CONFORMED COPY
Page 1 of 2031
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, 20012002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-3437-2
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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
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At November 1, 2001,2002, the number of shares of common stock, $1.25 par value,
outstanding was 99,983,686100,070,453 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,
2002 2001 2000
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $483,457 $394,956 $364,125
-------- --------
Operating expenses
Operation and maintenance 242,955 166,890 154,400
Depreciation and amortization 57,032 46,819 41,648
General taxes 35,363 33,049 31,942
-------- --------
Total operating expenses 335,350 246,758 227,990
-------- --------
Operating income 148,107 148,198 136,135
-------- --------
Other income (deductions)
Interest (55,976) (47,512) (48,556)
Allowance for other funds used during
construction 2,377 1,098 1,241
Allowance for borrowed funds used
during construction 1,342 968 931
Amortization of debt expense (728) (694) (691)
Preferred dividends of subsidiaries (655) (750)
(789)
RWE/AG acquisition expenseMerger expenses (1,647) (9,860) -
Gain from sale of operating systemsystems - 4,820
Gain on sale of other investments - 1,810
Other, net 1,481 (4,052)796 (329)
-------- --------
Total other income (deductions) (54,491) (50,449) (51,916)
-------- --------
Income before income taxes 93,616 97,749 84,219
Provision for income taxes 38,428 41,972 33,488
-------- --------
Net income 55,188 55,777 50,731
Dividends on preferred stocks - 146 996
-------- --------
Net income to common stock 55,188 55,631 49,735
-------- --------
Three Months Ended
September 30,
2002 2001
---------- ----------
Other comprehensive loss,income (loss), net of tax
Unrealized lossgain (loss) on securities 866 (12,181) (23,856)
Reclassification adjustment for gain
included in net income - (1,104)
Foreign currency translation adjustment (1,242) -
-------- ------------------ ----------
Other comprehensive loss,income (loss), net of tax (376) (13,285)
(23,856)
-------- ------------------ ----------
Comprehensive income $ 54,812 $ 42,346
$ 25,879
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Page 3 FORM 10-Q
Three Months Ended
September 30,
2001 2000
---------- ----------
========== ==========
Average shares of basic common stock outstanding 100,062 99,723
98,139
Basic and diluted earningsEarnings per average common share on
average shares outstanding
Basic $ 0.56.55 $ 0.51.56
========== ==========
Diluted $ .55 $ .56
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at July 1 $1,173,145 $1,096,271 $1,026,417
Add - net income 55,188 55,777
50,731Preferred stock redemption premium (37) -
Gain (loss) on treasury stock - 57 (15)
---------- ----------
1,228,296 1,152,105
1,077,133
---------- -------------------
Deduct - dividends paid
Preferred stock - 32 882
Preference stock 114- 114
Common stock - $.245 per share in 2002;
$.235 per share in 2001;
$.225 per share in 20002001 24,512 23,409 22,062
---------- ----------
24,512 23,555 23,058
---------- ----------
Balance at September 30 $1,203,784 $1,128,550 $1,054,075
========== ==========
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 Earnings (Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
September 30,
2002 2001 2000
---------- ----------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $1,292,211 $1,075,261 $1,018,293
---------- ----------
Operating expenses
Operation and maintenance 674,506 478,189 453,028
Depreciation and amortization 170,292 136,248 122,061
General taxes 105,595 98,825
96,610
---------- ------------------
Total operating expenses 950,393 713,262
671,699
---------- ------------------
Operating income 341,818 361,999
346,594
---------- ------------------
Other income(deductions)
Interest (170,399) (144,653) (143,030)
Allowance for other funds used during
construction 5,908 3,364 5,747
Allowance for borrowed funds used
during construction 3,512 3,035 4,210
Amortization of debt expense (2,119) (2,082) (2,081)
Preferred dividends of subsidiaries (2,063) (2,275)
(2,382)
RWE/AG acquisition expenseMerger expenses (3,380) (9,860) -
Gain from sale of operating systemsystems 50,709 4,820
Gain on sale of other investments 11,702 5,177
Gain on sale of land 15,851 -
Other, net 3,876 (5,126)813 (1,301)
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Total other income (deductions) (89,466) (143,775)
(142,662)
---------- -----------------
Income before income taxes 252,352 218,224 203,932
Provision for income taxes 115,286 89,605
80,979
---------- -----------------
Income before cumulative effect of change in
accounting principle 137,066 128,619
Cumulative effect of change in accounting principle 2,679 -
---------- --------
Net income 139,745 128,619 122,953
Dividends on preferred stocks 146 438
2,988
---------- -----------------
Net income to common stock 139,599 128,181
119,965
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Nine Months Ended
September 30,
2002 2001
---------- ----------
Other comprehensive loss,income (loss), net of tax
Unrealized loss on securities (7,596) (16,636) (47,062)
Reclassification adjustment for gain(gain) loss
included in net income 5,837 (3,158)
Foreign currency translation adjustment 165 -
---------- -------------------
Other comprehensive loss,income (loss), net of tax (1,594) (19,794)
(47,062)
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Comprehensive income $108,387 $ 72,903138,005 $ 108,387
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Page 5 FORM 10-Q
Nine Months Ended
September 30,
2001 2000
---------- ----------
==========
Average shares of basic common stock outstanding 100,041 99,287
97,944
Basic and diluted earningsEarnings per average common share on
average shares outstanding
Income before cumulative effect of change
in accounting principle $ 1.37 $ 1.29
Cumulative effect of change in accounting
principle .03 -
---------- ----------
Basic $ 1.221.40 $ 1.29
========== ==========
Income before cumulative effect of change in
accounting principle $ 1.36 $ 1.29
Cumulative effect of change in accounting
principle .03 -
---------- ----------
Diluted $ 1 .39 $ 1.29
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,137,772 $1,069,486 $1,001,029
Add - net income 139,745 128,619
122,953Preferred stock redemption premium (62) -
gain (loss)Gain on treasury stock - 801 (959)
---------- ----------
1,277,455 1,198,906 1,123,023
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Deduct - dividends paid
Preferred stock 32 96 2,646
Preference stock 342114 342
Common stock - $.735 per share in 2002;
$.705 per share in 2001;
$.675 per share in 20002001 73,525 69,918 65,960
---------- ----------
73,671 70,356 68,948
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Balance at September 30 $1,203,784 $1,128,550 $1,054,075
========== ==========
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 Sheet (Unaudited)
(In thousands)
September 30, December 31,
2002 2001 2000
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ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 5,358,1746,076,022 $ 5,202,8335,458,909
Utility plant acquisition adjustments, net 72,881 75,294211,306 68,916
Non-utility property, net of accumulated
depreciation 47,236 37,831
Excess of cost of investments in
subsidiaries over book equity at
acquisition, net 59,142 55,59099,480 94,149
----------- -----------
Total property, plant and equipment 5,537,433 5,371,5486,386,808 5,621,974
----------- -----------
Current assets
Cash and cash equivalents 43,357 28,571
Customer40,031 19,691
Utility customer accounts receivable 134,232 103,975139,618 105,101
Allowance for uncollectible accounts (3,316) (2,575)(4,320) (2,860)
Unbilled revenues 94,168 83,878
Miscellaneous94,602 86,065
Other receivables, 12,911 15,117net 69,909 59,724
Materials and supplies 23,154 20,68333,610 32,281
Deferred vacation pay 12,818 10,923
Restricted funds 224 22412,503 11,422
Other 17,820 16,90023,301 19,164
----------- -----------
Total current assets 335,368 277,696409,254 330,588
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 216,376 216,652213,377 217,330
Other investments 39,196 73,99722,394 39,956
Debt and preferred stock expense 46,571 47,63047,332 45,882
Deferred pension expense 28,755 23,47938,085 30,712
Deferred postretirement benefit expense 9,521 10,1298,650 9,318
Deferred security costs 26,259 7,058
Deferred business services project costs 32,559 4,796expenses 42,513 36,311
Deferred insurance expense 8,102 4,998
Deferred tank painting costs 16,005 16,82913,468 16,585
Restricted funds 8,590 8,343- 8,570
Goodwill 238,883 136,488
Intangible assets 72,295 23,400
Other 88,301 83,69987,152 77,929
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Total regulatory and other long-term assets 485,874 485,554818,510 654,537
----------- -----------
TOTAL ASSETS $ 6,358,6757,614,572 $ 6,134,7986,607,099
=========== =========== Page 7 FORM 10-Q
September 30, December 31,
2002 2001 2000
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,746,5201,823,278 $ 1,669,6771,758,018
Preferred stocks without mandatory
redemption requirements 11,673- 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 30,698 32,90228,254 30,474
Preferred stocks of subsidiaries without
mandatory redemption requirements 8,118 8,1185,708 7,268
Long-term debt
American Water Works Company, Inc. 147,000 159,000169,000 297,000
Subsidiaries 2,234,916 2,112,1653,298,763 2,253,019
----------- -----------
Total capitalization 4,178,925 3,993,5355,325,003 4,357,452
----------- -----------
Current liabilities
Short-term debt 447,556 412,179196,965 414,083
Current portion of long-term debt 79,661 161,395285,502 166,087
Accounts payable 46,344 52,44748,567 67,996
Taxes accrued, including federal income 86,402 25,96061,316 21,756
Interest accrued 49,153 42,64186,720 43,015
Accrued vacation pay 13,060 11,56412,731 11,577
Other 66,758 67,865109,232 100,220
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Total current liabilities 788,934 774,051801,033 824,734
----------- -----------
Regulatory and other long-term liabilities
Advances for construction 224,741 216,125265,335 230,801
Deferred income taxes 603,051 605,343629,997 624,449
Deferred investment tax credits 38,889 40,09835,938 38,633
Accrued pension expense 61,231 50,41473,200 62,355
Accrued postretirement benefit expense 13,394 13,93014,272 13,808
Accrued insurance expense 11,526 5,020
Other 37,263 37,82340,722 35,987
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Total regulatory and other long-term
liabilities 978,569 963,7331,070,990 1,011,053
----------- -----------
Contributions in aid of construction 412,247 403,479417,546 413,860
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Commitments and contingencies -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 6,358,6757,614,572 $ 6,134,7986,607,099
=========== ===========
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,
2002 2001
2000
-------- ------------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $128,619 $122,953$ 139,745 $ 128,619
Adjustments
Depreciation and amortization 170,292 136,248
122,061Cumulative effect of change in accounting
Principle (2,679) -
Gain from sale of operating systems (50,709) (4,820)
Gain on sale of other investments (22,466) (5,177)
Loss on write down of other investments 10,764 -
Gain on sale of land (15,851) -
Provision for deferred income taxes 31,553 10,148 13,757
Provision for losses on accounts receivable 10,689 7,266 6,334
Allowance for other funds used during
construction (5,908) (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 (less)
than funding 4,090 525 4,946
Employee stock plan expenses 3,351 3,745
(2)
Deferred business services project expenses (27,763) -
Deferred tank paintingregulatory costs (2,184) (1,591)
Deferred rate case expense (2,095) (1,322)(28,043) (32,042)
Amortization of deferred charges 16,020 12,332 8,266
Other, net (5,727) (2,683) (7,047)
Changes in assets and liabilities, net
of effects from acquisitions
Accounts receivable (45,623) (34,576) (29,458)
Unbilled revenues (8,997) (10,290) (7,489)
Other current assets (7,239) (3,391) (4,226)
Accounts payable (22,345) (6,103) (26,480)
Taxes accrued, including federal income 37,795 60,442 21,206
Interest accrued 45,239 6,512 4,679
Other current liabilities 9,305 (1,107)
(19,778)
-------- ------------------ ----------
Net cash from operating activities 263,256 262,284
201,062
-------- ------------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (294,678) (251,225) (253,011)
Allowance for other funds used during
construction 5,908 3,364
5,747
Acquisitions (898,047) (55,859) (48,951)
Proceeds from the dispositionsale of property,
plant and equipmentassets 164,684 19,359 2,342
Removal costs from property, plant and
equipment retirements (5,002) (9,633) (4,500)
Restricted funds 8,570 (247)
12,540
-------- ------------------ ----------
Net cash used in investing activities (1,018,565) (294,241)
(285,833)
-------- --------
Page 9 FORM 10-Q---------- ----------
Nine Months Ended
September 30,
2002 2001
2000
----------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $148,321 $ 46,0141,119,317 148,321
Proceeds from common stock 1,583 34,736 25,455
Purchase of common stock for treasury (36) (932) (3,426)
Net borrowings (repayments) under
short-term debt agreements (209,515) 35,377 73,583
Advances and contributions for construction,
net of refunds 35,811 22,109 21,243
Debt issuance costs (6,782) (1,004) (1,782)
Repayment of long-term debt (76,912) (119,304) (26,796)
Redemption of preferred stocks (14,146) (2,204) (926)
Dividends paid (73,671) (70,356)
(68,948)
----------------- --------
Net cash from financing activities 775,649 46,743
64,417
----------------- --------
Net increase (decrease) in cash and cash equivalents 20,340 14,786 (20,354)
Cash and cash equivalents at January 1 19,691 28,571
43,100
----------------- --------
Cash and cash equivalents at September 30 $43,357 $ 22,74640,031 $ 43,357
========= ======== ========
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 $983 in 2002 and $1,774 in 2001 and $4,871 in 2000.2001.
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 30, December 31,
2002 2001
2000
---------- ---------------------- ------------
Preferred stocks without mandatory redemption requirements
(All outstanding shares redeemed March 1, 2002)
Cumulative preferred stock - $25 par value
Authorized 1,770,000 shares
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 - 100,006,273100,086,564 shares in 2001;
98,819,8452002;
100,016,273 shares in 20002001 $ 125,008125,108 $ 123,525125,020
Paid-in capital 489,257 454,568490,704 489,868
Retained earnings 1,128,550 1,069,4861,203,784 1,137,772
Accumulated other comprehensive income 5,509 25,3034,364 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$1,823,278 $1,758,018
========== ==========
At September 30, 2001,2002, 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.
Page 11 FORM 10-Q2002.
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 normal 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 no statutory
jurisdiction over the RWE transaction. The Company is still awaiting
approval in Connecticut and New Hampshire will likely not be
required when the sale of those properties to Kelda Group (See Note 3) is
completed. In five states only advisory letter filings are required.states. Those states are Hawaii, Iowa, Missouri, Tennessee,Arizona, California, Illinois,
New Jersey and Texas.New York. In Arizona the briefing process has been
completed and the Commission is expected to reach a decision by the latter
part of November. In California a schedule for processing the request has
been issued by the Commission that could result in an Administrative Law
Judge (ALJ) assigned to the case issuing a recommended decision no later
than December 19, 2002. Once the ALJ's decision is issued there is a 25-
day period for comments by the applicants and intervenors before the
record is presented to the Commission for decision. In Illinois the ALJ
has issued a decision recommending approval of the transaction with
conditions. The date to file exceptions to that decision has expired.
The Commission's decision is anticipated prior to the statutory deadline
of November 21, 2002. In New Jersey briefing will be completed by
November 18, 2002 and a final decision is anticipated in the fourth
quarter. In New York an accord has been reached with the Commission Staff
that could be reviewed by the Commission at its November 20, 2002 public
meeting. Settlement was earlier reached with the labor union that
represents a portion of the Company's workforce and resulted in the
Union's recommendation that the Commission approve the acquisition. Since
approving the transaction in May, the Kentucky Public Service Commission
reaffirmed its decision and clarified some of the conditions set forth in
its original order. Several parties to the Kentucky proceedings have
appealed the Kentucky Commission's decision in a consolidated action
before a Kentucky state court, which will consider no evidence other than
the record that was before the Kentucky Commission. Although the West
Virginia Public Service Commission approved the transaction subject only
to conditions as to which the Company is seeking clarification, the West
Virginia attorney general has petitioned the Commission seeking to
intervene in the proceedings. Although the Indiana Utility Regulatory
Commission 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, 2001have statutory jurisdiction over 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, 2001transaction, that
they had reached an agreement whereby Kelda Group would acquire the
Company's New England operations. The transaction priceCommission is approximately
$118 million in cash plus the assumption of $115 million in debt.
The utility operations being acquired by Kelda Group serveconducting a total of
64,000 customers and had revenues of $47.3 million in 2000. Massachusetts
Capital Resources Company, a finance subsidiary of the Company, which owns
and leases certain assets to Massachusetts-American, will also be acquired
as partreview 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 of the first half of 2002. The transaction is also
subject to review byCompany made a
Hart-Scott-Rodino filing with the Federal Trade Commission.
Note 4 -- Pending Acquisition
WATER AND WASTEWATER ASSETS OF CITIZENS COMMUNICATIONS
On October 15, 1999,Commission in the second
quarter of 2002 and the investigation period expired without additional
inquiry. The Company continues to believe that the original projection
for a closing to occur some time during the first six months of 2003
remains a reasonable expectation.
One condition of the agreement requires the Company entered into an agreement to acquire allredeem its publicly
traded preferred stock prior to closing. That redemption was completed on
March 1, 2002.
During the first nine months of the water2002 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 service 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 recorded charges
of $3.4 million and $9.9 million, respectively, reflecting costs incurred
in connection with the merger. The merger related costs have been reported
on a separate line in the consolidated statement of income and
comprehensive income. No tax benefit was recognized for these expenses,
which are mostly legal fees, because it is awaiting a possible rehearing beforenot probable that commission and a possible
appellate proceeding before closing the acquisition.
Note 5-- Acquisition
AZURIX NORTH AMERICA AND AZURIX INDUSTRIALSthese costs
will be deductible for tax purposes.
On AugustNovember 6, 2001 the Company entered intoand its financing subsidiary, American
Water Capital Corp.(AWCC), executed a Note Purchase Agreement with RWE for
$1.2 billion in senior unsecured notes at an agreementinterest rate of 4.92%. The
notes were purchased at par by RWE and mature on November 6, 2006. The
Company and its subsidiaries used the proceeds from the sale of the notes
to acquire the common stock of Azurix North America Corp. and Azurix
Industrials Corp., to fund the acquisition of the water and wastewater
assets of Citizens Communications Company and to reduce outstanding short-
term debt. Closing occurred in two tranches with one on November 6, 2001
in the amount of $298.5 million and another on January 14, 2002 in the
amount of $900 million.
On June 12, 2002 the Company and AWCC executed a Note Purchase Agreement
with RWE for approximately$320 million in senior unsecured notes. The agreement calls
for up to $170 million in notes at an interest rate of 5.65% maturing on
June 12, 2007 and $150 million in cashnotes at a floating interest rate based
on LIBOR rates plus 20 basis points maturing on June 26, 2003. Closing
occurred on $40 million of the 5.65% senior notes on June 12, 2002 and
debt. Azurix North America and Azurix Industrials are
wholly-owned subsidiariesclosing on the remaining $130 million 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, which was completed5.65% notes took place on
November 7, 2001, strengthensSeptember 30, 2002. AWCC intends to issue the Company's position as a premier provider of water resource management
servicesfloating rate notes in the
United Statesfourth quarter and Canada.
Page 13 FORM 10-Q
Note 6-- Security Issues
Inwill use the aftermathproceeds to repay other short-term debt.
NOTE 3 -- Business Combinations/Goodwill and Other Intangible Assets,
Adoption 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. It is anticipated 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 "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.
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(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
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.
During the second quarter of 2002 the Company completed 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 as of January 1, 2002. The
Company's reporting units are the 27 separate regulated utility
subsidiaries (including the five New England subsidiaries that were sold
on April 25, 2002) and unregulated services reporting units at American
Water Resources and American Water Services. The Company's carrying value
of goodwill at January 1, 2002 was $139.2 million, of which $23.4 million
was assigned to various regulated subsidiaries and $115.8 million was
assigned to American Water Services. Intangible assets with an assigned
value of $23.4 million (subsequently adjusted to $14.2 million in 2002)
were management contracts at American Water Services that have a finite
life.
A transitional impairment test for goodwill as of January 1, 2002 was
completed by the Company in the second quarter of 2002. Income and market
approaches were used for reporting unit valuations. The methodologies
used to implement the market approach were the market multiples
methodology, which results in an indication of value by comparing the
business being valued to guideline publicly traded companies, and the
similar transactions methodology, which develops an indication of value
based on prices paid for comparable businesses. The methodology used to
implement the income approach was the capitalized income approach that
bases the value of an asset on the future cash flows attributable to that
asset. Based on these approaches the Company determined that goodwill is
not currently impaired. The Company will perform required annual
impairment tests in the fourth quarter after the long-term planning
process has been completed.
The Company is no longer recording $1.7 million of annual tax deductible
amortization relating to the goodwill associated with the 1999 acquisition
of its joint venture partner's interest in AmericanAnglian Environmental
Technologies. The remainder of the goodwill and intangible assets acquiredat
January 1, 2002 were not being amortized because they are related to
business combinations completed after June 30, 2001. With respect
to goodwill and intangible assets acquired prior tothe July 1, 2001 effective date of
SFAS 141 or the goodwill was related to acquisitions that occurred prior
to October 31, 1970 that was not being amortized because in the opinion of
management there had been no diminution in value. The following table
reflects consolidated results adjusted as though the adoption of the
Standards occurred as of the beginning of the three and nine-month periods
ended September 30, 2001:
($000's except per share amounts)
2002
2001
Three months ended September 30
Reported net income
$55,188
$55,777
Add back goodwill amortization
-
269
Adjusted net income
$55,188
$56,046
Basic earnings per share:
Reported net income
$.55
$.56
Goodwill amortization
-
-
Adjusted net income
$.55
$.56
Diluted earnings per share:
Reported net income
$.55
$.56
Goodwill amortization
-
-
Adjusted net income
$.55
$.56
Nine months ended September 30
Reported income before cumulative
effect of change in
accounting principle
$137,066
$128,619
Add back goodwill amortization
-
807
Adjusted income before cumulative
effect of change in accounting
principle
$137,066
$129,426
Reported net income
$139,745
$128,619
Add back goodwill amortization
-
807
Adjusted net income
$139,745
$129,426
Basic earnings per share:
Income before cumulative effect
of change in accounting
principle
$1.37
$1.29
Cumulative effect of change in
accounting principle
.03
-
As reported
1.40
1.29
Goodwill amortization
-
.01
Adjusted
$1.40
$1.30
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle
$1.36
$1.29
Cumulative effect of change in
accounting principle
.03
-
As reported
1.39
1.29
Goodwill amortization
-
.01
Adjusted
$1.39
$1.30
NOTE 4 -- Acquisition Of Water And Wastewater Assets Of Citizens
Communications Company
On January 15, 2002 the Company is requiredand 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. Upon completion of the audited closing
statement of net assets a final purchase price will be agreed upon. At
this time the Company expects a minor decrease in the purchase price. The
acquired operations provide water and wastewater service to adopt SFAS 142 effective January 1, 2002.almost 300,000
regulated customers in Arizona, California, Illinois, Indiana, Ohio and
Pennsylvania. Citizens also had developed a water supply project in
Illinois with the possibility of additional wholesale customers along the
pipeline.
The Company is currently evaluatingcompleting the effect that adoptiondetermination of the provisionsamounts to be assigned
to intangible assets and goodwill. At September 30, 2002, $84.2 million
and $59.6 were recorded as goodwill and intangibles, respectively, in
connection with this transaction. A value of SFAS 142$54.4 million was assigned
to intangible assets with an indefinite life, and $5.3 million of value
was assigned to intangible assets with lives ranging from 15 to 21 years.
The purchase price for these assets was consistent with the multiples paid
in other similar transactions. Regulatory and strategic considerations
contributed to a purchase price that are effectiveresulted in the recognition of
goodwill. The assets reside in progressive regulatory environments where
the Company currently operates and broadens the geographic diversity of
the Company's total operations. The inclusion of the acquired customers
in California and Arizona increases the Company's customers in the Western
United States to 10% of its total customer base. With the acquisition,
the Company becomes one of the principal water purveyors in the Phoenix
area and strengthens its competitive position for the privatization
opportunities in this rapidly growing region and the other 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 include 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
that might have occurred had the acquisition actually taken place on the
date indicated, or of future results of operations of the combined
entities:
($000's except per share amounts)
Three months ended September 30, 2002 2001
Revenues $ 483,457 $ 429,769
Net income 55,188 58,464
Earnings per average common share outstanding
Basic $.55 $.58
Diluted $.55 $.58
Nine months ended September 30, 2002 2001
Revenues $1,297,035 $1,164,126
Income before cumulative effect of change
in accounting principle 135,628 123,740
Net income 138,307 123,740
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $1.35 $1.24
Cumulative effect of change in accounting
principle .03 -
Basic $1.38 $1.24
Income before cumulative effect of change
in accounting principle $1.35 $1.24
Cumulative effect of change in accounting
principle .03 -
Diluted $1.38 $1.24
NOTE 5 -- Acquired Intangible Assets
As of September 30, 2002
($000's)
Gross
Carrying
Amount
Accumulated
Amortization
Amortized intangible assets
O&M contracts
$18,500
$(1,491)
Communication sites
970
(35)
Total
$19,470
$(1,526)
Unamortized intangible assets
Franchise rights
$54,351
Estimated amortization expense:
For year ended 12/31/03
$ 1,634
For year ended 12/31/04
$ 1,694
For year ended 12/31/05
$ 1,753
For year ended 12/31/06
$ 1,812
For year ended 12/31/07
$ 1,799
NOTE 6 -- Goodwill
($000's)
Regulated
Utility
Services
Unregulated
Services
Total
Balance as of December 31, 2001
$ 20,715
$115,773
$136,488
Cumulative effect of change
in accounting principle
2,679
-
2,679
Balance as of January 1, 2002
will have23,394
115,773
139,167
Goodwill acquired during year
84,224
-
84,224
Adjust purchase accounting
-
15,492
15,492
Balance as of September 30, 2002
$107,618
$131,265
$238,883
NOTE 7 -- Other Investments
On April 2, 2002 the Company tendered approximately 2.2 million shares of
its 3.5 million shares of ITC Holding Company (ITC) common stock. The
Company tendered the shares as part of ITC's program to repurchase its own
stock. The Company acquired this stock with the 1999 acquisition of
National Enterprises Inc. (NEI) as it was part of NEI's non-water related
investments. The sale resulted in proceeds of $26.2 million, and a $14
million after-tax gain which was reflected in second quarter 2002 results.
This cash gain was offset by a non-cash loss of $10.8 million, $6.7
million after tax, that was also recorded during the second quarter when
the Company determined that the value of two other securities acquired as
part of the NEI acquisition had become permanently impaired. The Company
continues to review all reasonable options regarding the remaining
securities that include 1.3 million shares of Deutsche Telekom and 1.3
million shares of ITC acquired as part of the NEI acquisition.
NOTE 8 -- Gain From Sale Of Operating Systems
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 resultsinitial cash payment of
$120.5 million subject to the terms and conditions of the agreement. An
$18.6 million after-tax gain was reflected in second quarter 2002 results.
The utility operations acquired by Aquarion serve a total of 65,000
customers and financial position.
Alsohad revenues of $51 million in 2001. A finance subsidiary
of the Company, which owned and leased certain assets to its affiliated
operating company in Massachusetts, was also acquired by Aquarion as part
of the transaction.
NOTE 9 -- Gain On Sale Of Land
Two of the Company's subsidiaries completed separate transactions for the
sale of non-essential property that resulted in $10 million in after-tax
gains during the second quarter of 2002. These sales resulted in proceeds
of approximately $16 million.
NOTE 10 -- Revolving Credit Agreement and Long-Term Debt
On July 31, 2002 the Company's financing subsidiary, American Water
Capital Corp.(AWCC) extended for one year its current 364-day $500 million
revolving credit agreement with a group of eleven domestic and
international banks. The revolving credit agreement supports AWCC's
commercial paper program.
Two subsidiaries issued $39.9 million in tax-exempt long-term debt during
the first nine months of 2002.
NOTE 11 -- Earnings Per Share
The average number of shares used to calculate diluted earnings per share
includes 15,794 of potential common shares issuable in connection with the
long-term incentive program for the three-month period ended September 30,
2001, and 254,529 and 169,624 potential common shares for employee stock
options for the three-month periods ended September 30, 2002 and 2001,
respectively.
The average number of shares used to calculate diluted earnings per share
includes 10,963 of potential common shares issuable in connection with the
long-term incentive program for the nine-month period ended September 30,
2001, and 281,740 and 143,850 potential common shares for employee stock
options for the nine-month periods ended September 30, 2002 and 2001,
respectively.
NOTE 12 -- Segment Information
The following table presents information about the Company's reportable
segments.
Regulated
Utility
Services
Unregulated
Services
Other
Items
Consolidated
($000's)
Three months ended September 30, 2002
Revenues from external
customers
$ 421,065
$ 62,392
$ -
$ 483,457
Intersegment revenues
$ -
$ 1,956
$ (1,956)
$ -
Net income
$ 67,531
$ (3,106)
$ (9,237)
$ 55,188
Merger expenses
(7)
-
(1,640)
(1,647)
Net income excluding unusual
items
$ 67,538
$ (3,106)
$ (7,597)
$ 56,835
Three months ended September 30, 2001
Revenues from external
customers
$ 385,256
$ 9,700
$ -
$ 394,956
Intersegment revenues
$ -
$ 1,635
$ (1,635)
$ -
Net income
$ 71,610
$ (992)
$(14,841)
$ 55,777
Merger expenses
-
-
(9,860)
(9,860)
Gain from sale of New
England operations
2,930
-
-
2,930
Gain on other investments
-
-
1,104
1,104
Net income excluding unusual
items
$ 68,680
$ (992)
$ (6,085)
$ 61,603
Nine months ended September 30, 2002
Revenues from external
customers
$1,129,511
$ 162,700
$ -
$1,292,211
Intersegment revenues
$ -
$ 5,612
$ (5,612)
$ -
Income before cumulative
effect of change in
accounting principle
$ 141,411
$ (3,658)
$ (687)
$ 137,066
Net income
$ 144,090
$ (3,658)
$ (687)
$ 139,745
Merger expenses
(115)
-
(3,265)
(3,380)
Gain from sale of New
England operations
-
-
18,552
18,552
Gain on other investments
-
-
13,979
13,979
Loss on write down of other
investments
-
-
(6,697)
(6,697)
Gain on sale of land
5,779
4,184
-
9,963
Cumulative effect of change
in accounting principle
2,679
-
-
2,679
Net income excluding unusual
items
$ 135,747
$ (7,842)
$(23,256)
$ 104,649
Total assets
$7,283,630
$338,902
$ (7,960)
$7,614,572
Nine months ended September 30, 2001
Revenues from external
customers
$1,045,312
$ 29,949
$ -
$1,075,261
Intersegment revenues
$ -
$ 4,949
$ (4,949)
$ -
Income before cumulative
effect of change in
accounting principle
$ 156,795
$ (2,357)
$(25,819)
$ 128,619
Net income
$ 156,795
$ (2,357)
$(25,819)
$ 128,619
Merger expenses
-
-
(9,860)
(9,860)
Gain from sale of New
England operations
2,930
-
-
2,930
Gain on other investments
-
-
3,158
3,158
Net income excluding unusual
items
$ 153,865
$ (2,357)
$(19,117)
$ 132,391
Total assets
$6,251,944
$108,215
$ (1,484)
$6,358,675
The "other items" include corporate costs of American Water Works Company
and intersegment eliminations. Total revenues are from United States of
America (U.S.) operations except Unregulated Services Canadian revenues of
$14,711 and $37,481 for the three and nine months ended September 30,
2002, respectively. Total assets are from U.S. operations except
Unregulated Services Canadian assets of $59,404 at September 30, 2002.
NOTE 13 -- New Accounting Standards
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 Event
On November 6, 2001 the Company 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 rate of 4.92%. The notes
will be purchased at par by RWE/AG and mature on November 6, 2006. The
Company and its subsidiaries are using 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 Communication Company and to reduce outstanding short-term debt.
Closing will occur in two or more tranches, the first of which took place
on November 6, 2001 in the amount of $298.5 million.
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
- ---------------------
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 gallons in the third quarter of 2000.
The 260.7 billion gallons of sales volume for the first nine months of
2001 was 1% greater than the 258.0 billion gallons sold in the same period
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 in 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 compared to the same periods in 2000. Operation and
maintenance expenses increased by 8% and 6% in 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 portion 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") 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 sold 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 issued in connection with the Dividend Reinvestment and Stock
Purchase Plan, and 32,184 shares were issued for non-qualified stock
options that were exercised. Also, 163,892 non-qualified stock options
were granted in connection with the 2000 Stock Award and Inventive Plan
during the first nine months of 2001.
The Company issued 153,648 shares of common stock out of treasury during
the first nine months of 2001 in connection with the Employees' Stock
Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award
and Incentive Plan.
On March 29, 2001 the Company's financing subsidiary, 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. The 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.
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). 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. 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 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 the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
In June 2002 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting For Costs Associated
with Exit or Disposal Activities," (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and Issue 94-3
relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability
for an exit cost was recognized at the date of an entity's commitment to
an exit plan. SFAS 146 is effective for fiscal years beginningexit or disposal activities that
are initiated after December 15, 2001.31, 2002. The Company is currently evaluating
the effecteffects that adoption of the provisions of SFAS 144146 will have on its
results of operations and financial position.
Page 18 FORM 10-Q
Subsequent Eventposition but does not expect them to
be material.
PART I - ----------------
On November 6, 2001 the CompanyFINANCIAL INFORMATION
Item 2. Management's Discussion 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 rateAnalysis of 4.92%.Financial Condition
and Results of Operations
- ----------------------------------------------------------------------
Results of Operations
- ---------------------
The notes
will be purchased at par by RWE/AG and mature on November 6, 2006. The
Company and its subsidiaries are using proceeds from the saleoperating results of the notes
to acquire the common stock of Azurix North AmericaAmerican Corp. and Azurix
Industrials to fund the acquisition ofCorp. (Azurix), and the water and wastewater assets of
Citizens CommunicationCommunications Company (Citizens) acquisitions have been included
in the consolidated statements of income and to reduce outstanding short-term debt.
Closing will occurcomprehensive income since
the completion of the acquisitions on November 7, 2001 and January 15,
2002, respectively.
Consolidated revenues for the third quarter and first nine months of 2002
were higher than for the same periods in 2001 by 22% and 20%,
respectively. These increases reflect the additional revenues from the
Company's Azurix and Citizens acquisitions and revenues from rate
increases, that were partially offset by the issuancesale of two or more tranches,the New England
subsidiaries on April 25, 2002.
Approximately $53 million and $133 million of the overall revenue increase
in the third quarter and first nine months in 2002 occurred in the
unregulated services segment, reflecting the November 2001 acquisition of
Azurix. The portion of the Company's overall revenue from its unregulated
businesses grew from 2% during the third quarter of 2001 to 13% during the
third quarter of 2002.
Regulated business revenues increased by 9% and 8% for the third quarter
and first nine months of 2002 compared to the same periods in 2001. The
primary reason for the increase in revenue generated by the regulated
businesses during the third quarter of 2002 was the addition of $38
million in revenue from the Citizens acquisition. The Citizens acquisition
added revenues of $94 million during the first nine months of 2002.
As of November 11, 2002, five utility subsidiaries received rate orders in
2002 that are expected to provide $31 million in additional annual
revenues. The largest of these rate increases was a $24 million annual
rate increase authorization in Pennsylvania that became effective in
January of 2002. Three of the Company's subsidiaries have rate increase
applications on file requesting additional annual revenues of $52 million.
The $36 and $15 million requests by the Company's Illinois and California
subsidiaries account for the major portion of the pending requests.
Included in the operations covered by the pending rate proceedings in
Illinois and California are several of the operating systems that were
acquired from Citizens. Rate increases to recover the capital costs
related to new facilities necessary to ensure the delivery of high quality
water had not been requested by Citizens for the past several years.
Total water sales in 2002 of 116 billion gallons for the third quarter and
282 billion gallons for the first nine months were 13% and 8% higher than
for the same periods of 2001, respectively. Water sales were higher in
2002 due to the addition of almost 300,000 customers from the six-state
Citizens acquisition and increased sales to residential and small business
customers, not withstanding the impact of drought restrictions, the sale
of New England operations with 65,000 customers and declining sales to
industrial customers.
Most of the drought restrictions, which took placewere in effect throughout New
Jersey, portions of Pennsylvania and some of the Company's smaller east
coast subsidiaries, have now been lifted.
Industrial water use continued on a decline that began in late 2001.
Industrial sales for the third quarter and first nine months
were down 1% and 6%, or 140 million gallons and 2 billion gallons,
compared to the same periods in 2001. Lingering weak economic conditions
continue to impact water sales to industrial customers. The Company sees
no indication that in the near future water sales to industrial customers
will strengthen or return to levels experienced in the past.
Operating expenses in the third quarter and the first nine months of 2002
were 36% and 33% higher than the same periods in 2001. The inclusion of
the operating expenses related to the Azurix and Citizens operations
during the third quarter and first nine months of 2002 significantly
increased total expenses as these acquisitions were not part of the
Company's consolidated financial information during the same periods last
year. Included in these expenses are costs to integrate the businesses,
particularly the Azurix operations into existing operations. These costs
will continue throughout the year as the Company continues to transition
systems and locations. The increase in third quarter operating expenses
reflects an increase of almost $3 million in pension expense above levels
experienced during the third quarter of 2001. The Company resumed funding
of its primary pension plan in the third quarter of 2002. The resumption
of funding was in part due to the recent poor performance of the financial
markets. Because pension expense in excess of amounts contributed to
plans is deferred by the regulated subsidiaries in states where rate
recovery is based on cash contributions, increased contributions result in
increased operating expenses.
The increases in depreciation expense for the third quarter and first nine
months were related to the Company's ongoing program of utility plant
construction and the additional depreciation associated with the Azurix
and Citizens transactions.
Interest expense rose by $8 million in the third quarter and $26 million
in the first nine months of 2002 compared to the same periods in 2001.
This increase is attributable to approximately $1.2 billion of new debt
associated with the Azurix and Citizens acquisitions.
Income taxes increased in the third quarter and first nine months of 2002
when compared to the third quarter and first nine months in 2001
reflecting increased earnings due to the sale of operating systems,
investments and land. The Company's effective income tax rate for the
nine months ended September 30 increased to 45.7% in 2002 from 41.1% in
2001, reflecting the relatively low tax basis in the stock of the New
England subsidiaries that was sold in 2002 and $3.4 million of expenses
incurred in 2002 and $9.9 million in 2001 in connection with the pending
merger with RWE Aktiengesellschaft for which it is not probable that the
Company will receive a tax deduction.
Net income to common stock was $55.2 million for the third quarter of 2002
compared with $55.6 million for the same period in 2001. Net income to
common stock for the first nine months of 2002 was $139.6 million compared
with $128.2 million for the same period in 2001.
Other comprehensive loss, net of tax, was $0.4 million in the third
quarter of 2002 compared to a $13.3 million loss in the same period in
2001. Other comprehensive loss, net of tax, was $1.6 million and $19.8
million in the first nine months of 2002 and 2001, respectively. 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 increased to $54.8 million and $138.0 million in the
third quarter and first nine months of 2002, respectively, compared to
comprehensive income of $42.3 million and $108.4 million in the same
periods in 2001.
Diluted earnings per share of common stock in the third quarter of 2002
were $.55 compared to $.56 in the same period in 2001. The 2002 results
included expenses amounting to two-cents per share related to the RWE
merger. The 2001 results included a three-cent per share gain from the
sale of the Company's New England operations, a one-cent gain from the
sale of other investments in Deutsche Telekom stock, and expenses of ten-
cents per share related to the RWE merger.
Diluted earnings per share of common stock in the first nine months of
2002 were $1.39 compared to $1.29 in the same period in 2001. The 2002
results include a three-cent per share positive impact of adopting the new
financial accounting standards relating to business combinations, a 19-
cent per share gain from the sale of the Company's New England operations,
a 14-cent gain from the sale of other investments in ITC Holding Company
stock, a seven-cent loss from the permanent write-down of other
investments that were part of non-water investments included in the
Company's 1999 acquisition of NEI, a ten-cent gain from sales of land and
expenses of three-cents per share related to the RWE merger. The 2001
results included a three-cents per share gain from the sale of the
Company's New England operations, a three-cent per share gain from the
sale of other investments in Deutsche Telekom stock, and expenses of ten-
cents per share related to the RWE merger.
Capital Resources and Liquidity
- -------------------------------
On January 14, 2002 the Company's financing subsidiary, American Water
Capital Corp.(AWCC) closed on its second and final issue totaling $900
million under its November 6, 2001 Note Purchase Agreement with RWE.
These 4.92% notes were primarily used to fund the acquisition of the
Citizens water and wastewater assets. On June 12, 2002 the Company and
AWCC executed another Note Purchase Agreement with RWE for up to $320
million in senior unsecured notes. The agreement allows AWCC to issue up
to $170 million in notes at an interest rate of 5.65% maturing on June 12,
2007 and $150 million in notes at a floating interest rate based on LIBOR
rates plus 20 basis points maturing on June 26, 2003. Closing occurred on
$40 million of the 5.65% senior notes on June 12, 2002. The remaining
$130 million of 5.65% notes closed on September 30, 2002. AWCC intends to
issue the floating rate notes in the fourth quarter and will use the
proceeds to repay other short-term debt.
On July 31, 2002 AWCC extended for one year its current 364-day $500
million revolving credit agreement with a group of eleven domestic and
international banks. The revolving credit agreement supports AWCC's
commercial paper program.
Two subsidiaries issued $39.9 million in tax-exempt long-term debt during
the first nine months of 2002.
In the first nine months of 2002, the Company invested $19.5 million in
the common stock of three 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
its 3.5 million shares of ITC Holding Company (ITC) common stock. The
Company tendered the shares as part of ITC's program to repurchase its own
stock. The Company acquired this stock with the 1999 acquisition of
National Enterprises Inc. (NEI) as it was part of NEI's non-water related
investments. The sale resulted in proceeds of $26.2 million, and a $14
million after-tax gain which was reflected in second quarter 2002 results.
This cash gain was offset by a non-cash loss of $10.8 million, $6.7
million after tax, that was also recorded during the second quarter when
the Company determined that the value of two other securities acquired as
part of the NEI acquisition had become permanently impaired. The Company
continues to review all reasonable options regarding the remaining
securities that include 1.3 million shares of Deutsche Telekom and 1.3
million shares of ITC acquired as part of the NEI acquisition.
During the first nine months of 2002, the market value of the assets in
the Company's defined benefit pension plans declined by approximately $51
million, or 14%, due to plan benefit payments and the poor performance of
the financial markets in 2002. After a period of several years in which
the Company was not allowed to make tax deductible contributions to its
primary pension plan, funding resumed in the third quarter of 2002 at an
annual level of approximately $12.3 million. Continued poor performance
of the financial markets may also significantly increase future pension
expense and funding requirements beyond 2002. Management believes any
additional contributions to the pension plans could be funded without any
significant impact on liquidity. If the actual return on pension plan
assets was zero for the balance of the year and the appropriate discount
rate at year-end was 6.75%, the estimated accumulated benefit obligation
at December 31 would exceed the market value of plan assets by
approximately $80 million. This would require an unfavorable after-tax
adjustment of approximately $15 million to other comprehensive income and
shareholders' equity at December 31, 2002. Since September 30, equity
values and the appropriate discount rate have increased. If these trends
hold for the rest of 2002 the charge to other comprehensive income will be
reduced.
Condemnation of Utility Systems
As previously reported, the cities of Pekin and Peoria in Illinois are
seeking to acquire the utility assets of Illinois-American Water Company
that are used to provide water service to their respective communities.
Illinois-American is seeking to appeal an Illinois appellate court
decision affirming a lower court decision that an 1889 franchise agreement
gives the City of Peoria the right to purchase Illinois-American's assets
there. The City of Pekin has filed a petition with the Illinois Commerce
Commission requesting the Commission's determination that the City of
Pekin may acquire Illinois-American's assets there by the use of eminent
domain. Illinois-American is vigorously contesting these proposed
takeovers.
In California, The Montara Sanitary District has filed a lawsuit seeking
to condemn California-American's water system there, an action being
vigorously contested by California-American.
In other locations local governments have evidenced an interest in
acquiring some assets of the Company's subsidiaries, but have not taken
any formal steps to acquire them by eminent domain. The City of
Lexington, Kentucky has hired a financial adviser to prepare an initial
valuation of Kentucky-American in contemplation of a possible acquisition
of that Company's assets. The City Council of the City of Hopewell
Virginia has authorized the City to acquire Virginia-American's Hopewell
Division. Each of Kentucky-American and Virginia-American is opposing the
attempt to acquire its assets in these places.
The Company does not consider any of the forgoing actions to be material
individually, nor, given the Company's view that the probability is remote
that all of them would result in a taking, does it believe that they are
material in the aggregate.
New Accounting Standards
- ------------------------
In June 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 $298.5 million.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 effects that adoption of
the provisions of SFAS 143 will have on its results of operations and
financial position but does not expect them to be material.
In August 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 January 1, 2002
did not have a material effect on its results of operations and financial
position.
In April 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 the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
In June 2002 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting For Costs Associated
with Exit or Disposal Activities," (SFAS 146). SFAS 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS 146 and Issue 94-3
relates to its requirements for recognition of a liability for a cost
associated with an exit or disposal activity. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability
for an exit cost was recognized at the date of an entity's commitment to
an exit plan. SFAS 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company is currently evaluating
the effects that adoption of the provisions of SFAS 146 will have on its
results of operations and financial position but does not expect them to
be material.
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 19 FORM 10-QPART I - FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
There have been no significant changes in the Company's exposure to market
risks described in the Company's Annual Report on Form 10-K for the Year
Ended December 31, 2001.
Item 4. Controls and Procedures
-------------------------------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures within 90 days
of the filing date of this quarterly report, and they concluded that these
controls and procedures are effective. There were no significant changes
in internal controls or in other factors that could significantly affect
these internal controls subsequent to the date of that evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
Exhibit Number Description
- -------------- -----------
10 Material Contracts99 Additional Exhibits
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) Note Purchase Agreement for up to $1.2
billion 4.92% senior notes due November 6, 2006and
(b) of Section 1350, Chapter 63 of Title 18,
United States Code)
B. Reports on Form 8-K
-------------------
A current report on Form 8-K was filed on August 7, 2001July 16, 2002 by the Company
regarding the agreementexpiration of the waiting period under Hart-Scott-Rodino
Antitrust Improvements Act of 1976 in respect of its notification filed
regarding the proposed merger with and into a subsidiary of RWE/AG.
A current report on Form 8-K was filed on July 29, 2002 by the Company
regarding an employee communication relating to acquire Azurix North America Corp.its proposed merger with
and Azurix
Industrials Corp.into a subsidiary of RWE/AG.
A current report on Form 8-K was filed on August 30, 20017, 2002 by the Company
regarding an employee communication relating to its proposed merger with
and into a subsidiary of RWE/AG.
A current report on Form 8-K was filed on August 7, 2002 by the agreement to sellCompany
regarding each of the Company's New England OperationsPrincipal Executive Officer and Principal Financial
Officer's submitted sworn statements to the Kelda Group Plc.SEC pursuant to Securities and
Exchange Commission Order No. 4-460.
A current report on Form 8-K was filed on September 17, 20019, 2002 by the Company
regarding the RWE/AGan employee communication relating to its proposed merger agreement.
A current report on Form 8-K was filed on October 30, 2001 by the Company
regarding the releasewith
and into a subsidiary of the Company's third quarter earnings.
A current report on Form 8-K was filed on November 7, 2001 by the Company
regarding the note purchase agreement with RWE/AG.
A current report on Form 8-K was filed on November 8, 2001September 30, 2002 by the
Company regarding completionan employee communication relating to its proposed
merger with and into a subsidiary of the acquisition of Azurix North America Corp. and
Azurix Industrials Corp.
Page 20 FORM 10-QRWE/AG.
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, 20012002 \s\Ellen C. Wolf
- ---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date November 14, 20012002 \s\Robert D. Sievers
- ---------------------- ---------------------------------------
Comptroller
(Chief Accounting Officer)
CERTIFICATIONS
I, J. James Barr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Water Works
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date:November 14, 2002 \s\ J. James Barr
----------------- -----------------------------------------
President and CEO
CERTIFICATIONS
I, Ellen C. Wolf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Water Works
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date:November 14, 2002 \s\ Ellen C. Wolf
----------------- -----------------------------------------
Vice President and Chief Financial Officer