CONFORMED COPY
Page 1 of 2232
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 March 31,June 30, 2002
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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
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(Registrant's telephone number, including area code)
Not Applicable
- ---------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ -----
At MayAugust 1, 2002, the number of shares of common stock, $1.25 par value,
outstanding was 100,032,346100,061,238 shares. Page 2 FORM 10-Q
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,June 30,
2002 2001
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $384,740 $316,427$424,014 $363,878
-------- --------
Operating expenses
Operation and maintenance 209,252 150,823222,299 160,476
Depreciation and amortization 55,027 44,36058,233 45,069
General taxes 34,758 33,31135,474 32,465
-------- --------
Total operating expenses 299,037 228,494316,006 238,010
-------- --------
Operating income 85,703 87,933108,008 125,868
-------- --------
Other income (deductions)
Interest (57,412) (48,597)(57,011) (48,544)
Allowance for other funds used during
construction 1,620 1,0811,911 1,185
Allowance for borrowed funds used
during construction 1,026 9791,144 1,088
Amortization of debt expense (673) (678)(718) (710)
Preferred dividends of subsidiaries (713) (783)(695) (742)
Merger expenses (947)(786) -
Gain from sale of operating systems 50,709 -
Gain on sale of other investments 22,466 3,367
Loss on write down of other investments (10,764) -
Gain on sale of land 15,851 -
Other, net (934) (671)951 (301)
-------- --------
Total other income (deductions) (58,033) (48,669)23,058 (44,657)
-------- --------
Income before income taxes 27,670 39,264131,066 81,211
Provision for income taxes 12,457 15,80364,401 31,830
-------- --------
Net income 66,665 49,381
Dividends on preferred stocks - 146
-------- --------
Net income to common stock 66,665 49,235
-------- --------
Three Months Ended
June 30,
2002 2001
---------- ----------
Other comprehensive income (loss), net of tax
Unrealized loss on securities (5,536) (2,463)
Reclassification adjustment for gain (loss)
included in net income 5,837 (2,052)
Foreign currency translation adjustment 699 -
---------- ----------
Other comprehensive income (loss), net of tax 1,000 (4,515)
---------- ----------
Comprehensive income $ 67,665 $ 44,720
========== ==========
Average shares of basic common stock outstanding 100,034 99,256
Earnings per average common share outstanding
Basic $ .67 $ .50
========== ==========
Diluted $ .66 $ .50
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at April 1 $1,130,988 $1,069,927
Add - net income 66,665 49,381
Gain on treasury stock - 406
---------- ----------
1,197,653 1,119,714
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Deduct - dividends paid
Preferred stock - 32
Preference stock - 114
Common stock - $.245 per share in 2002;
$.235 per share in 2001 24,508 23,297
---------- ----------
24,508 23,443
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Balance at June 30 $1,173,145 $1,096,271
========== ==========
The accompanying notes are an integral part of these 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)
Six Months Ended
June 30,
2002 2001
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $808,754 $680,305
-------- --------
Operating expenses
Operation and maintenance 431,551 311,299
Depreciation and amortization 113,260 89,429
General taxes 70,232 65,776
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Total operating expenses 615,043 466,504
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Operating income 193,711 213,801
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Other income(deductions)
Interest (114,423) (97,141)
Allowance for other funds used during
construction 3,531 2,266
Allowance for borrowed funds used
during construction 2,170 2,067
Amortization of debt expense (1,391) (1,388)
Preferred dividends of subsidiaries (1,408) (1,525)
Merger expenses (1,733) -
Gain from sale of operating systems 50,709 -
Gain on sale of other investments 22,466 3,367
Loss on write down of other investments (10,764) -
Gain on sale of land 15,851 -
Other, net 17 (972)
-------- --------
Total other income (deductions) (34,975) (93,326)
-------- --------
Income before income taxes 158,736 120,475
Provision for income taxes 76,858 47,633
-------- --------
Income before cumulative effect of change in
accounting principle 15,213 23,46181,878 72,842
Cumulative effect of change in accounting principle 2,679 -
-------- --------
Net income 17,892 23,46184,557 72,842
Dividends on preferred stocks 146 146292
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Net income to common stock 17,746 23,31584,411 72,550
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Page 3 FORM 10-Q
ThreeSix Months Ended
March 31,June 30,
2002 2001
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Other comprehensive loss,income (loss), net of tax
Unrealized loss on securities (2,926) (1,994)(8,462) (4,457)
Reclassification adjustment for gain (loss)
included in net income 5,837 (2,052)
Foreign currency translation adjustment 7081,407 -
---------- ----------
Other comprehensive income (loss), net of tax (1,218) (6,509)
---------- ----------
Comprehensive income $ 15,52883,193 $ 21,32166,041
========== ==========
Average shares of basic common stock outstanding 100,027 98,873100,031 99,066
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $ 0.15.81 $ 0.24.73
Cumulative effect of change in accounting
principle $ 0.03.03 -
---------- ------------------
Basic $ 0.18.84 $ 0.24.73
========== ==========
Income before cumulative effect of change in
accounting principle $ 0.15.81 $ 0.24.73
Cumulative effect of change in accounting
principle $ 0.03.03 -
---------- -------------------
Diluted $ 0.18.84 $ 0.24.73
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,137,772 $1,069,486
Add - net income 17,892 23,46184,557 72,842
Preferred stock redemption premium (25) -
Gain on treasury stock - 338744
---------- ----------
1,155,639 1,093,2851,222,304 1,143,072
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Deduct - dividends paid
Preferred stock 32 3264
Preference stock 114 114228
Common stock - $.245$.49 per share in 2002;
$.235$.47 per share in 2001 24,505 23,21249,013 46,509
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24,651 23,35849,159 46,801
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Balance at March 31 $1,130,988 $1,069,927June 30 $1,173,145 $1,096,271
========== ==========
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 Balance Sheet (Unaudited)
(In thousands)
March 31,June 30, December 31,
2002 2001
------------ -----------
ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 6,152,2856,018,369 $ 5,458,909
Utility plant acquisition adjustments, net 215,338214,568 68,916
Non-utility property, net of accumulated
depreciation 95,87498,297 94,149
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Total property, plant and equipment 6,463,4976,331,234 5,621,974
----------- -----------
Current assets
Cash and cash equivalents 15,51124,479 19,691
Customer accounts receivable 164,048178,567 153,142
Allowance for uncollectible accounts (8,412)(8,898) (7,660)
Unbilled revenues 90,966101,380 86,065
Miscellaneous receivables 20,33520,590 16,483
Materials and supplies 32,86133,505 32,281
Deferred vacation pay 13,93513,281 11,422
Restricted funds 224 224
Other 19,216 18,94027,583 19,164
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Total current assets 348,684390,487 330,588
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 219,293212,775 217,330
Other investments 37,88123,927 39,956
Debt and preferred stock expense 48,18347,882 45,882
Deferred pension expense 33,72436,472 30,712
Deferred postretirement benefit expense 9,1158,884 9,318
Deferred security costs 11,60916,400 7,058
Deferred business services project expenses 40,10940,742 36,311
Deferred insurance expense 9,335 4,998
Deferred tank painting costs 16,22514,312 16,585
Restricted funds 9,397- 8,570
Goodwill 285,326219,133 136,488
Intangible assets 21,77881,866 23,400
Other 98,262 82,92791,483 77,929
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Total regulatory and other long-term assets 830,902803,211 654,537
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TOTAL ASSETS $ 7,643,0837,524,932 $ 6,607,099
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Page 5 FORM 10-Q
March 31,June 30, December 31,
2002 2001
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,748,6741,792,412 $ 1,758,018
Preferred stocks without mandatory
redemption requirements - 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 30,09928,620 30,474
Preferred stocks of subsidiaries without
mandatory redemption requirements 7,2686,708 7,268
Long-term debt
American Water Works Company, Inc. 297,000216,000 297,000
Subsidiaries 3,221,6013,164,321 2,253,019
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Total capitalization 5,304,6425,208,061 4,357,452
----------- -----------
Current liabilities
Short-term debt 416,596290,162 414,083
Current portion of long-term debt 170,314244,158 166,087
Accounts payable 45,65761,303 67,996
Taxes accrued, including federal income 42,89090,065 21,756
Interest accrued 59,46659,088 43,015
Accrued vacation pay 14,08613,468 11,577
Other 119,065110,292 100,220
----------- -----------
Total current liabilities 868,074868,536 824,734
----------- -----------
Regulatory and other long-term liabilities
Advances for construction 262,141255,901 230,801
Deferred income taxes 627,077611,645 624,449
Deferred investment tax credits 38,27236,311 38,633
Accrued pension expense 68,63670,872 62,355
Accrued postretirement benefit expense 19,16813,964 13,808
Accrued insurance expense 10,907 5,020
Other 40,329 41,00739,572 35,987
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Total regulatory and other long-term
liabilities 1,055,6231,039,172 1,011,053
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Contributions in aid of construction 414,744409,163 413,860
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Commitments and contingencies -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 7,643,0837,524,932 $ 6,607,099
=========== ===========
The accompanying information and notes are an integral part of these financial statements.
Page 6 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
ThreeSix Months Ended
March 31,June 30,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,892 $23,46184,557 $ 72,842
Adjustments
Depreciation and amortization 55,027 44,360113,260 89,429
Cumulative effect of change in accounting principle (2,679) -
Gain from sale of operating systems (50,709) -
Gain on sale of other investments (22,466) (3,367)
Loss on write down of other investments 10,764 -
Gain on sale of land (15,851) -
Provision for deferred income taxes 4,288 3,16511,169 6,255
Provision for losses on accounts receivable 2,840 1,9436,231 4,555
Allowance for other funds used during
construction (1,620) (1,081)(3,531) (2,266)
Employee benefit expenses greater (less)
than funding 7,441 3,8761,966 (280)
Employee stock plan expenses 813 1,2122,087 2,192
Deferred regulatory costs (9,247) (9,969)(15,869) (22,678)
Amortization of deferred charges 4,431 3,68410,405 7,344
Other, net (11,890) (8,735)(3,279) (2,243)
Changes in assets and liabilities, net
of effects from acquisitions
Accounts receivable (2,995) 16,081(26,217) (12,889)
Unbilled revenues (154) 2,370(15,775) (15,337)
Other current assets (61) (350)(11,416) (2,935)
Accounts payable (24,077) (18,164)(9,609) (14,712)
Taxes accrued, including federal income 19,870 23,80866,544 27,433
Interest accrued 16,442 5,14317,607 (134)
Other current liabilities 16,935 (4,486)10,365 (8,437)
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Net cash from operating activities 93,256 86,318157,554 124,772
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CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (65,242) (62,523)(198,025) (153,488)
Allowance for other funds used during
construction 1,620 1,0813,531 2,266
Acquisitions (883,064) (48,575)(54,173)
Proceeds from the sale of assets 197 410164,612 4,950
Removal costs from property, plant and
equipment retirements (1,394) (1,880)(2,414) (5,090)
Restricted funds (827)8,570 (247)
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Net cash used in investing activities (948,710) (111,734)(906,790) (205,782)
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Page 7 FORM 10-Q
ThreeSix Months Ended
March 31,June 30,
2002 2001
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $926,097 $143,788984,365 146,765
Proceeds from common stock 691 9,269980 21,109
Purchase of common stock for treasury (36) (63)(386)
Net borrowings (repayments) under
short-term debt agreements 2,513 (60,138)(116,318) 6,172
Advances and contributions for construction,
net of refunds 5,490 6,50616,147 12,936
Debt issuance costs (3,021) (780)(6,767) (1,114)
Repayment of long-term debt (43,736) (57,828)(62,445) (66,530)
Redemption of preferred stocks (12,073) (319)(12,743) (1,940)
Dividends paid (24,651) (23,358)(49,159) (46,801)
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Net cash from financing activities 851,274 17,077754,024 70,211
-------- --------
Net decreaseincrease(decrease) in cash and
cash equivalents (4,180) (8,339)4,788 (10,799)
Cash and cash equivalents at January 1 19,691 28,571
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Cash and cash equivalents at March 31 $15,511 $20,232June 30 $ 24,479 $ 17,772
======== ========
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 $890$1,774 in 2001.
The accompanying information and notes are an integral part of these financial statements.
Page 8 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Information Accompanying Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
March 31,June 30, December 31,
2002 2001
--------- ------------
Preferred stocks without mandatory redemption requirements
(All 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
Cumulative preference stock - $25 par value
Authorized - 750,000 shares
5% series (non-voting) - 365,158 shares
outstanding in 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
========= ====================== ===========
Common stockholders' equity
Common stock - $1.25 par value
Authorized - 300,000,000 shares
Issued - 100,048,457100,062,186 shares in 2002;
100,016,273 shares in 2001 $ 125,060125,078 $ 125,020
Paid-in capital 489,568490,131 489,868
Retained earnings 1,130,9881,173,145 1,137,772
Accumulated other comprehensive income 3,7404,740 5,958
Unearned compensation -- (539)
Treasury stock at cost - 16,111 shares in
2002; 1,891 shares in 2001 (682) (61)
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$1,748,674 $ 1,758,018-----------
$1,792,412 $1,758,018
========== ======================
At March 31,June 30, 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 4,234,367 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 March 31,June 30, 2002. Page 9 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 -- Financial Statement Presentation
The information presented in this Form 10-Q is unaudited. In the opinion
of management the information reported reflects all adjustments,
consisting of both normal recurring as well as any non-recurring adjustments which were
necessary to a fair statement of the results for the periods reported.
Certain reclassifications have been made to conform previously reported
data to the current presentation.
NOTE 2 -- Merger 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 Company common stock at a price of $46.00 per
share in cash.
RWE 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 waste and recycling. Upon completion of
the transaction, American Water will be combined with the U.S. operations
of Thames Water Plc, RWE's London-based international water services
business. American Water will manage the joint operations in North,
Central and South America.
The transaction was approved at a special 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 state regulatory authorities. The states where
applications for approval have been filed are Arizona, California, Hawaii,
Illinois, Kentucky, Maryland, New Jersey, New Mexico, New York,
Pennsylvania, Tennessee, Virginia and West Virginia. The states of
Georgia and Michigan do not regulate the Company's utility operations, and
the states of Indiana, Iowa, Missouri, Ohio and Texas have determined they
have no statutory
jurisdiction over the RWE transaction. Regulatory
approval has not been requested in Connecticut, Massachusetts and New
Hampshire since these operations have been sold. As of April 1, 2002 theThe Company is still awaiting
approval in tennine states. Those states are Arizona, California, Illinois, Kentucky,
Maryland, New Jersey, New Mexico, New York, Pennsylvania and West
Virginia. In Arizona hearings will be conducted in August and a final
decision is anticipated during the early part of the fourth quarter of
2002. 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 hearings have been completed
and it is anticipated that a final decision will be issued by the end of
the year. In Maryland hearing dates have not been established. In New
Jersey hearings are scheduled to conclude during August and a final
decision is anticipated early in the fourth quarter. In New Mexico the
ALJ assigned to the case issued a decision that recommends approval of the
acquisition with conditions, and a final decision from the Commission on
the Judge's recommendation is anticipated during August. In New York the
labor union representing a portion of the Company's workforce has
recommended that the Commission approve the acquisition, with a final
decision from the Commission anticipated prior to the end of 2002. In
Pennsylvania the ALJ assigned to the case issued a decision that
recommends approval of the acquisition with conditions, and a final
decision from the Commission on the Judge's recommendation is anticipated
during August. In West Virginia an agreement has been reached among the
parties that recommends approval of the acquisition and identifies
conditions to be included in the order, and a final Commission decision
regarding the agreement is anticipated during August. 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. Although the Indiana Public Utility Commission does not have
statutory jurisdiction over the transaction, that Commission is conducting
a review of the transaction that is anticipated to be concluded during
September. The Company anticipates makingmade a Hart-Scott-Rodino filing with the Federal
Trade Commission in the second quarter of 2002. As2002 and the investigation
period expired without additional inquiry. The Company continues to
believe that the original projection for a result of theclosing to occur some time
required to complete the
approval process by the various regulatory agencies, the Company does not
anticipate completion of the merger untilduring the first halfsix months of 2003.2003 remains a reasonable expectation.
One condition of the agreement requires the Company to redeem its publicly
traded preferred stock prior to closing. That redemption was completed on
March 1, 2002.
Page 10 FORM 10-Q
During the first threesix months of 2002 the Company recorded a charge of $0.9$1.7
million, 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 legal fees because it is not probable that these
costs will be deductible for tax purposes.
On November 6, 2001 the Company and 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 interest rate of 4.92%. The
notes were purchased at par by RWE and mature on November 6, 2002.2006.
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-termshort-
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 $320 million in senior unsecured notes. The agreement calls
for up to $170 million in notes at an interest rate of 5.65% and $150
million in notes at a floating interest rate based on LIBOR rates plus 20
basis points. Closing occurred on $40 million of the 5.65% senior notes
on June 12, 2002 and the Company expects closing of the remaining $130
million of 5.65% notes to occur in the fourth quarter of 2002. The 5.65%
notes and floating rate notes are due on June 12, 2007 and June 26, 2003,
respectively. These notes will be primarily used to repay short-term debt.
NOTE 3 -- Acquisition ofOf Water andAnd Wastewater Assets ofOf Citizens
Communications Company
On January 15, 2002 the Company and its subsidiaries completed their
acquisition of all of the water and wastewater assets of Citizens
Communications Company (NYSE:CZN) for $859 million in cash and $120
million of assumed liabilities. TheA $.8 million increase to the purchase
price is subject to
adjustmenthas been agreed upon after the substantial completion of an audited
closing statement of net assets. The acquired operations provide water
and wastewater service to approximately 284,000almost 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 incompleting the processdetermination of making the determinations as to the amounts to be assigned
to intangible assets and goodwill,goodwill. At June 30, 2002, $80.6 million and
thus has not
finalized the allocation of the purchase price. At March 31, 2002, $137.9
million has been$59.6 were recorded as goodwill on a preliminary basisand intangibles, respectively, in
connection with this transaction. A value of $54.3 million was assigned
to intangible assets with an indefinite life, and $5.3 million of value
was assigned to intangible assets with lives 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 resulted 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
Page 11 FORM 10-Q
that might have occurred had the acquisition actually taken place on the
date indicated, or of future results of operations of the combined
entities:
QuarterThree months ended March 31,June 30, 2002 2001
Revenues $389,564 $340,300$424,014 $394,056
Net income 66,672 46,450
Earnings per average common share outstanding
Basic $.67 $.47
Diluted $.66 $.47
Six months ended June 30, 2002 2001
Revenues $813,578 $734,276
Income before cumulative effect of change
in accounting principle 13,767 18,82680,439 65,276
Net income 16,446 18,82683,118 65,276
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $.13 $.19$.80 $.66
Cumulative effect of change in accounting
principle $.03 $.03 -
Basic $.16 $.19.83 $.66
Income before cumulative effect of change
in accounting principle $.13 $.19$.80 $.66
Cumulative effect of change in accounting
principle $.03 $.03 -
Diluted $.16 $.19.83 .66
NOTE 4 -- Goodwill and Intangible Assets
Goodwill increased from $136.5 million at December 31, 2001 to $219.1
million at June 30, 2002, primarily due to goodwill associated with the
Citizens acquisition that was completed on January 15, 2002. At June 30,
2002 $103.3 million of the Company's goodwill was assigned to the
regulated utility services segment and $115.8 million was assigned to the
unregulated services segment.
Intangible assets increased from $23.4 million at December 31, 2001 to
$81.9 million at June 30, 2002, reflecting $59.6 million of intangible
assets acquired in the Citizens transaction. At June 30, 2002 $59.5
million of the intangible assets were in the regulated utility services
segment and $22.4 million were in the unregulated services segment.
Intangible assets with finite lives at June 30, 2002 consisted of $5.3
million ($5.2 million net) in the regulated utility services segment with
lives from 15 to 21 years and $23.4 million ($22.4 million net) in the
unregulated services segment with lives of 11 years.
NOTE 5 -- 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 $10.8 million non-cash loss, $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 6 -- 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 initial 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 had revenues of $51 million in 2001. A finance subsidiary
of the Company, which owns and leases certain assets to its affiliated
operating company in Massachusetts, was also acquired by Aquarion as part
of the transaction.
NOTE 7 -- 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
net gains during the second quarter of 2002. These sales resulted in
proceeds of approximately $16 million.
NOTE 8 -- Earnings Per Share
The average number of shares used to calculate diluted earnings per share
includes 13,520 of potential common shares issuable in connection with the
long-term incentive program for the three-month period ended June 30, 2001
and 259,534 and 145,483 potential common shares for employee stock options
for the three-month periods ended June 30, 2002 and 2001, respectively.
The average number of shares used to calculate diluted earnings per share
includes 8,128 of potential common shares issuable in connection with the
long-term incentive program for the six-month period ended June 30, 2001
and 287,490 and 119,110 potential common shares for employee stock options
for the six-month periods ended June 30, 2002 and 2001, respectively.
NOTE 9 -- Segment Information
The following table presents information about the Company's reportable
segments.
Regulated
Utility
Services
Unregulated
Services
Other
Items
Consolidated
Three months ended
March 31, 2002
Revenues from external
customers
$338,361
$46,379
$ -
$384,740
Intersegment revenues
1,558
(1,558)
- -
Income before
cumulative effect
of change in
accounting principle
25,350
(2,060)
(8,077)
15,213
Net income
28,029
(2,060)
(8,077)
17,892
Total assets
7,346,079
318,454
(21,450)
7,643,083
Three months ended
March 31, 2001
Revenues from external
customers
$306,142
$10,285
$ -
$316,427
Intersegment revenues
1,350
(1,350)
- -
Income before
cumulative effect
of change in
accounting principle
30,220
(741)
(6,018)
23,461
Net income
30,220
(741)
(6,018)
23,461
Total assets
6,084,757
98,687
6,494
6,189,938
Page 12 FORM 10-Q
Regulated
Utility
Services
Unregulated
Services
Other
Items
Consolidated
Three months ended June 30, 2002
Revenues from external
customers
$370,085
$ 53,929
$ -
$ 424,014
Intersegment revenues
- -
2,098
(2,098)
-
Net income
48,530
1,508
16,627
66,665
Net income excluding unusual
items
42,859
(2,676)
(8,529)
31,654
Three months ended June 30, 2001
Revenues from external
customers
$353,914
$ 9,964
$ -
$ 363,878
Intersegment revenues
- -
1,964
(1,964)
-
Net income
54,965
(624)
(4,960)
49,381
Net income excluding unusual
items
54,965
(624)
(7,014)
47,327
Six months ended June 30, 2002
Revenues from external
customers
$708,446
$100,308
$ -
$ 808,754
Intersegment revenues
- -
3,656
(3,656)
-
Income before cumulative
effect of change in
accounting principle
73,880
(552)
8,550
81,878
Net income
76,559
(552)
8,550
84,557
Net income excluding unusual
items
68,209
(4,736)
(15,659)
47,814
Total assets
7,204,634
330,450
(10,152)
7,524,932
Six months ended June 30, 2001
Revenues from external
customers
$660,056
$ 20,249
-
$ 680,305
Intersegment revenues
- -
3,314
(3,314)
-
Income before cumulative
effect of change in
accounting principle
85,185
(1,365)
(10,978)
72,842
Net income
85,185
(1,365)
(10,978)
72,842
Net income excluding unusual
items
85,185
(1,365)
(13,032)
70,788
Total assets
6,176,579
101,193
11,806
6,289,578
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 $13,983 and
$22,770 for the three and six months ended June 30, 2002, respectively. Total
assets are from U.S. operations except Unregulated Services Canadian assets of
$63,603 at June 30, 2002. Unusual items include merger expenses, a gain on the
sale of operating systems, gains from the sale of other investments, a loss on
the write down of other investments, and gains on the sale of land.
NOTE 510 -- New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
collectively referred to as the "Standards." SFAS 141 supersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
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.
TheDuring the second quarter of 2002 the Company is incompleted 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.units as of January 1, 2002. The
reporting units were 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 is assigned to
various regulated subsidiaries and $115.8 million is assigned to American
Water Services. Intangible assets with an assigned value of $23.4 million
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 business. 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 its existingthe 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 at
January 1, 2002 were not being amortized because they are related to
business combinations completed after the July 1, 2001 effective date of
SFAS 142 requires141 or the goodwill was related to acquisitions that goodwill be tested annually for impairment using a
two-step process.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 first step is to identify a potential impairment
and, in transition, this step must be measuredfollowing table
reflects consolidated results adjusted as though the adoption of the
Standards occurred as of the beginning of the fiscal year. However, a company has sixthree and six-month periods
ended June 30, 2001:
2002
2001
Three months from the dateended June 30
Reported net income
$66,665
$49,381
Add back goodwill amortization
-
269
Adjusted net income
$66,665
$49,650
Basic earnings per share:
Reported net income
$.67
$.50
Goodwill amortization
-
-
Adjusted net income
$.67
$.50
Diluted earnings per share:
Reported net income
$.66
$.50
Goodwill amortization
-
-
Adjusted net income
$.66
$.50
Six months ended June 30
Reported income before cumulative
effect of adoption
to complete the first step. The Company expects to complete that first
stepchange in
accounting principle
$81,878
$72,842
Add back goodwill amortization
-
539
Adjusted income before cumulative
effect of thechange in accounting
principle
$81,878
$73,381
Reported net income
$84,557
$72,842
Add back goodwill impairment test during the second quarteramortization
-
539
Adjusted net income
$84,557
$73,381
Basic earnings per share:
Income before cumulative effect
of 2002.
The second stepchange in accounting
principle
$.81
$.73
Cumulative effect of the goodwill impairment test measures the amountchange in
accounting principle
.03
-
As reported
.84
.73
Goodwill amortization
-
.01
Adjusted
$.84
$.74
Diluted earnings per share:
Income before cumulative effect of
the
impairment loss (measured aschange in accounting principle
$.81
$.73
Cumulative effect of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will
Page 13 FORM 10-Q
have on the Company's earnings and financial position.change in
accounting principle
.03
-
As reported
.84
.73
Goodwill amortization
-
.01
Adjusted
$.84
$.74
In June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
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 of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company does not expect that the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
NOTE 6 -- Subsequent Events
SALE OF INVESTMENT IN ITC HOLDING COMPANY
On April 2,In June of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 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 tendered approximately 2.2 million sharesis currently evaluating
the effects that adoption of the 3.5 million sharesprovisions of ITC Holding Company's common stock it acquired
as partSFAS 146 will have on its
results of the acquisition of National Enterprises Inc. The sale, which
was carried out through ITC Holding Company's repurchase program, resulted
in proceeds of $26.2 million, including a $13 million after-tax gain which
willoperations and financial position but does not expect them to
be reflected in second quarter 2002 results.
DIVESTITURE OF NEW ENGLAND OPERATIONS
Kelda Group plc and the Company jointly announced on August 30, 2001 that
they had reached an agreement whereby Kelda's Aquarion Company would
acquire the Company's New England operations. On April 25, 2002 the
Company completed the divestiture and received its initial cash payment of
Page 14 FORM 10-Q
$120.5 million subject to the terms and conditions of the agreement. The
contract calls for certain true-ups with the expected after-tax gain to
amount to approximately $20 million.
The utility operations acquired by Aquarion serve a total of 65,000
customers and had revenues of $51 million in 2001. A finance subsidiary
of the Company, which owns and leases certain assets to its affiliated
operating company in Massachusetts, was also acquired by Aquarion as part
of the transaction.
Page 15 FORM 10-Qmaterial.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ----------------------------------------------------------------------
Results of Operations
- ---------------------
The operating results of the Azurix North American Corp. and Azurix
Industrials Corp. (Azurix), and the water and wastewater assets of
Citizens Communications Company (Citizens) acquisitions have been included
in the consolidated statements of income and comprehensive income since
the completion of the acquisitions on November 7, 2001 and January 15,
2002, respectively.
Consolidated revenues of $384.7 million for the second quarter and first six months of 2002
were 22% higher than those recorded infor the first quartersame periods of 2001. More than half of this
overall revenue growth came about as a result2001 by 17% and 19%,
respectively. These increases reflect the additional revenues from the
Company's Azurix and Citizens acquisitions, that were partially offset by
the sale of the acquisitionNew England subsidiaries on April 25, 2002.
Approximately $44 million and $80 million of Azurix's North American water and wastewater related operations. Another
significant portion of this increase in revenues came from a 13%the overall revenue increase
in the numbersecond quarter and first six months in 2002 occurred in the
unregulated services segment, reflecting the November 2001 acquisition of
customers receiving water and wastewater servicesAzurix. The portion of the Company's overall revenue from regulated subsidiariesits unregulated
businesses grew from 3% during the firstsecond quarter of 2001 to 13% during
the firstsecond quarter of 2002.
This additionRegulated business revenues increased by 5% and 7% for the second quarter
and first six months of 334,000 new customers increases2002 compared to the customer
basesame periods in 2001. The
primary reason for the increase in revenue generated by the regulated
businesses during the second quarter of the Company's regulated operations to almost three million
customers.
The six state acquisition of the water and wastewater assets from Citizens
accounted for 284,000 of the 334,000 new customers. Customer growth2002 was
also realized by the addition of more than 23,000 new customers$32
million in Missourirevenue from tuck-in acquisitions around St. Louis. Smaller acquisitions
and organic growththe Citizens acquisition. The Citizens acquisition
added revenues of existing distribution systems accounted for$53 million during the remaining 27,000 additional customers.
Revenue from rate increases accounted forfirst six months of 2002.
During the remainderfirst six months of the revenue
growth. During 2002, four utility subsidiaries have received
rate orders that are expected to provide $26.3 million in additional
annual revenues. The most notablelargest of these rate increases was a $24 million
annual rate increase authorization in Pennsylvania that became effective
in January of 2002. TwoThree of the Company's subsidiaries have rate
increase applications on file requesting additional annual revenues of
$13.6$19.6 million. The $12.7 million request by the Company's Indiana
subsidiary accounts for the major portion of the pending requests.
The addition of almost 300,000 customers from the Citizens acquisition
resulted in increases of 6% and 5% in total water sales in the second
quarter and six months over the same periods in 2001. Even though
revenues and sales increased between the second quarter and first quartersix
months of 2001 and the first quarter ofsame periods in 2002, per customer water sales,
excluding the Citizens acquisition, were five percent less quarter over quarter. This decrease
isthan prior year amounts.
These decreases are mainly a result of lowerweather patterns and the economy.
Mandated restrictions on water salesuse due to drought conditions in New Jersey
and Pennsylvania, and unusually high rainfall in the Midwest and
Southeast, were the primary causes for water use reductions for
residential and small business customers.
In addition, industrial customers. Thewater use continued on a decline that began in
waterlate 2001. Industrial sales to industrial customers that impacted financial
results for the year 2001 persisted into thesecond quarter and first quarter of 2002. Water
sales of ninesix months
were down 8% and 9%, or 900 million gallons and 1.8 billion gallons,
forcompared to the first quartersame periods in 2001. Present economic conditions
continue to put pressure on these large customers, forcing curtailments or
closing of 2002 to this group
of customers was about one billion gallons, or about 10 percent less than
water sales to this same group of customers during the first quarter of
2001. These sales losses were most notableoperations.
Operating expenses in the Midwestern and
Pennsylvania operations.
Page 16 FORM 10-Q
Comparison of water sales information for the firstsecond quarter of 2002 and the first quartersix months of 2001 showed a slight decline2002
were 33% and 32% higher than the same periods in water sales in
Pennsylvania and New Jersey, where state mandated water use restrictions
are in place. However, if drought conditions persist along the east cost2001. The inclusion of
the U.S. water use restrictions will have a noticeable impact on
earnings. Water sales are typically greater during June, July and August
than in any other months of the year.
Revenues fromoperating expenses related to the Azurix and Citizens operations
are anticipated to be
greater induring the latersecond quarter and first six months of 2002 than theysignificantly
increased total expenses as these acquisitions were not part of the
company's consolidated financial information during the first
quarter of 2002. Portionssame periods last
year. Approximately $60 million of the Azurix operations, such as its residual
waste removal business, complete their work during the summer months when
warmer weather facilitates the$62 million increase in operation of that business. Citizens
operations have historically experienced increased water sales during the
summer months, and that pattern is expected to be repeated during 2002.
Of the 284,000 customers associated with the Citizens acquisition, only
37,000 of those are located in Pennsylvania where water use restrictions
are currently in place.
Operation
and maintenance expenses (O&M) increased 39% from thoseand $73 million of the $78 million increase
in total operating expenses experienced by the firstCompany during the second
quarter of 2002 over the second quarter of 2001 primarilyresulted from the addition
of expenses from Azurix and Citizens.
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 resultCompany continues to transition
systems and locations.
On a per customer basis, regulated operations experienced a 2% increase in
O&M expenses in the second quarter of including2002 compared to the expensessecond quarter
of 2001, reflecting the beginning of the Azurix andrealization of the synergies with
the Citizens operations. Exclusiveacquisition. Per customer O&M expenses for the six months
ended June 30, 2002 had increased by 4% over the first six months in 2001.
During the remainder of those acquisitions,the year the Company anticipates O&M per customer
O&M of the regulated operations increased 8%. Increased
productionexpense savings will continue to materialize as projects to consolidate
certain business functions are completed. However, it should be noted that
expenses will be negatively impacted by anticipated increases in pension
and insurance costs especially increased purchased water costs associated
with the drought on the east coast and increased sales in California, were
significant factors in this increase.reflecting external market dynamics.
The increaseincreases in depreciation expense was primarilyfor the second quarter and first six
months were related to the company'sCompany's ongoing program of utility plant
construction.
Interest expense rose by $8.8$8.5 million or 18%, to $57.4in the second quarter and $17.3
million in the first quartersix months of 2002.2002 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 decreasedincreased in the second quarter and first threesix months of 2002
when compared to the second quarter and first threesix months in 2001
asreflecting increased earnings due to the sale of operating systems,
investments and land. The Company's effective income tax rate for the six
months ended June 30 increased to 48.4% in 2002 from 39.5% in 2001,
reflecting the relatively low tax basis in the stock of the New England
subsidiaries that was sold in 2002 and $1.7 million of expenses incurred
in 2002 in connection with the pending merger with RWE Aktiengesellschaft
for which it is not probable that the Company will receive a result of decreased earnings.tax
deduction.
Net income to common stock was $17.7$66.7 million for the firstsecond quarter of
2002 compared with $23.3$49.2 million for the same period in 2001. Net income
to common stock for the first six months of 2002 was $84.4 million
compared with $72.6 million for the same period in 2001.
Other comprehensive income, net of tax, was $1 million in the second
quarter of 2002 compared to a $4.5 million loss in the same period in
2001. Other comprehensive loss, net of tax, was $2.2$1.2 million and $6.5
million in the first quartersix months of 2002 compared to $2 million in the same period in 2001.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 was $15.5increased to $67.7 million and $83.2 million in the
second quarter and first six months of 2002, respectively, compared to
comprehensive income of $44.7 million and $66.0 million in the same
periods in 2001.
Diluted earnings per share of common stock in the second quarter of 2002
were $.66 compared to $21.3 million$.50 in the same period in 2001. EarningsThese 2002 results
include a 19-cent per share positive impact associated with the sale of
the Company's New England operations, a 14-cent positive impact from the
sale of other investments in ITC Holding Company stock, a seven-cent
negative impact from the permanent write-down of other investments that
were part of non-water investments included in the Company's 1999
acquisition of National Enterprises Inc. (NEI), a ten-cent positive impact
resulting from sales of land and expenses of one-cent per share related to
the RWE merger. Diluted earnings per share of common stock in the first
six months of 2002 were $.18$.84 compared to $.24$.73 in the same period in 2001.
These 2002 results include a three-cent per share positive impact of
adopting the new financial accounting standards relating to business
combinations, as well as a six-cent19-cent per share negativepositive impact associated with recentthe sale
of the Company's New England operations, a 14-cent positive impact from
the sale of other investments in ITC Holding Company stock, a seven-cent
negative impact from the permanent write-down of other investments that
were part of non-water investments included in the Company's 1999
acquisition activityof NEI, a ten-cent positive impact resulting from sales of
land and expenses of one-centtwo-cents per share related to the RWE transaction.
Page 17 FORM 10-Qmerger.
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 theits 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 of 5.65% and $150 million in notes
at a floating interest rate based on LIBOR rates plus 20 basis points.
Closing occurred on $40 million of the 5.65% senior notes on June 12, 2002
and the Company expects closing of the remaining $130 million of 5.65%
notes to occur in the fourth quarter of 2002. The 5.65% notes and
floating rate notes are due on June 12, 2007 and June 26, 2003,
respectively. These notes will be primarily used to repay 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 foursix months of 2002.
In the first foursix months of 2002, the Company invested $13.5$19.5 million in the
common stock of twothree 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
theits 3.5 million shares of ITC Holding Company'sCompany (ITC) common stock it acquiredstock. 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 which
was carried out through ITC Holding Company's repurchase program, resulted in proceeds of $26.2 million, includingand a $13$14
million after-tax gain which will bewas reflected in second quarter 2002 results.
This cash gain was offset by a $10.8 million non-cash loss, $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.
The value of the Company's pension plan assets decreased to $339.3 million
at June 30, 2002 from $365.9 million at December 31, 2001, reflecting
negative equity returns. Negative investment returns will increase the
Company's pension expense and plan contributions in the future.
New Accounting Standards
- ------------------------
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
collectively referred to as the "Standards." SFAS 141 supersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
Page 18 FORM 10-Q
limitation on the amortization period of intangible assets that have
finite lives. The Company adopted the provisions of the Standards on
January 1, 2002.
The Standards require the excess of the fair values of acquired net assets
over cost recorded in the statement of financial position to be recognized
as the effect of a change in accounting principle as of the date SFAS 141
is initially applied in its entirety. In compliance with this transition
requirement the Company recognized a $2.7 million gain on January 1, 2002.
TheDuring the second quarter of 2002 the Company is incompleted 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.units as of January 1, 2002. The
reporting units were 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 is assigned to
various regulated subsidiaries and $115.8 million is assigned to American
Water Services. Intangible assets with an assigned value of $23.4 million
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 business. 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 it was 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 its existingthe 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 at
January 1, 2002 were not being amortized because they are related to
business combinations completed after the July 1, 2001 effective date of
SFAS 142 requires141 or the goodwill was related to acquisitions that goodwill be tested annually for impairment using a
two-step process.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 first step is to identify a potential impairment
and, in transition, this step must be measuredfollowing table
reflects consolidated results adjusted as though the adoption of the
Standards occurred as of the beginning of the fiscal year. However, a company has sixthree and six-month periods
ended June 30, 2001:
2002
2001
Three months from the dateended June 30
Reported net income
$66,665
$49,381
Add back goodwill amortization
-
269
Adjusted net income
$66,665
$49,650
Basic earnings per share:
Reported net income
$.67
$.50
Goodwill amortization
-
-
Adjusted net income
$.67
$.50
Diluted earnings per share:
Reported net income
$.66
$.50
Goodwill amortization
-
-
Adjusted net income
$.66
$.50
Six months ended June 30
Reported income before cumulative
effect of adoption
to complete the first step. The Company expects to complete that first
stepchange in
accounting principle
$81,878
$72,842
Add back goodwill amortization
-
539
Adjusted income before cumulative
effect of thechange in accounting
principle
$81,878
$73,381
Reported net income
$84,557
$72,842
Add back goodwill impairment test during the second quarteramortization
-
539
Adjusted net income
$84,557
$73,381
Basic earnings per share:
Income before cumulative effect
of 2002.
The second stepchange in accounting
principle
$.81
$.73
Cumulative effect of the goodwill impairment test measures the amountchange in
accounting principle
.03
-
As reported
.84
.73
Goodwill amortization
-
.01
Adjusted net income
$.84
$.74
Diluted earnings per share:
Income before cumulative effect
of the
impairment loss (measured aschange in accounting
principle
$.81
$.73
Cumulative effect of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will
have on the Company's earnings and financial position.change in
accounting principle
.03
-
As reported
$.84
$.73
Goodwill amortization
-
.01
Adjusted
$.84
$.74
In June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
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 of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
Page 19 FORM 10-Q
January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company does not expect that the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
In June of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 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, inability to obtain, or to meet conditions imposed for,
regulatory approval of pending 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 20 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.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
(a) The Company held its annual meeting of shareholders on May 1,2, 2002.
(b) Class I Directors (with a term expiring in 2005) were elected by
a vote of:
For Withheld
--- --------
J. James Barr 90,256,263 562,361
Elizabeth H. Gemmill 90,259,959 558,665
Nancy Ware Wainwright 90,229,487 589,137
Paul W. Ware 90,244,309 574,315
William S. White 90,338,173 538,316
The appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the year ending December 31, 2002 was approved by a vote
of 89,055,798 for the appointment and 1,503,888 against, with 258,938
abstentions.
Page 21 FORM 10-Q
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
NoneExhibit Number Description
-------------- -----------
10 Material Contracts
(a) Note Purchase Agreement dated June 12, 2002
between American Water Capital Corp. and RWE
Aktiengesellschaft for up to $320 Million Senior
Unsecured Notes and related Note and Registration
Rights Agreement.
99 Additional Exhibits
Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and
(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 January 15,May 9, 2002 by the Company
regarding the completion of the acquisition of Citizens Communications'
wateran employee communication relating to its proposed merger with
and wastewater assets.
A current report on Form 8-K was filed on January 17, 2002 by the Company
regarding the stockholders approval of the September 16, 2001 agreement
and plan of merger pursuant to which the company will merge withinto a subsidiary of RWE/AG.
A current report on Form 8-K was filed on February 8,June 20, 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 March 28, 2002 by the Company
regarding an employee communication relating to its proposed merger with a
subsidiary of RWE/AG.
Page 22 FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN WATER WORKS COMPANY, INC.
(Registrant)
Date May 15,August 14, 2002 \s\ Ellen C. Wolf
- ---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date May 15,August 14, 2002 \s\ Robert D. Sievers
- ---------------------- ---------------------------------------
Comptroller
(Chief Accounting Officer)