CONFORMED COPY
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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 JuneSeptember 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
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(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 AugustNovember 1, 2002, the number of shares of common stock, $1.25 par value,
outstanding was 100,061,238100,070,453 shares.
PART I FINANCIAL INFORMATION
----------------------------
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
JuneSeptember 30,
2002 2001
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $424,014 $363,878$483,457 $394,956
-------- --------
Operating expenses
Operation and maintenance 222,299 160,476242,955 166,890
Depreciation and amortization 58,233 45,06957,032 46,819
General taxes 35,474 32,46535,363 33,049
-------- --------
Total operating expenses 316,006 238,010335,350 246,758
-------- --------
Operating income 108,008 125,868148,107 148,198
-------- --------
Other income (deductions)
Interest (57,011) (48,544)(55,976) (47,512)
Allowance for other funds used during
construction 1,911 1,1852,377 1,098
Allowance for borrowed funds used
during construction 1,144 1,0881,342 968
Amortization of debt expense (718) (710)(728) (694)
Preferred dividends of subsidiaries (695) (742)(655) (750)
Merger expenses (786) -(1,647) (9,860)
Gain from sale of operating systems 50,709 - 4,820
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 -1,810
Other, net 951 (301)796 (329)
-------- --------
Total other income (deductions) 23,058 (44,657)(54,491) (50,449)
-------- --------
Income before income taxes 131,066 81,21193,616 97,749
Provision for income taxes 64,401 31,83038,428 41,972
-------- --------
Net income 66,665 49,38155,188 55,777
Dividends on preferred stocks - 146
-------- --------
Net income to common stock 66,665 49,23555,188 55,631
-------- --------
Three Months Ended
JuneSeptember 30,
2002 2001
---------- ----------
Other comprehensive income (loss), net of tax
Unrealized lossgain (loss) on securities (5,536) (2,463)866 (12,181)
Reclassification adjustment for gain
(loss)
included in net income 5,837 (2,052)- (1,104)
Foreign currency translation adjustment 699(1,242) -
---------- ----------
Other comprehensive income (loss), net of tax 1,000 (4,515)(376) (13,285)
---------- ----------
Comprehensive income $ 67,66554,812 $ 44,72042,346
========== ==========
Average shares of basic common stock outstanding 100,034 99,256100,062 99,723
Earnings per average common share outstanding
Basic $ .67.55 $ .50.56
========== ==========
Diluted $ .66.55 $ .50.56
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at AprilJuly 1 $1,130,988 $1,069,927$1,173,145 $1,096,271
Add - net income 66,665 49,38155,188 55,777
Preferred stock redemption premium (37) -
Gain on treasury stock - 40657
---------- ----------
1,197,653 1,119,7141,228,296 1,152,105
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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 23,29724,512 23,409
---------- ----------
24,508 23,44324,512 23,555
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Balance at JuneSeptember 30 $1,173,145 $1,096,271$1,203,784 $1,128,550
========== ==========
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)
SixNine Months Ended
JuneSeptember 30,
2002 2001
-------- ------------------ ----------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $808,754 $680,305
-------- --------$1,292,211 $1,075,261
---------- ----------
Operating expenses
Operation and maintenance 431,551 311,299674,506 478,189
Depreciation and amortization 113,260 89,429170,292 136,248
General taxes 70,232 65,776
--------105,595 98,825
---------- --------
Total operating expenses 615,043 466,504
--------950,393 713,262
---------- --------
Operating income 193,711 213,801
--------341,818 361,999
---------- --------
Other income(deductions)
Interest (114,423) (97,141)(170,399) (144,653)
Allowance for other funds used during
construction 3,531 2,2665,908 3,364
Allowance for borrowed funds used
during construction 2,170 2,0673,512 3,035
Amortization of debt expense (1,391) (1,388)(2,119) (2,082)
Preferred dividends of subsidiaries (1,408) (1,525)(2,063) (2,275)
Merger expenses (1,733) -(3,380) (9,860)
Gain from sale of operating systems 50,709 -4,820
Gain on sale of other investments 22,466 3,367
Loss on write down of other investments (10,764) -11,702 5,177
Gain on sale of land 15,851 -
Other, net 17 (972)
--------813 (1,301)
---------- --------
Total other income (deductions) (34,975) (93,326)
--------(89,466) (143,775)
---------- --------
Income before income taxes 158,736 120,475252,352 218,224
Provision for income taxes 76,858 47,633
--------115,286 89,605
---------- --------
Income before cumulative effect of change in
accounting principle 81,878 72,842137,066 128,619
Cumulative effect of change in accounting principle 2,679 -
------------------ --------
Net income 84,557 72,842139,745 128,619
Dividends on preferred stocks 146 292
--------438
---------- --------
Net income to common stock 84,411 72,550139,599 128,181
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--------
SixNine Months Ended
JuneSeptember 30,
2002 2001
---------- ----------
Other comprehensive income (loss), net of tax
Unrealized loss on securities (8,462) (4,457)(7,596) (16,636)
Reclassification adjustment for gain (loss)(gain) loss
included in net income 5,837 (2,052)(3,158)
Foreign currency translation adjustment 1,407165 -
---------- ----------
Other comprehensive income (loss), net of tax (1,218) (6,509)(1,594) (19,794)
---------- ----------
Comprehensive income $ 83,193138,005 $ 66,041108,387
========== ==========
Average shares of basic common stock outstanding 100,031 99,066100,041 99,287
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $ .811.37 $ .731.29
Cumulative effect of change in accounting
principle .03 -
---------- ----------
Basic $ .841.40 $ .731.29
========== ==========
Income before cumulative effect of change in
accounting principle $ .811.36 $ .731.29
Cumulative effect of change in accounting
principle .03 -
---------- ----------
Diluted $ .841 .39 $ .731.29
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,137,772 $1,069,486
Add - net income 84,557 72,842139,745 128,619
Preferred stock redemption premium (25)(62) -
Gain on treasury stock - 744801
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1,222,304 1,143,0721,277,455 1,198,906
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Deduct - dividends paid
Preferred stock 32 6496
Preference stock 114 228342
Common stock - $.49$.735 per share in 2002;
$.47$.705 per share in 2001 49,013 46,50973,525 69,918
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49,159 46,80173,671 70,356
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Balance at JuneSeptember 30 $1,173,145 $1,096,271$1,203,784 $1,128,550
========== ==========
The accompanying notes are an integral part of these financial statements.
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Balance Sheet (Unaudited)
(In thousands)
JuneSeptember 30, December 31,
2002 2001
------------ -----------
ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 6,018,3696,076,022 $ 5,458,909
Utility plant acquisition adjustments, net 214,568211,306 68,916
Non-utility property, net of accumulated
depreciation 98,29799,480 94,149
----------- -----------
Total property, plant and equipment 6,331,2346,386,808 5,621,974
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Current assets
Cash and cash equivalents 24,47940,031 19,691
CustomerUtility customer accounts receivable 178,567 153,142139,618 105,101
Allowance for uncollectible accounts (8,898) (7,660)(4,320) (2,860)
Unbilled revenues 101,38094,602 86,065
MiscellaneousOther receivables, 20,590 16,483net 69,909 59,724
Materials and supplies 33,50533,610 32,281
Deferred vacation pay 13,28112,503 11,422
Other 27,58323,301 19,164
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Total current assets 390,487409,254 330,588
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 212,775213,377 217,330
Other investments 23,92722,394 39,956
Debt and preferred stock expense 47,88247,332 45,882
Deferred pension expense 36,47238,085 30,712
Deferred postretirement benefit expense 8,8848,650 9,318
Deferred security costs 16,40026,259 7,058
Deferred business services project expenses 40,74242,513 36,311
Deferred insurance expense 9,3358,102 4,998
Deferred tank painting costs 14,31213,468 16,585
Restricted funds - 8,570
Goodwill 219,133238,883 136,488
Intangible assets 81,86672,295 23,400
Other 91,48387,152 77,929
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Total regulatory and other long-term assets 803,211818,510 654,537
----------- -----------
TOTAL ASSETS $ 7,524,9327,614,572 $ 6,607,099
=========== ===========
JuneSeptember 30, December 31,
2002 2001
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,792,4121,823,278 $ 1,758,018
Preferred stocks without mandatory
redemption requirements - 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 28,62028,254 30,474
Preferred stocks of subsidiaries without
mandatory redemption requirements 6,7085,708 7,268
Long-term debt
American Water Works Company, Inc. 216,000169,000 297,000
Subsidiaries 3,164,3213,298,763 2,253,019
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Total capitalization 5,208,0615,325,003 4,357,452
----------- -----------
Current liabilities
Short-term debt 290,162196,965 414,083
Current portion of long-term debt 244,158285,502 166,087
Accounts payable 61,30348,567 67,996
Taxes accrued, including federal income 90,06561,316 21,756
Interest accrued 59,08886,720 43,015
Accrued vacation pay 13,46812,731 11,577
Other 110,292109,232 100,220
----------- -----------
Total current liabilities 868,536801,033 824,734
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Regulatory and other long-term liabilities
Advances for construction 255,901265,335 230,801
Deferred income taxes 611,645629,997 624,449
Deferred investment tax credits 36,31135,938 38,633
Accrued pension expense 70,87273,200 62,355
Accrued postretirement benefit expense 13,96414,272 13,808
Accrued insurance expense 10,90711,526 5,020
Other 39,57240,722 35,987
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Total regulatory and other long-term
liabilities 1,039,1721,070,990 1,011,053
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Contributions in aid of construction 409,163417,546 413,860
----------- -----------
Commitments and contingencies -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 7,524,9327,614,572 $ 6,607,099
=========== ===========
The accompanying notes are an integral part of these financial statements.
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
SixNine Months Ended
JuneSeptember 30,
2002 2001
-------- ------------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 84,557139,745 $ 72,842128,619
Adjustments
Depreciation and amortization 113,260 89,429170,292 136,248
Cumulative effect of change in accounting
principlePrinciple (2,679) -
Gain from sale of operating systems (50,709) -(4,820)
Gain on sale of other investments (22,466) (3,367)(5,177)
Loss on write down of other investments 10,764 -
Gain on sale of land (15,851) -
Provision for deferred income taxes 11,169 6,25531,553 10,148
Provision for losses on accounts receivable 6,231 4,55510,689 7,266
Allowance for other funds used during
construction (3,531) (2,266)(5,908) (3,364)
Employee benefit expenses greater (less)
than funding 1,966 (280)4,090 525
Employee stock plan expenses 2,087 2,1923,351 3,745
Deferred regulatory costs (15,869) (22,678)(28,043) (32,042)
Amortization of deferred charges 10,405 7,34416,020 12,332
Other, net (3,279) (2,243)(5,727) (2,683)
Changes in assets and liabilities, net
of effects from acquisitions
Accounts receivable (26,217) (12,889)(45,623) (34,576)
Unbilled revenues (15,775) (15,337)(8,997) (10,290)
Other current assets (11,416) (2,935)(7,239) (3,391)
Accounts payable (9,609) (14,712)(22,345) (6,103)
Taxes accrued, including federal income 66,544 27,43337,795 60,442
Interest accrued 17,607 (134)45,239 6,512
Other current liabilities 10,365 (8,437)
-------- --------9,305 (1,107)
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Net cash from operating activities 157,554 124,772
-------- --------263,256 262,284
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CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (198,025) (153,488)(294,678) (251,225)
Allowance for other funds used during
construction 3,531 2,2665,908 3,364
Acquisitions (883,064) (54,173)(898,047) (55,859)
Proceeds from the sale of assets 164,612 4,950164,684 19,359
Removal costs from property, plant and
equipment retirements (2,414) (5,090)(5,002) (9,633)
Restricted funds 8,570 (247)
-------- ------------------ ----------
Net cash used in investing activities (906,790) (205,782)
-------- --------
Six(1,018,565) (294,241)
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Nine Months Ended
JuneSeptember 30,
2002 2001
----------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 984,365 146,7651,119,317 148,321
Proceeds from common stock 980 21,1091,583 34,736
Purchase of common stock for treasury (36) (386)(932)
Net borrowings (repayments) under
short-term debt agreements (116,318) 6,172(209,515) 35,377
Advances and contributions for construction,
net of refunds 16,147 12,93635,811 22,109
Debt issuance costs (6,767) (1,114)(6,782) (1,004)
Repayment of long-term debt (62,445) (66,530)(76,912) (119,304)
Redemption of preferred stocks (12,743) (1,940)(14,146) (2,204)
Dividends paid (49,159) (46,801)
--------(73,671) (70,356)
--------- --------
Net cash from financing activities 754,024 70,211
--------775,649 46,743
--------- --------
Net increase(decrease)increase in cash and cash equivalents 4,788 (10,799)20,340 14,786
Cash and cash equivalents at January 1 19,691 28,571
----------------- --------
Cash and cash equivalents at JuneSeptember 30 $ 24,47940,031 $ 17,772
========43,357
========= ========
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.
The accompanying notes are an integral part of these financial statements.
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)
JuneSeptember 30, December 31,
2002 2001
--------------------- ------------
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
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 - 100,062,186100,086,564 shares in 2002;
100,016,273 shares in 2001 $ 125,078125,108 $ 125,020
Paid-in capital 490,131490,704 489,868
Retained earnings 1,173,1451,203,784 1,137,772
Accumulated other comprehensive income 4,7404,364 5,958
Unearned compensation --- (539)
Treasury stock at cost - 16,111 shares in
2002; 1,891 shares in 2001 (682) (61)
---------- -----------
$1,792,412----------
$1,823,278 $1,758,018
========== ==========
At JuneSeptember 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 JuneSeptember 30,
2002.
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 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 no statutory
jurisdiction over the RWE transaction. The Company is still awaiting
approval in ninefive states. Those states are Arizona, California, Illinois,
Maryland, New Jersey and New Mexico, New York, Pennsylvania and West
Virginia.York. In Arizona hearings will be conducted in Augustthe briefing process has been
completed and the Commission is expected to reach a final
decision is anticipated duringby the earlylatter
part of the fourth quarter of
2002.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-day25-
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 itthe 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 that a final decision will be issued byprior to the endstatutory deadline
of the year. In Maryland hearing dates have not been established.November 21, 2002. In New Jersey hearings are scheduled to conclude during Augustbriefing will be completed by
November 18, 2002 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
acquisitionYork an accord has been reached with conditions, and a final decision from the Commission onStaff
that could be reviewed by the Judge's recommendation is anticipated during August. In New YorkCommission at its November 20, 2002 public
meeting. Settlement was earlier reached with the labor union representingthat
represents a portion of the Company's workforce has
recommendedand resulted in the
Union's recommendation 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.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 Public Utility Regulatory
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.transaction. The Company made a
Hart-Scott-Rodino filing with the Federal Trade 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 to redeem its publicly
traded preferred stock prior to closing. That redemption was completed on
March 1, 2002.
During the first sixnine months of 2002 and 2001 the Company recorded a chargecharges
of $1.7$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 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, 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 $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 notes at a floating interest rate based
on LIBOR rates plus 20 basis points.points maturing on June 26, 2003. Closing
occurred on $40 million of the 5.65% senior notes on June 12, 2002 and
the Company expects closing ofon the remaining $130 million of 5.65% notes took place on
September 30, 2002. AWCC intends to occurissue the floating rate notes 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 useduse the proceeds to repay other short-term debt.
NOTE 3 -- Acquisition Of Water And Wastewater Assets Of Citizens
Communications Company
On January 15, 2002 the Company and its subsidiaries completed their
acquisition of all of the water and wastewater assets of Citizens
Communications Company (NYSE:CZN) for $859 million in cash and $120
million of assumed liabilities. A $.8 million increase to the purchase
price has been agreed upon after the substantial completion of an audited
closing statement of net assets. The acquired operations provide water
and wastewater service to 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 completing the determination of the amounts to be assigned
to intangible assets and goodwill. At June 30, 2002, $80.6 million and
$59.6 were recorded as goodwill and 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
that might have occurred had the acquisition actually taken place on the
date indicated, or of future results of operations of the combined
entities:
Three months ended June 30, 2002 2001
Revenues $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 80,439 65,276
Net income 83,118 65,276
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $.80 $.66
Cumulative effect of change in accounting
principle .03 -
Basic .83 $.66
Income before cumulative effect of change
in accounting principle $.80 $.66
Cumulative effect of change in accounting
principle .03 -
Diluted .83 .66
NOTE 4 -- Business Combinations/Goodwill and Other 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 millionAdoption 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 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 10 -- 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.
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 wereare 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
iswas assigned to various regulated subsidiaries and $115.8 million iswas
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 business.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 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 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 six-monthnine-month periods
ended JuneSeptember 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 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. 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 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 completing the determination of the amounts 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 $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 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
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 JuneSeptember 30, Reported net2002 2001
Revenues $ 483,457 $ 429,769
Net income $66,665
$49,381
Add back goodwill amortization
-
269
Adjusted net income
$66,665
$49,65055,188 58,464
Earnings per average common share outstanding
Basic earnings per share:
Reported net income
$.67
$.50
Goodwill amortization
-
-
Adjusted net income
$.67
$.50$.55 $.58
Diluted earnings per share:
Reported net income
$.66
$.50
Goodwill amortization
-
-
Adjusted net income
$.66
$.50
Six$.55 $.58
Nine months ended JuneSeptember 30, Reported income before cumulative
effect of change in
accounting principle
$81,878
$72,842
Add back goodwill amortization
-
539
Adjusted income before cumulative
effect of change in accounting
principle
$81,878
$73,381
Reported net income
$84,557
$72,842
Add back goodwill amortization
-
539
Adjusted net income
$84,557
$73,381
Basic earnings per share:2002 2001
Revenues $1,297,035 $1,164,126
Income before cumulative effect of change
in accounting principle $.81
$.73135,628 123,740
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 -
As reported
.84
.73
Goodwill amortization
-
.01
Adjusted
$.84
$.74
Diluted earnings per share:Basic $1.38 $1.24
Income before cumulative effect of change
in accounting principle $.81
$.73$1.35 $1.24
Cumulative effect of change in accounting
principle .03 -
Diluted $1.38 $1.24
NOTE 5 -- Acquired Intangible Assets
As reported
.84
.73of 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
amortization($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
-
.01
Adjusted
$.84
$.742,679
Balance as of January 1, 2002
23,394
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 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 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 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 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 StandardStandards 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 forceForce (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.
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 for the secondthird quarter and first sixnine months of 2002
were higher than for the same periods ofin 2001 by 17%22% and 19%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 sale of the New England
subsidiaries on April 25, 2002.
Approximately $44$53 million and $80$133 million of the overall revenue increase
in the secondthird quarter and first sixnine 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 3%2% during the secondthird quarter of 2001 to 13% during the
secondthird quarter of 2002.
Regulated business revenues increased by 5%9% and 7%8% for the secondthird quarter
and first sixnine 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 secondthird quarter of 2002 was the addition of $32$38
million in revenue from the Citizens acquisition. The Citizens acquisition
added revenues of $53$94 million during the first sixnine months of 2002.
During the first six monthsAs of November 11, 2002, fourfive utility subsidiaries received rate orders in
2002 that are expected to provide $26.3$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 $19.6$52 million.
The $12.7$36 and $15 million requestrequests by the Company's Indiana
subsidiary accountsIllinois and California
subsidiaries account for the major portion of the pending requests.
TheIncluded 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 resulted in increases of 6% and 5% in total waterincreased 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 six
months of 2001 and the same periods in 2002, per customer water sales,
excluding the Citizens acquisition, were less than prior year amounts.
These decreases are mainly a result of weather patterns and the economy.
Mandated restrictions on water use 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, not withstanding the impact of drought restrictions, the sale
of New England operations with 65,000 customers and declining sales to
industrial customers.
In addition, industrialMost of the drought restrictions, which were 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 secondthird quarter and first sixnine months
were down 8%1% and 9%6%, or 900140 million gallons and 1.82 billion gallons,
compared to the same periods in 2001. PresentLingering weak economic conditions
continue to put pressure on these largeimpact water sales to industrial customers. The Company sees
no indication that in the near future water sales to industrial customers
forcing curtailmentswill strengthen or closing of operations.return to levels experienced in the past.
Operating expenses in the secondthird quarter and the first sixnine months of 2002
were 33%36% and 32%33% higher than the same periods in 2001. The inclusion of
the operating expenses related to the Azurix and Citizens operations
during the secondthird quarter and first sixnine months of 2002 significantly
increased total expenses as these acquisitions were not part of the
company'sCompany's consolidated financial information during the same periods last
year. Approximately $60 million of the $62 million increase in operation
and maintenance expenses (O&M) and $73 million of the $78 million increase
in total operating expenses experienced by the Company during the second
quarter of 2002 over the second quarter of 2001 resulted 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 Company continues to transition
systems and locations. On a per customer basis, regulated operations experienced a 2%The increase in O&Mthird 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 secondthird quarter of 2002 compared2002. The resumption
of funding was in part due to the second quarter
of 2001, reflecting the beginningrecent poor performance of the realizationfinancial
markets. Because pension expense in excess of amounts contributed to
plans is deferred by the synergies with
the Citizens acquisition. Per customer O&M expenses for the six months
ended June 30, 2002 hadregulated subsidiaries in states where rate
recovery is based on cash contributions, increased by 4% over the first six monthscontributions result in
2001.
During the remainder of the year the Company anticipates O&M per customer
expense 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 reflecting external market dynamics.increased operating expenses.
The increases in depreciation expense for the secondthird quarter and first sixnine
months were related to the Company's ongoing program of utility plant
construction.construction and the additional depreciation associated with the Azurix
and Citizens transactions.
Interest expense rose by $8.5$8 million in the secondthird quarter and $17.3$26 million
in the first sixnine 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 secondthird quarter and first sixnine months of 2002
when compared to the secondthird quarter and first sixnine 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
sixnine months ended JuneSeptember 30 increased to 48.4%45.7% in 2002 from 39.5%41.1% in
2001, reflecting the relatively low tax basis in the stock of the New
England subsidiaries that was sold in 2002 and $1.7$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 $66.7$55.2 million for the secondthird quarter of 2002
compared with $49.2$55.6 million for the same period in 2001. Net income to
common stock for the first sixnine months of 2002 was $84.4$139.6 million compared
with $72.6$128.2 million for the same period in 2001.
Other comprehensive income,loss, net of tax, was $1$0.4 million in the secondthird
quarter of 2002 compared to a $4.5$13.3 million loss in the same period in
2001. Other comprehensive loss, net of tax, was $1.2$1.6 million and $6.5$19.8
million in the first sixnine 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 $67.7$54.8 million and $83.2$138.0 million in the
secondthird quarter and first sixnine months of 2002, respectively, compared to
comprehensive income of $44.7$42.3 million and $66.0$108.4 million in the same
periods in 2001.
Diluted earnings per share of common stock in the secondthird quarter of 2002
were $.66$.55 compared to $.50$.56 in the same period in 2001. TheseThe 2002 results
include a 19-centincluded expenses amounting to two-cents per share positive impact associated withrelated 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 14-cent positive impactone-cent gain from the
sale of other investments in ITC Holding CompanyDeutsche Telekom 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-centten-
cents per share related to the RWE merger.
Diluted earnings per share of common stock in the first sixnine months of
2002 were $.84$1.39 compared to $.73$1.29 in the same period in 2001. TheseThe 2002
results include a three-cent per share positive impact of adopting the new
financial accounting standards relating to business combinations, a 19-cent19-
cent per share positive impact associated withgain from the sale of the Company's New England operations,
a 14-cent positive impactgain from the sale of other investments in ITC Holding Company
stock, a seven-cent negative impactloss 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 positive impact resultinggain from sales of land and
expenses of two-centsthree-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.points maturing on June 26, 2003. Closing occurred on
$40 million of the 5.65% senior notes on June 12, 2002
and the Company expects closing of the2002. The remaining
$130 million of 5.65% notes closed on September 30, 2002. AWCC intends to
occurissue the floating rate notes 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 useduse 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 sixnine months of 2002.
In the first sixnine 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, 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.
TheDuring 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 decreased to $339.3 millionwas zero for the balance of the year and the appropriate discount
rate at June 30, 2002 from $365.9 millionyear-end was 6.75%, the estimated accumulated benefit obligation
at December 31 2001, reflecting
negativewould 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 returns. Negative investment returnsat 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 increasebe
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 pension expensesubsidiaries, 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 plan contributionsVirginia-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 future.aggregate.
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.
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
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 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 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 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 six-month periods
ended June 30, 2001:
2002
2001
Three months ended 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 change in
accounting principle
$81,878
$72,842
Add back goodwill amortization
-
539
Adjusted income before cumulative
effect of change in accounting
principle
$81,878
$73,381
Reported net income
$84,557
$72,842
Add back goodwill amortization
-
539
Adjusted net income
$84,557
$73,381
Basic earnings per share:
Income before cumulative effect
of change in accounting
principle
$.81
$.73
Cumulative effect of change 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 change in accounting
principle
$.81
$.73
Cumulative effect of 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 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 StandardStandards 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 forceForce (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.
PART 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)Controls and Procedures
-------------------------------------------------------------------
The Company held its annual meeting of shareholders on May 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 asCompany's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's independent
accountants fordisclosure controls and procedures within 90 days
of the year ending December 31, 2002 was approved by a votefiling date of 89,055,798 forthis 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 appointment and 1,503,888 against, with 258,938
abstentions.date of that evaluation.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
Exhibit Number Description
-------------- -----------
10 Material Contracts
(a) Note Purchase Agreement 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 MayJuly 16, 2002 by the Company
regarding the expiration 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 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 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 Company
regarding each of the Principal Executive Officer and Principal Financial
Officer's submitted sworn statements to the SEC pursuant to Securities and
Exchange Commission Order No. 4-460.
A current report on Form 8-K was filed on September 9, 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 June 20,September 30, 2002 by the
Company regarding an employee communication relating to its proposed
merger with and into a subsidiary of RWE/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 AugustNovember 14, 2002 \s\ Ellen C. Wolf
- ---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date AugustNovember 14, 2002 \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
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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