which
will be reflected in second quarter 2002 results.
DIVESTITURE OF NEW ENGLAND OPERATIONS
Kelda Group plc and the Company jointly announced on August 30, 2001 that
they had reached an agreement whereby Kelda's Aquarion Company would
acquire the Company's New England operations. On April 25, 2002 the
Company completed the divestiture and received its initial cash payment of
Page 14 FORM 10-Q
$120.5 million subject to the terms and conditions of the agreement. The
contract calls for certain true-ups with the expected after-tax gain to
amount to approximately $20 million.
The utility operations acquired by Aquarion serve a total of 65,000
customers and had revenues of $51 million in 2001. A finance subsidiary
of the Company, which owns and leases certain assets to its affiliated
operating company in Massachusetts, was also acquired by Aquarion as part
of the transaction.
Page 15 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ----------------------------------------------------------------------
Results of Operations
- ---------------------
The operating results of the Azurix and Citizens acquisitions have been
included in the consolidated statements of income and comprehensive income
since the completion of the acquisitions on November 7, 2001 and January
15, 2002, respectively.
Consolidated revenues of $384.7 million for the quarter were 22% higher
than those recorded in the first quarter of 2001. More than half of this
overall revenue growth came about as a result of the acquisition of
Azurix's North American water and wastewater related operations. Another
significant portion of this increase in revenues came from a 13% increase
in the number of customers receiving water and wastewater services from
regulated subsidiaries from the first quarter of 2001 to the first quarter
of 2002. This addition of 334,000 new customers increases the customer
base of the Company's regulated operations to almost three million
customers.
The six state acquisition of the water and wastewater assets from Citizens
accounted for 284,000 of the 334,000 new customers. Customer growth was
also realized by the addition of more than 23,000 new customers in
Missouri from tuck-in acquisitions around St. Louis. Smaller acquisitions
and organic growth of existing distribution systems accounted for the
remaining 27,000 additional customers.
Revenue from rate increases accounted for the remainder of the revenue
growth. During 2002, four utility subsidiaries have received rate orders
that are expected to provide $26.3 million in additional annual revenues.
The most notable of these rate increases was a $24 million annual rate
increase authorization in Pennsylvania that became effective in January of
2002. Two of the Company's subsidiaries have rate increase applications
on file requesting additional annual revenues of $13.6 million. The $12.7
million request by the Company's Indiana subsidiary accounts for the major
portion of the pending requests.
Even though revenues increased between the first quarter of 2001 and the
first quarter of 2002, per customer water sales, excluding the Citizens
acquisition, were five percent less quarter over quarter. This decrease
is mainly a result of lower water sales to industrial customers. The
decline in water sales to industrial customers that impacted financial
results for the year 2001 persisted into the first quarter of 2002. Water
sales of nine billion gallons for the first quarter of 2002 to this group
of customers was about one billion gallons, or about 10 percent less than
water sales to this same group of customers during the first quarter of
2001. These sales losses were most notable in the Midwestern and
Pennsylvania operations.
Page 16 FORM 10-Q
Comparison of water sales information for the first quarter of 2002 and
the first quarter of 2001 showed a slight decline in water sales in
Pennsylvania and New Jersey, where state mandated water use restrictions
are in place. However, if drought conditions persist along the east cost
of the U.S. water use restrictions will have a noticeable impact on
earnings. Water sales are typically greater during June, July and August
than in any other months of the year.
Revenues from the Azurix and Citizens operations are anticipated to be
greater in the later months of 2002 than they were during the first
quarter of 2002. Portions of the Azurix operations, such as its residual
waste removal business, complete their work during the summer months when
warmer weather facilitates the operation of that business. Citizens
operations have historically experienced increased water sales during the
summer months, and that pattern is expected to be repeated during 2002.
Of the 284,000 customers associated with the Citizens acquisition, only
37,000 of those are located in Pennsylvania where water use restrictions
are currently in place.
Operation and maintenance expenses (O&M) increased 39% from those in the
first quarter of 2001 primarily as the result of including the expenses of
the Azurix and Citizens operations. Exclusive of those acquisitions, per
customer O&M of the regulated operations increased 8%. Increased
production costs, especially increased purchased water costs associated
with the drought on the east coast and increased sales in California, were
significant factors in this increase.
The increase in depreciation expense was primarily related to the
company's ongoing program of utility plant construction.
Interest expense rose by $8.8 million, or 18%, to $57.4 million in the
first quarter of 2002. This increase is attributable to approximately
$1.2 billion of new debt associated with the Azurix and Citizens
acquisitions.
Income taxes decreased in the first three months of 2002 when compared to
the first three months in 2001 as a result of decreased earnings.
Net income to common stock was $17.7 million for the first quarter of 2002
compared with $23.3 million for the same period in 2001.
Other comprehensive loss, net of tax, was $2.2 million in the first
quarter of 2002 compared to $2 million in the same period in 2001. The
Company's other comprehensive income or loss represents the after-tax
unrealized gain or loss on passive investments in publicly traded
securities and foreign currency translation adjustments.
Comprehensive income was $15.5 million in the first quarter of 2002
compared to $21.3 million in the same period in 2001.
Earnings per share of common stock in 2002 were $.18 compared to $.24 in
the same period in 2001. These 2002 results include a three-cent per share
positive impact of adopting the new financial accounting standards
relating to business combinations, as well as a six-cent per share
negative impact associated with recent acquisition activity and expenses
of one-cent per share related to the RWE transaction.
Page 17 FORM 10-Q
Capital Resources and Liquidity
- -------------------------------
On January 14, 2002 the Company's financing subsidiary, American Water
Capital Corp. closed on its second and final issue totaling $900 million
under the Note Purchase Agreement with RWE. These 4.92% notes were
primarily used to fund the acquisition of the Citizens water and
wastewater assets.
Two subsidiaries issued $39.9 million in tax-exempt long-term debt during
the first four months of 2002.
In the first four months of 2002, the Company invested $13.5 million in
the common stock of two subsidiaries.
A condition of the merger agreement with RWE required the Company to
redeem all of its issued and outstanding shares of 5% Cumulative
Preference Stock and 5% Cumulative Preferred Stock prior to closing. That
redemption was completed on March 1, 2002. The 365,158 shares of 5%
Cumulative Preference Stock were redeemed for $25.00 per share and the
101,777 shares of 5% Cumulative Preferred Stock were redeemed for $25.25
per share, in each case without interest.
On April 2, 2002 the Company tendered approximately 2.2 million shares of
the 3.5 million shares of ITC Holding Company's common stock it acquired
as part of the acquisition of National Enterprises Inc. The sale, which
was carried out through ITC Holding Company's repurchase program, resulted
in proceeds of $26.2 million, including a $13 million after-tax gain which
will be reflected in second quarter 2002 results.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
collectively referred to as the "Standards." SFAS 141 supersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
Page 18 FORM 10-Q
limitation on the amortization period of intangible assets that have
finite lives. The Company adopted the provisions of the Standards on
January 1, 2002.
The Standards require the excess of the fair values of acquired net assets
over cost recorded in the statement of financial position to be recognized
as the effect of a change in accounting principle as of the date SFAS 141
is initially applied in its entirety. In compliance with this transition
requirement the Company recognized a $2.7 million gain on January 1, 2002.
The Company is in the process of making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. The
Company is no longer recording $1.7 million of annual tax deductible
amortization relating to its existing goodwill associated with the 1999
acquisition of its joint venture partner's interest in AmericanAnglian
Environmental Technologies.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the
fiscal year. However, a company has six months from the date of adoption
to complete the first step. The Company expects to complete that first
step of the goodwill impairment test during the second quarter of 2002.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will
have on the Company's earnings and financial position.
In June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effecteffects that adoption of the provisions of SFAS 144143 will have on its
results of operations and financial position.position but does not expect them to
be material.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
Page 1819 FORM 10-Q
Subsequent Event
- ----------------
On November 6, 2001January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the CompanyFinancial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and its financing subsidiary, American
Water Capital Corp., executed a Note Purchase Agreement for up to $1.2
billion in senior unsecured notes at an interest rate64, Amendment of 4.92%. The notes
will be purchased at par by RWE/AGFASB Statement No. 13, and mature on November 6, 2006.Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company and its subsidiaries are using proceeds fromdoes not expect that the
saleadoption of the notesprovisions of SFAS 145 to acquire the common stockhave a material effect on its
results of Azurix North Americaoperations and Azurix
Industrials, to fund the acquisition of the water and wastewater assets of
Citizens Communication Company and to reduce outstanding short-term debt.
Closing will occur by the issuance of two or more tranches, the first of
which took place on November 6, 2001 in the amount of $298.5 million.financial position.
Forward Looking Information
- ---------------------------
Forward looking statements in this report, including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to
the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. These forward looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed
or implied by such forward looking statements. These factors include,
among others, the following: the success of pending applications for rate
increases;increases, inability to obtain, or to meet conditions imposed for,
regulatory approval of pending acquisitions;acquisitions, weather conditions that tend
to extremes of temperature or duration; availability, terms and
development of capital; business abilities and judgment of personnel;
changes in, or the failure to comply with governmental regulations,
particularly those affecting the environment and water quality;
competition; success of operating initiatives, advertising and promotional
efforts; existence of adverse publicity or litigation; changes in business
strategy or plans; quality of management; general economic and business
conditions; and other factors described in filings of the Company with the
SEC. The Company undertakes no obligation to publicly update or revise any
forward looking statement, whether as a result of new information, future
events or otherwise.
Page 1920 FORM 10-Q
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
(a) The Company held its annual meeting of shareholders on May 1, 2002.
(b) Class I Directors (with a term expiring in 2005) were elected by
a vote of:
For Withheld
--- --------
J. James Barr 90,256,263 562,361
Elizabeth H. Gemmill 90,259,959 558,665
Nancy Ware Wainwright 90,229,487 589,137
Paul W. Ware 90,244,309 574,315
William S. White 90,338,173 538,316
The appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the year ending December 2002 was approved by a vote of
89,055,798 for the appointment and 1,503,888 against, with 258,938
abstentions.
Page 21 FORM 10-Q
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
Exhibit Number Description
- -------------- -----------
10 Material Contracts
(a) Note Purchase Agreement for up to $1.2
billion 4.92% senior notes due November 6, 2006None
B. Reports on Form 8-K
-------------------
A current report on Form 8-K was filed on August 7, 2001January 15, 2002 by the Company
regarding the agreement to acquire Azurix North America Corp.completion of the acquisition of Citizens Communications'
water and Azurix
Industrials Corp.wastewater assets.
A current report on Form 8-K was filed on August 30, 2001January 17, 2002 by the Company
regarding the agreement to sell the Company's New England Operations to
the Kelda Group Plc.
A current report on Form 8-K was filed on September 17, 2001 by the
Company regarding the RWE/AG merger agreement.
A current report on Form 8-K was filed on October 30, 2001 by the Company
regarding the releasestockholders approval of the Company's third quarter earnings.
A current report on Form 8-K was filed on November 7,September 16, 2001 byagreement
and plan of merger pursuant to which the Company
regarding the note purchase agreementcompany will merge with a
subsidiary of RWE/AG.
A current report on Form 8-K was filed on NovemberFebruary 8, 20012002 by the Company
regarding completionan employee communication relating to its proposed merger with a
subsidiary of RWE/AG.
A current report on Form 8-K was filed on March 28, 2002 by the acquisitionCompany
regarding an employee communication relating to its proposed merger with a
subsidiary of Azurix North America Corp. and
Azurix Industrials Corp.RWE/AG.
Page 2022 FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN WATER WORKS COMPANY, INC.
(Registrant)
Date November 14, 2001May 15, 2002 \s\Ellen C. Wolf
- ---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date November 14, 2001May 15, 2002 \s\Robert D. Sievers
- ---------------------- ---------------------------------------
Comptroller
(Chief Accounting Officer)