FORM 10-Q Page 1 of 19
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
---------------------------------------------
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
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(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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
At August 1, 1999, the number of shares of common stock, $1.25 par value,
outstanding was 96,595,725 shares.
Page 2 FORM 10-Q
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
1999 1998
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $318,975 $301,156
-------- --------
Operating expenses
Operation and maintenance 139,714 132,973
Depreciation and amortization 37,195 34,165
General taxes 30,768 28,523
-------- --------
Total operating expenses 207,677 195,661
-------- --------
Operating income 111,298 105,495
-------- --------
Other income (deductions)
Interest (44,581) (42,591)
Allowance for other funds used during
construction 2,656 2,529
Allowance for borrowed funds used
during construction 2,706 1,451
Amortization of debt expense (716) (619)
Preferred dividends of subsidiaries (825) (873)
Merger related costs (13,836) --
Other, net (733) 150
------- -------
Total other income (deductions) (55,329) (39,953)
------- -------
Income before income taxes 55,969 65,542
Provision for income taxes 22,847 25,930
------- -------
Net income 33,122 39,612
Dividends on preferred stocks 996 996
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Net income to common stock 32,126 38,616
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Other comprehensive income
Unrealized gains on securities 34,368 12,475
Income taxes on other comprehensive income (13,194) (4,865)
------- -------
Comprehensive income $ 53,300 $ 46,226
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Page 3 FORM 10-Q
Three Months Ended
June 30,
1999 1998
-------- --------
Average shares of basic common stock outstanding 96,341 95,111
Basic and diluted earnings per common share on
average shares outstanding $ 0.33 $ 0.41
======== ========
CONSOLIDATED RETAINED EARNINGS
Balance at April 1 $946,058 $875,364
Add - net income 33,122 39,612
-------- --------
979,180 914,976
-------- --------
Deduct - dividends paid
Preferred stock 882 882
Preference stock 114 114
Common stock - $.215 per share in 1999;
$.205 per share in 1998 17,488 16,421
National Enterprises Inc. common stock 1,475 1,416
-------- --------
19,959 18,833
-------- --------
Balance at June 30 $959,221 $896,143
======== ========
The results presented in 1999 and the restated results for 1998 reflect the
pooling of interests method of accounting to recognize the recent acquisition
of National Enterprises Inc.
The accompanying information and notes are an integral part of these
financial statements.
Page 4 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Six Months Ended
June 30,
1999 1998
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $596,391 $566,445
-------- --------
Operating expenses
Operation and maintenance 274,258 256,012
Depreciation and amortization 73,734 67,461
General taxes 62,173 57,802
-------- --------
Total operating expenses 410,165 381,275
-------- --------
Operating income 186,226 185,170
-------- --------
Other income(deductions)
Interest (88,312) (83,178)
Allowance for other funds used during
construction 5,841 4,106
Allowance for borrowed funds used
during construction 5,413 2,346
Amortization of debt expense (1,360) (1,195)
Preferred dividends of subsidiaries (1,646) (1,739)
Merger related costs (14,014) --
Other, net (1,605) (572)
-------- --------
Total other income (deductions) (95,683) (80,232)
-------- --------
Income before income taxes 90,543 104,938
Provision for income taxes 36,999 41,629
-------- --------
Net income 53,544 63,309
Dividends on preferred stocks 1,992 1,992
-------- --------
Net income to common stock 51,552 61,317
-------- --------
Other comprehensive income
Unrealized gains on securities 61,130 25,841
Income taxes on other comprehensive income (23,468) (10,078)
-------- --------
Comprehensive income $ 89,214 $ 77,080
======== ========
Average shares of basic common stock outstanding 96,125 94,932
Basic and diluted earnings per common share on
average shares outstanding $ 0.54 $ 0.65
======== ========
Page 5 FORM 10-Q
Six Months Ended
June 30,
1999 1998
-------- --------
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $945,434 $870,368
Add - net income 53,544 63,309
-------- --------
998,978 933,677
-------- --------
Deduct - dividends paid
Preferred stock 1,764 1,764
Preference stock 228 228
Common stock - $.43 per share in 1999;
$.41 per share in 1998 34,874 32,767
National Enterprises Inc. common stock 2,891 2,775
-------- --------
39,757 37,534
-------- --------
Balance at June 30 $959,221 $896,143
======== ========
The results presented in 1999 and the restated results for 1998 reflect the
pooling of interests method of accounting to recognize the recent acquisition
of National Enterprises Inc.
The accompanying information and notes are an integral part of these
financial statements.
Page 6 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Balance Sheet (Unaudited)
(In thousands)
June 30 December 31
1999 1998
----------- -----------
ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 4,723,441 $ 4,612,351
Utility plant acquisition adjustments, net 54,507 55,097
Non-utility property, net of accumulated
depreciation 31,521 32,985
Excess of cost of investments in
subsidiaries over book equity at
acquisition, net 24,396 24,431
----------- -----------
Total property, plant and equipment 4,833,865 4,724,864
----------- -----------
Current assets
Cash and cash equivalents 47,517 51,794
Customer accounts receivable 91,826 85,018
Allowance for uncollectible accounts (2,217) (2,263)
Unbilled revenues 91,486 75,943
Miscellaneous receivables 10,080 9,308
Materials and supplies 19,222 16,786
Deferred vacation pay 13,356 10,127
Other 21,201 13,513
----------- -----------
Total current assets 292,471 260,226
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 220,111 218,527
Other investments 140,383 79,253
Debt and preferred stock expense 49,375 45,645
Deferred pension expense 29,182 27,011
Deferred postretirement benefit expense 11,495 12,538
Deferred treatment plant costs 6,342 6,873
Deferred water utility billings 1,654 1,862
Tank painting costs 13,239 13,558
Funds restricted for construction 30,404 10,935
Other 63,472 57,366
----------- -----------
Total regulatory and other long-term assets 565,657 473,568
----------- -----------
TOTAL ASSETS $ 5,691,993 $ 5,458,658
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Page 7 FORM 10-Q
June 30 December 31
1999 1998
----------- -----------
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock $ 120,787 $ 119,790
Paid-in capital 406,485 384,254
Retained earnings 959,221 945,434
Accumulated other comprehensive income 70,800 33,138
Unearned compensation (1,393) (980)
Treasury stock (3,700) (25)
----------- -----------
Common stockholders' equity 1,552,200 1,481,611
Preferred stocks with mandatory redemption
requirements 40,000 40,000
Preferred stocks without mandatory
redemption requirements 11,673 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 36,532 39,161
Preferred stocks of subsidiaries without
mandatory redemption requirements 6,255 6,255
Long-term debt
American Water Works Company, Inc. 211,000 216,500
Subsidiaries 2,169,678 2,115,687
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Total capitalization 4,027,338 3,910,887
----------- -----------
Current liabilities
Bank debt 150,951 88,590
Current portion of long-term debt 58,741 53,763
Accounts payable 50,884 69,623
Taxes accrued, including federal income 30,535 23,628
Interest accrued 43,387 41,863
Accrued vacation pay 14,015 10,613
Other 52,178 47,532
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Total current liabilities 400,691 335,612
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Page 8 FORM 10-Q
June 30 December 31
1999 1998
----------- -----------
Regulatory and other long-term liabilities
Advances for construction $ 200,770 $ 191,738
Deferred income taxes 572,822 535,106
Deferred investment tax credits 41,281 41,976
Accrued pension expense 55,871 50,591
Accrued postretirement benefit expense 12,486 18,549
Other 21,457 19,798
----------- -----------
Total regulatory and other long-term
liabilities 904,687 857,758
----------- -----------
Contributions in aid of construction 359,277 354,401
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Commitments and contingencies -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 5,691,993 $ 5,458,658
=========== ===========
The results presented in 1999 and the restated results for 1998 reflect the
pooling of interests method of accounting to recognize the recent acquisition
of National Enterprises Inc.
The accompanying information and notes are an integral part of these
financial statements.
Page 9 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
Six Months Ended
June 30,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 53,544 $ 63,309
Adjustments
Depreciation and amortization 73,734 67,461
Provision for deferred income taxes 11,101 13,059
Provision for losses on accounts receivable 3,027 3,168
Allowance for other funds used during
construction (5,841) (4,106)
Employee benefit expenses less than
funding (1,072) (2,799)
Employee stock plan expenses 3,379 3,903
Deferred tank painting costs (695) (1,767)
Deferred rate case expense (747) (493)
Deferred treatment plant costs (828) (1,289)
Amortization of deferred charges 8,403 4,676
Other, net (3,523) (1,982)
Changes in assets and liabilities
Accounts receivable (10,653) (6,335)
Unbilled revenues (15,543) (16,354)
Other current assets (10,124) (2,575)
Accounts payable (18,739) (22,106)
Taxes accrued, including federal income 6,907 13,490
Interest accrued 1,524 741
Other current liabilities 4,646 (10,132)
-------- --------
Net cash from operating activities 98,500 99,869
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (185,707) (170,816)
Allowance for other funds used during
construction 5,841 4,106
Utility system acquisitions (6,366) (30,401)
Proceeds from the disposition of property,
plant and equipment 2,215 1,260
Removal costs from property, plant and
equipment retirements (1,624) (3,807)
Funds restricted for construction activity (19,469) (445)
-------- --------
Net cash used in investing activities (205,110) (200,103)
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Page 10 FORM 10-Q
Six Months Ended
June 30,
1999 1998
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $ 96,436 $ 33,901
Escrowed proceeds from long-term debt -- 1,181
Proceeds from common stock 19,395 13,356
Purchase of common stock for treasury (1,190) --
Net borrowings under
line-of-credit agreements 62,361 95,648
Advances and contributions for construction,
net of refunds 16,230 12,618
Debt issuance costs (5,546) (3,979)
Repayment of long-term debt (42,967) (20,529)
Redemption of preferred stocks (2,629) (660)
Dividends paid (39,757) (37,534)
-------- --------
Net cash from financing activities 102,333 94,002
-------- --------
Net decrease in cash and
cash equivalents (4,277) (6,232)
Cash and cash equivalents at January 1
51,794 30,814
-------- --------
Cash and cash equivalents at June 30 $ 47,517 $ 24,582
======== ========
Cash paid during the period for:
Interest, net of capitalized amount $ 88,598 $ 84,244
======== ========
Income taxes $ 24,783 $ 25,561
======== ========
Common stock issued in lieu of cash in connection with the Employees' Stock
Ownership Plan, the Savings Plan for Employees and the Long-Term
Performance-Based Incentive Plan totaled $4,037 in 1999 and $5,607 in 1998.
Common stock placed into treasury in connection with the Long-Term
Performance-Based Incentive Plan totaled $3,675 in 1999.
The results presented in 1999 and the restated results for 1998 reflect the
pooling of interests method of accounting to recognize the recent acquisition
of National Enterprises Inc.
The accompanying information and notes are an integral part of these
financial statements.
Page 11 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Information Accompanying Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
June 30 December 31
1999 1998
---------- -----------
Preferred stocks with mandatory redemption requirements
Cumulative preferred stock - $25 par value
Authorized - 1,770,000 shares
8.50% series (non-voting) - 1,600,000 shares
outstanding $ 40,000 $ 40,000
========== ===========
Preferred stocks without mandatory redemption requirements
Cumulative preferred stock - $25 par value
5% series (one-tenth of a vote per share)
- 101,777 shares outstanding $ 2,544 $ 2,544
Cumulative preference stock - $25 par value
Authorized - 750,000 shares
5% series (non-voting) - 365,158 shares
outstanding 9,129 9,129
Cumulative preferential stock - $35 par value
Authorized - 3,000,000 shares
(one-tenth of a vote per share) -- --
---------- -----------
$ 11,673 $ 11,673
========== ===========
The terms of the 8.50% preferred stock provide that all shares of the series
shall be redeemed on December 1, 2000.
Common stockholders' equity
Common stock - $1.25 par value
Authorized - 300,000,000 shares
Issued - 96,629,893 shares at June 30, 1999;
95,831,790 at December 31, 1998 $ 120,787 $ 119,790
Paid-in capital 406,485 384,254
Retained earnings 959,221 945,434
Accumulated other comprehensive income 70,800 33,138
Unearned compensation (1,393) (980)
Treasury stock at cost - 109,675 shares at (3,700) (25)
June 30, 1999; 800 shares at December 31, 1998 ---------- -----------
$1,552,200 $ 1,481,611
========== ===========
At June 30, 1999, common shares authorized but not issued reserved for
issuance in connection with the Company's stock plans were 80,865,863 shares
for the Stockholder Rights Plan, 4,787,713 shares for the Dividend
Reinvestment and Stock Purchase Plan, 597,627 shares for the Employees' Stock
Ownership Plan, 698,582 shares for the Savings Plan for Employees and 296,347
shares for the Long-Term Performance-Based Incentive Plan.
The results presented in 1999 and the restated results for 1998 reflect the
pooling of interests method of accounting to recognize the recent acquisition
of National Enterprises Inc.
Page 12 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 -- Financial Statement Presentation
The information presented in this Form 10-Q is unaudited. In the opinion of
management the information reported reflects all adjustments, consisting of
normal recurring adjustments, which were necessary to a fair statement of the
results for the periods reported. Certain reclassifications have been made
to conform previously reported data to the current presentation. The results
presented in 1999 and the restated results for 1998 reflect the pooling of
interests method of accounting to recognize the recent acquisition of
National Enterprises Inc.
NOTE 2 -- Acquisition of National Enterprises Inc.
On October 13, 1998, American Water Works Company, Inc. (the Company)
announced that an agreement in principle had been reached to acquire National
Enterprises Inc.(NEI)in a transaction valued at $700 million. Subsidiaries
of NEI, a privately owned company, provide water service to approximately
504,000 customers in Missouri, Illinois, Indiana and New York.
On June 25, 1999, the Company completed the acquisition of NEI. The
transaction was accomplished through a tax free exchange of 14,937,000 shares
of the Company's stock for all of the outstanding shares of NEI and the
assumption of $241 million of debt. The transaction was completed following
regulatory approvals, termination of the waiting period under Federal
anti-trust laws and completion of other requirements.
This business combination has been accounted for as a pooling of interests
and, accordingly, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results of
operations of NEI.
During the second quarter of 1999, the Company recorded a charge of $13.8
million, and related tax benefits of $5.2 million, for merger related costs
consisting primarily of severance costs as well as vesting of certain
benefits, professional fees and other costs. Merger costs of $.2 million
were incurred in the 1st quarter of 1999. The merger related costs have been
reported on separate lines in the Consolidated Statement of Income and
Comprehensive Income.
The results of operations previously reported by the Company and the combined
amounts presented in the accompanying consolidated financial statements are
summarized below in thousands:
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30 1998
------------- ------------- ------------- ------------
Revenues:
Company $509,281 $481,980 $272,279 $255,980
NEI 87,110 84,465 46,696 45,176
-------- -------- -------- --------
Combined $596,391 $566,445 $318,975 $301,156
======== ======== ======== ========
Page 13 FORM 10-Q
Net income
(loss):
Company $ 56,458 $ 56,650 $ 36,773 $ 35,062
NEI (2,914) 6,659 (3,651) 4,550
-------- -------- -------- --------
Combined $ 53,544 $ 63,309 $ 33,122 $ 39,612
======== ======== ======== ========
The restated financial statements also reflect other comprehensive income
related to NEI's publicly traded investments, primarily ITC Deltacom and
Powertel. Investments in publicly traded securities are classified as
available for sale and are recorded in the balance sheet at fair market value
with the difference between cost and market value, net of the tax effect,
recorded as a part of comprehensive income. The fair value of investments is
determined using quoted market prices.
Note 3 -- Other Acquisitions
One July 13, 1999 the Company announced it had agreed to acquire from United
Water Resources Inc. several water utilities in Missouri, Indiana, Illinois
and Virginia for approximately $49 million in cash. These water utilities
provide water service to approximately 35,000 customers.
NOTE 4 -- New Accounting Standard
In 2001, the Company will adopt Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). This statement establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 was issued by
the Financial Accounting Standards Board in June of 1998 and requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The effective date of SFAS 133 was delayed by the Financial Accounting
Standards Board in June of 1999. As of June 30, 1999, the Company had no
derivative instruments or hedging activities.
Page 14 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Results of Operations
- ---------------------
Operating revenues for the second quarter and the first six months of 1999
were higher than for the same periods of 1998 by 6% and 5%, respectively.
The increased water revenues were due to increased water usage during
extended periods of hot and dry summer weather experienced in a number of
subsidiary service territories, ongoing customer growth and rate increases
authorized by regulatory agencies.
Water sales volume during the second quarter of 1999 increased 3% to 80.0
billion gallons from 77.3 billion gallons in the second quarter of 1998. The
154.4 billion gallons of sales volume for the first six months of 1999 was 3%
greater than the 149.4 billion gallons sold in the same period of 1998.
During the first seven months of 1999, four utility subsidiaries received
rate orders which are expected to provide approximately $27.5 million in
additional annual revenues. Six subsidiaries have rate increase applications
on file before regulatory agencies which, if granted in full, would provide
approximately $48 million in additional annual revenues.
Operation and maintenance expenses in the second quarter of 1999 increased by
5% compared to the same period in 1998. Operation and maintenance expenses
in the second quarter of 1999 include $3.0 million of costs incurred by two
subsidiaries defending condemnation initiatives by municipalities in their
respective service territories. For the first six months of 1999 compared to
the first six months of 1998, operation and maintenance expenses increased by
7%. This increase reflects adverse winter weather experienced at several
subsidiaries during the first quarter that increased maintenance, purchased
water and production costs. Depreciation and general tax expense was higher
for the second quarter and first six months of 1999 when compared to the
second quarter and first six months of 1998 due to the Company's ongoing
program of utility plant construction.
Interest expense rose by 5% and 6% in the second quarter and first six months
of 1999 compared to the same period in 1998, primarily due to an increase in
total debt to fund construction of new water service assets. The total
allowance for funds used (equity and borrowed) during construction ("AFUDC")
recorded in the second quarter of 1999 was $5.4 million, compared to $4.0
million in the second quarter of 1998. AFUDC for the first six months of
1999 was $11.3 million compared to $6.5 million for the same period in 1998.
The utility subsidiaries record AFUDC to the extent permitted by the
regulatory authorities.
During the second quarter and the first six months of 1999 the Company
recorded merger related costs amounting to $13.8 and $14.0 million,
respectively.
Income taxes decreased in the second quarter and first six months of 1999
when compared to the comparable periods in 1998, as a result of decreased
earnings due to merger related costs.
Page 15 FORM 10-Q
Net income to common stock was $32.1 million for the second quarter of 1999
compared with $38.6 million for the same period in 1998. Net income to
common stock for the first six months of 1999 was $51.6 million compared with
$61.3 million for the first six months of 1998.
Before one-time merger costs of $8.6 million after taxes, net income to
common stock for the second quarter of 1999 was $40.7 million compared to
$38.6 million for same period in 1998. For the first six months of 1999, net
income to common stock was $60.4 million excluding $8.8 million of merger
costs after taxes compared with $61.3 million for the first six months of
1998.
Capital Resources and Liquidity
- -------------------------------
During the first six months of 1999, 557,887 shares of common stock were
issued in connection with the Dividend Reinvestment and Stock Purchase Plan,
109,932 shares were issued in connection with the Employees' Stock Ownership
Plan, 99,496 shares were issued in connection with the Savings Plan for
Employees and 30,788 shares were issued in connection with the Long-Term
Performance-Based Incentive Plan.
During the balance of 1999, the Company plans to issue shares of common stock
through its Dividend Reinvestment and Stock Purchase Plan, and the Savings
Plan for Employees. Proceeds from the issuance of common stock will fund
additional equity investments in subsidiaries.
The Company placed 108,875 shares of common stock into treasury in connection
with the Long-Term Performance-Based Incentive Plan in the first six months
of 1999.
Four subsidiaries issued $96.4 million of long-term debt during the first six
months of 1999.
In the first six months of 1999, the Company invested $18.2 million in the
common stock of three subsidiaries. It is anticipated that some subsidiaries
will sell long-term debt to institutional investors and common stock to the
Company during the remainder of 1999, with the proceeds used to fund
construction programs, continue acquisitions and repay bank loans.
Year 2000 Issues
- ----------------
Many computer systems in use today were designed and developed without regard
to the impact of the upcoming century change. Computer programs and devices
often use only two digits for the year to identify dates. As a result,
computer systems may fail completely or create erroneous results unless
corrective measures are taken.
The Company utilizes numerous computerized systems and date sensitive devices
in its operations. If some of these key systems and devices are not ready
for the Year 2000 there will likely be adverse effects on the Company's
business, results of operations, and financial condition. The Company is
also dependent on third parties that supply important materials and services
such as water treatment chemicals, electric power for pumps and the
processing of customer payments. The failure of some of these third parties
to be Year 2000 compliant on a timely basis would also have an adverse effect
on the Company. The Company has assigned a very high priority to its Year
2000 compliance efforts, and as discussed below, these efforts have been
substantially completed.
Page 16 FORM 10-Q
An inventory of all important computer programs and devices with embedded
technology has been prepared for each utility subsidiary. Those inventories
are being used to track the status of any necessary upgrades or replacements,
and to log the results of testing by Company personnel to ensure that all
important systems are in fact Year 2000 compliant. In some instances work on
other information technology projects has been delayed because of Year 2000
remediation projects, but these delays are not expected to have a significant
impact on the Company's operations.
Because the Company is particularly dependent on its computerized financial,
customer service and treatment plant automation systems, those systems are
the primary areas in which Year 2000 efforts are focused.
The Company has been implementing two new software packages for financial and
customer service applications that are Year 2000 compliant. Although the
decision to purchase and implement this software was based on an analysis of
all of the Company's current and future systems requirements, once the
decision was made these projects became a key part of the Company's Year 2000
compliance plan. In conjunction with these projects, midrange and personal
computers have been upgraded with hardware and operating systems that are
Year 2000 compliant.
In the second quarter of 1999, the implementation of the new Year 2000
compliant enterprise software for financial applications was completed. This
new software will also be implemented by the utility subsidiaries acquired
from NEI, whose current financial software is Year 2000 compliant.
As of August 1999, all of the customer service software in use was Year 2000
compliant. The new customer service software is currently being used by
three of the Company's largest subsidiaries. Implementation of the new
customer service software will continue beyond 1999, so the customer service
software currently used by the other subsidiaries has been made Year 2000
compliant.
Many of the Company's water treatment plants utilize automation systems that
are controlled by personal computers. These systems have been tested, and
are being upgraded if necessary. That work has been substantially completed,
and the control systems at most facilities are now year 2000 compliant. The
Company's production and distribution facilities also utilize many pieces of
equipment with embedded microcontroller chips. These chips, which may be
time/date sensitive, are an integral part of critical operating equipment.
Much of this equipment cannot be field tested to evaluate Year 2000
compliance, so the Company used a systematic approach to identify and resolve
this issue, and that was completed during the first quarter of 1999. As a
contingency, the Company's production and distribution facilities can be
operated manually in the event of an internal Year 2000 related failure.
In addition to the work being done on the Company's internal systems,
interfaces used to exchange information with banks and other entities are
being tested to ensure Year 2000 compliance. And where feasible, plans are
being formulated to minimize the impact of problems outside parties may have
in providing supplies and services.
The cost of the new financial and customer service software, implementation
consulting services, and the cost of upgrading and replacing computers and
other equipment will be capitalized by the utility subsidiaries and included
in future rate increase requests. The total cost of these capital projects
Page 17 FORM 10-Q
is expected to be approximately $46 million, of which approximately $42
million has been incurred to date. Costs for specific Year 2000 remediation
projects will be charged to expense unless they meet the requirements for
deferral as regulatory assets. However, current period expenses are not
expected to be materially different from the usual ongoing level of
information systems related expenses.
New Accounting Standards
- ------------------------
In 2001, the Company will adopt Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133). This statement establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 was issued by the
Financial Accounting Standards Board in June of 1998 and requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The effective date of SFAS 133 was delayed by the Financial Accounting
Standards Board in June of 1999. As of June 30, 1999, the Company had no
derivative instruments or hedging activities.
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 which 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: general economic and business conditions; competition; success of
operating initiatives, advertising and promotional efforts; existence of
adverse publicity or litigation; changes in business strategy or plans;
quality of management; availability, terms and development of capital;
business abilities and judgment of personnel; changes in, or the failure to
comply with governmental regulations; Year 2000 issues; and other factors
described in filings of the Company with the SEC. The Company undertakes no
obligation to publicly update or revise any forward looking statement,
whether as a result of new information, future events or otherwise.
Page 18 FORM 10-Q
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
Exhibit Number Description
- -------------- -----------
10 Material Contracts
Contract dated May 5, 1999 between Registrant and
Ellen C. Wolf, is filed herewith.
Amendment dated May 6, 1999 to Consulting Agreement
between Registrant and Anthony P. Terracciano, is filed
herewith.
27 Financial Data Schedule, is filed herewith
electronically.
B. Reports on Form 8-K
-------------------
No report on Form 8-K was filed by the registrant during the quarter ended
June 30, 1999.
Page 19 FORM 10-Q
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN WATER WORKS COMPANY, INC.
Date August 12, 1999 /s/ Ellen C. Wolf
- ---------------------- --------------------------------------
Chief Financial Officer
(Authorized Officer)
Date August 12, 1999 /s/ Robert D. Sievers
- ---------------------- --------------------------------------
Comptroller
(Chief Accounting Officer)