CONFORMED COPY
Page 1 of 20
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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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.
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(Exact name of registrant as specified in its charter)
Delaware 51-0063696
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(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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At November 1, 2001, the number of shares of common stock, $1.25 par value,
outstanding was 99,983,686 shares.
Page 2 FORM 10-Q
PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
September 30,
2001 2000
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CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $394,956 $364,125
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Operating expenses
Operation and maintenance 166,890 154,400
Depreciation and amortization 46,819 41,648
General taxes 33,049 31,942
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Total operating expenses 246,758 227,990
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Operating income 148,198 136,135
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Other income (deductions)
Interest (47,512) (48,556)
Allowance for other funds used during
construction 1,098 1,241
Allowance for borrowed funds used
during construction 968 931
Amortization of debt expense (694) (691)
Preferred dividends of subsidiaries (750) (789)
RWE/AG acquisition expense (9,860) -
Gain from sale of operating system 4,820 -
Other, net 1,481 (4,052)
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Total other income (deductions) (50,449) (51,916)
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Income before income taxes 97,749 84,219
Provision for income taxes 41,972 33,488
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Net income 55,777 50,731
Dividends on preferred stocks 146 996
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Net income to common stock 55,631 49,735
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Other comprehensive loss, net of tax
Unrealized loss on securities (12,181) (23,856)
Reclassification adjustment for gain included
in net income (1,104) -
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Other comprehensive loss, net of tax (13,285) (23,856)
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Comprehensive income $ 42,346 $ 25,879
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Page 3 FORM 10-Q
Three Months Ended
September 30,
2001 2000
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Average shares of basic common stock outstanding 99,723 98,139
Basic and diluted earnings per common share on
average shares outstanding $ 0.56 $ 0.51
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at July 1 $1,096,271 $1,026,417
Add - net income 55,777 50,731
Gain (loss) on treasury stock 57 (15)
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1,152,105 1,077,133
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Deduct - dividends paid
Preferred stock 32 882
Preference stock 114 114
Common stock - $.235 per share in 2001;
$.225 per share in 2000 23,409 22,062
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23,555 23,058
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Balance at September 30 $1,128,550 $1,054,075
========== ==========
The accompanying information and notes are an integral part of these
financial statements.
Page 4 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Nine Months Ended
September 30,
2001 2000
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CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $1,075,261 $1,018,293
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Operating expenses
Operation and maintenance 478,189 453,028
Depreciation and amortization 136,248 122,061
General taxes 98,825 96,610
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Total operating expenses 713,262 671,699
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Operating income 361,999 346,594
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Other income(deductions)
Interest (144,653) (143,030)
Allowance for other funds used during
construction 3,364 5,747
Allowance for borrowed funds used
during construction 3,035 4,210
Amortization of debt expense (2,082) (2,081)
Preferred dividends of subsidiaries (2,275) (2,382)
RWE/AG acquisition expense (9,860) -
Gain from sale of operating system 4,820 -
Other, net 3,876 (5,126)
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Total other income (deductions) (143,775) (142,662)
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Income before income taxes 218,224 203,932
Provision for income taxes 89,605 80,979
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Net income 128,619 122,953
Dividends on preferred stocks 438 2,988
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Net income to common stock 128,181 119,965
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Other comprehensive loss, net of tax
Unrealized loss on securities (16,636) (47,062)
Reclassification adjustment for gain included
in net income (3,158) -
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Other comprehensive loss, net of tax (19,794) (47,062)
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Comprehensive income $108,387 $ 72,903
========== =========
Page 5 FORM 10-Q
Nine Months Ended
September 30,
2001 2000
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Average shares of basic common stock outstanding 99,287 97,944
Basic and diluted earnings per common share on
average shares outstanding $ 1.29 $ 1.22
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,069,486 $1,001,029
Add - net income 128,619 122,953
- gain (loss) on treasury stock 801 (959)
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1,198,906 1,123,023
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Deduct - dividends paid
Preferred stock 96 2,646
Preference stock 342 342
Common stock - $.705 per share in 2001;
$.675 per share in 2000 69,918 65,960
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70,356 68,948
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Balance at September 30 $1,128,550 $1,054,075
========== ==========
The accompanying information and notes are an integral part of these
financial statements.
Page 6 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Balance Sheet (Unaudited)
(In thousands)
September 30 December 31
2001 2000
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ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 5,358,174 $ 5,202,833
Utility plant acquisition adjustments, net 72,881 75,294
Non-utility property, net of accumulated
depreciation 47,236 37,831
Excess of cost of investments in
subsidiaries over book equity at
acquisition, net 59,142 55,590
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Total property, plant and equipment 5,537,433 5,371,548
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Current assets
Cash and cash equivalents 43,357 28,571
Customer accounts receivable 134,232 103,975
Allowance for uncollectible accounts (3,316) (2,575)
Unbilled revenues 94,168 83,878
Miscellaneous receivables 12,911 15,117
Materials and supplies 23,154 20,683
Deferred vacation pay 12,818 10,923
Restricted funds 224 224
Other 17,820 16,900
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Total current assets 335,368 277,696
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Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 216,376 216,652
Other investments 39,196 73,997
Debt and preferred stock expense 46,571 47,630
Deferred pension expense 28,755 23,479
Deferred postretirement benefit expense 9,521 10,129
Deferred business services project costs 32,559 4,796
Deferred tank painting costs 16,005 16,829
Restricted funds 8,590 8,343
Other 88,301 83,699
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Total regulatory and other long-term assets 485,874 485,554
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TOTAL ASSETS $ 6,358,675 $ 6,134,798
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Page 7 FORM 10-Q
September 30 December 31
2001 2000
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,746,520 $ 1,669,677
Preferred stocks without mandatory
redemption requirements 11,673 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 30,698 32,902
Preferred stocks of subsidiaries without
mandatory redemption requirements 8,118 8,118
Long-term debt
American Water Works Company, Inc. 147,000 159,000
Subsidiaries 2,234,916 2,112,165
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Total capitalization 4,178,925 3,993,535
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Current liabilities
Short-term debt 447,556 412,179
Current portion of long-term debt 79,661 161,395
Accounts payable 46,344 52,447
Taxes accrued, including federal income 86,402 25,960
Interest accrued 49,153 42,641
Accrued vacation pay 13,060 11,564
Other 66,758 67,865
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Total current liabilities 788,934 774,051
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Regulatory and other long-term liabilities
Advances for construction 224,741 216,125
Deferred income taxes 603,051 605,343
Deferred investment tax credits 38,889 40,098
Accrued pension expense 61,231 50,414
Accrued postretirement benefit expense 13,394 13,930
Other 37,263 37,823
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Total regulatory and other long-term
liabilities 978,569 963,733
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Contributions in aid of construction 412,247 403,479
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Commitments and contingencies -- --
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TOTAL CAPITALIZATION AND LIABILITIES $ 6,358,675 $ 6,134,798
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The accompanying information and notes are an integral part of these
financial statements.
Page 8 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
September 30,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $128,619 $122,953
Adjustments
Depreciation and amortization 136,248 122,061
Provision for deferred income taxes 10,148 13,757
Provision for losses on accounts receivable 7,266 6,334
Allowance for other funds used during
construction (3,364) (5,747)
Gain from sale of telecommunications
company investments (5,177) -
Gain from sale of operating system (4,820) -
Employee benefit expenses greater
than funding 525 4,946
Employee stock plan expenses 3,745 (2)
Deferred business services project expenses (27,763) -
Deferred tank painting costs (2,184) (1,591)
Deferred rate case expense (2,095) (1,322)
Amortization of deferred charges 12,332 8,266
Other, net (2,683) (7,047)
Changes in assets and liabilities, net
Accounts receivable (34,576) (29,458)
Unbilled revenues (10,290) (7,489)
Other current assets (3,391) (4,226)
Accounts payable (6,103) (26,480)
Taxes accrued, including federal income 60,442 21,206
Interest accrued 6,512 4,679
Other current liabilities (1,107) (19,778)
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Net cash from operating activities 262,284 201,062
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CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (251,225) (253,011)
Allowance for other funds used during
construction 3,364 5,747
Acquisitions (55,859) (48,951)
Proceeds from the disposition of property,
plant and equipment 19,359 2,342
Removal costs from property, plant and
equipment retirements (9,633) (4,500)
Restricted funds (247) 12,540
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Net cash used in investing activities (294,241) (285,833)
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Page 9 FORM 10-Q
Nine Months Ended
September 30,
2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $148,321 $ 46,014
Proceeds from common stock 34,736 25,455
Purchase of common stock for treasury (932) (3,426)
Net borrowings under
short-term debt agreements 35,377 73,583
Advances and contributions for construction,
net of refunds 22,109 21,243
Debt issuance costs (1,004) (1,782)
Repayment of long-term debt (119,304) (26,796)
Redemption of preferred stocks (2,204) (926)
Dividends paid (70,356) (68,948)
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Net cash from financing activities 46,743 64,417
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Net increase (decrease) in cash and
cash equivalents 14,786 (20,354)
Cash and cash equivalents at January 1 28,571 43,100
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Cash and cash equivalents at September 30 $43,357 $ 22,746
======== ========
Common stock issued in lieu of cash in connection with the Employees' Stock
Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award and
Incentive Plan totaled $1,488 in 2000.
Common stock placed into treasury in connection with the Employees Stock
Ownership Plan, the Savings Plan for Employees, and 2000 Stock Award and
Incentive Plan totaled $1,774 in 2001 and $4,871 in 2000.
The accompanying information and notes are an integral part of these
financial statements.
Page 10 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Information Accompanying Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
September 30 December 31
2001 2000
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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 - $35 par value
Authorized - 3,000,000 shares
(one-tenth of a vote per share)-
no outstanding shares -- --
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$ 11,673 $ 11,673
========== ==========
Common stockholders' equity
Common stock - $1.25 par value
Authorized - 300,000,000 shares
Issued - 100,006,273 shares in 2001;
98,819,845 shares in 2000 $ 125,008 $ 123,525
Paid-in capital 489,257 454,568
Retained earnings 1,128,550 1,069,486
Accumulated other comprehensive income 5,509 25,303
Unearned compensation (778) (359)
Treasury stock at cost - 34,731 shares in
2001; 129,216 shares in 2000 (1,026) (2,846)
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$1,746,520 $1,669,677
========== ==========
At September 30, 2001, common shares reserved for issuance in connection with
the Company's stock plans were 80,865,863 shares for the Stockholder Rights
Plan, 1,641,852 shares for the Dividend Reinvestment and Stock Purchase Plan,
565,493 shares for the Employees' Stock Ownership Plan and 532,381 shares for
the Savings Plan for Employees. Up to 4,254,367 shares of common stock may
be issued under the 2000 Stock Award and Incentive Plan, of which
approximately 3,300,000 shares were available to be granted at September 30,
2001.
Page 11 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
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Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 -- Financial Statement Presentation
The information presented in this Form 10-Q is unaudited. In the opinion
of management the information reported reflects all adjustments,
consisting of normal recurring adjustments, which were necessary to a fair
statement of the results for the periods reported. Certain
reclassifications have been made to conform previously reported data to
the current presentation.
NOTE 2 -- RWE/AG Acquisition of American Water Works
On September 17, 2001 the Company announced that it had entered into a
definitive agreement under which an indirect wholly owned subsidiary of
RWE Aktiengesellschaft (RWE/AG) will merge with and into the Company, with
each outstanding share of the Company's common stock converted in the
merger into the right to receive $46.00 per share in cash. RWE/AG is a
global multi-utility company that does business, through its subsidiaries
and affiliates, in over 120 countries. Its core businesses are
electricity, gas, water, and wastewater management services.
RWE/AG's all-cash proposal represents a 37.2% premium over the average
closing price per share of the Company's shares over the 30 trading days
prior to September 10, 2001, and a 29.5% premium over the highest closing
share price the Company's stock ever obtained prior to the public
announcement of the agreement. The proposed transaction has a total value
of $7.6 billion, including the assumption of approximately $3.0 billion in
debt the Company had outstanding as of June 30, 2001.
Upon completion of the transaction, the Company will join with Thames
Water, RWE/AG's London-based international water services business. The
American Water brand will continue, and its management team headquartered
in Voorhees, New Jersey is expected to lead the RWE/AG-Thames water
business in North, Central and South America.
The transaction is expected to take at least a year to complete, following
approval by the Company's shareholders and appropriate state regulatory
agencies. The Company has identified fourteen states that it believes are
required to approve the transaction. Those states are Arizona,
California, Connecticut, Illinois, Kentucky, Maryland, New Hampshire, New
Jersey, New Mexico, New York, Ohio, Pennsylvania, Virginia, and West
Virginia. Approval in Connecticut and New Hampshire will likely not be
required when the sale of those properties to Kelda Group (See Note 3) is
completed. In five states only advisory letter filings are required.
Those states are Hawaii, Iowa, Missouri, Tennessee, and Texas. The
Company does not believe filings will be necessary in Georgia, Indiana,
Massachusetts, and Michigan.
NOTE 3 -Sales of Operating Systems
TOWN OF SALISBURY MASSACHUSETTS
On September 28, 2001 the Company completed the sale of its Salisbury
Water Supply Company's operating system to the Town of Salisbury,
Massachusetts for $11.5 million in cash plus outstanding accounts
receivable. The Salisbury system serves 3,000 customers and had revenues
of $1.9 million in 2000.
Page 12 FORM 10-Q
KELDA GROUP ACQUISITION OF NEW ENGLAND OPERATIONS
Kelda Group Plc and the Company jointly announced on August 30, 2001 that
they had reached an agreement whereby Kelda Group would acquire the
Company's New England operations. The transaction price is approximately
$118 million in cash plus the assumption of $115 million in debt.
The utility operations being acquired by Kelda Group serve a total of
64,000 customers and had revenues of $47.3 million in 2000. Massachusetts
Capital Resources Company, a finance subsidiary of the Company, which owns
and leases certain assets to Massachusetts-American, will also be acquired
as part of the transaction.
The Public Utility Commissions in Connecticut, New York, and New Hampshire
must approve the Kelda Group transaction, which is expected to be
consummated by the end of the first half of 2002. The transaction is also
subject to review by the Federal Trade Commission.
Note 4 -- Pending Acquisition
WATER AND WASTEWATER ASSETS OF CITIZENS COMMUNICATIONS
On October 15, 1999, the Company entered into an agreement to acquire all
of the water and wastewater utility assets of Citizens Communications
Company (formerly Citizens Utilities Company) (NYSE:CZN) for $835 million
in cash and debt. Citizens provides water and wastewater service to
305,000 customers in Arizona, California, Illinois, Indiana, Ohio and
Pennsylvania. For the latest fiscal year ended December 31, 2000, the
operations being acquired had revenues of approximately $110 million.
The Company now has approval from state regulatory agencies in all six
states covered by the purchase agreement. The California Public Utility
Commission approved the Company's acquisition of Citizens' water and
wastewater assets in that state on September 30, 2001, but the Company is
awaiting a possible rehearing before that commission and a possible
appellate proceeding before closing the acquisition.
Note 5-- Acquisition
AZURIX NORTH AMERICA AND AZURIX INDUSTRIALS
On August 6, 2001 the Company entered into an agreement to acquire Azurix
North America Corp. and Azurix Industrials Corp. for approximately $150
million in cash and debt. Azurix North America and Azurix Industrials are
wholly-owned subsidiaries of Azurix Corp. and provide a range of water and
wastewater services, including operations and maintenance, engineering,
carbon regeneration, underground infrastructure rehabilitation and
residuals management.
Azurix North America and Azurix Industrials, which had revenues totaling
approximately $157 million in 2000, have approximately 1,050 employees and
operate facilities serving an end-user population of approximately 2
million people across North America.
This acquisition, which was completed on November 7, 2001, strengthens the
Company's position as a premier provider of water resource management
services in the United States and Canada.
Page 13 FORM 10-Q
Note 6-- Security Issues
In the aftermath of the tragic events of September 11, 2001, all aspects
of how the Company secures its facilities in order to protect the safety
of its customers and associates are being reviewed and additional security
measures are being implemented. It is anticipated that these additional
measures will result in a significant increase in spending on security.
The regulated utility subsidiaries are seeking recognition of these
increased security costs in the rates charged for utility service. At
this time the Company plans to defer these additional costs because it
believes that it is probable that they will be recovered in rates, and
therefore expects no significant impact on the Company's financial
position or results of operations.
NOTE 7 -- New Accounting Standards
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended. The statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS 133 was issued by the Financial Accounting Standards Board in June
of 1998 and requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value.
This new accounting standard did not have any effect on the Company's
financial position or results of operations. The Company's contracts that
meet the definition of a derivative are for normal purchases and normal
sales, are expected to result in a physical delivery, and are of
quantities expected to be used or sold over a reasonable period in the
normal course of business. The Company has no hedging activities.
In June of 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under
SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets
that are not deemed to have indefinite lives will continue to be amortized
over their useful lives. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS 142 effective January 1, 2002. The
Company is currently evaluating the effect that adoption of the provisions
of SFAS 142 that are effective January 1, 2002 will have on its results of
operations and financial position.
Also in June of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset.
Page 14 FORM 10-Q
The asset will be depreciable in accordance with normal depreciation
policy and the liability will be increased, with a charge to the income
statement, until the obligation is settled. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. The Company is currently
evaluating the effect that adoption of the provisions of SFAS 143 will
have on its results of operations and financial position.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. SFAS 144
is effective for fiscal years beginning after December 15, 2001. The
Company is currently evaluating the effect that adoption of the provisions
of SFAS 144 will have on its results of operations and financial position.
Note 8 - Subsequent Event
On November 6, 2001 the Company and its financing subsidiary, American
Water Capital Corp., executed a Note Purchase Agreement for up to $1.2
billion in senior unsecured notes at an interest rate of 4.92%. The notes
will be purchased at par by RWE/AG and mature on November 6, 2006. The
Company and its subsidiaries are using proceeds from the sale of the notes
to acquire the common stock of Azurix North America and Azurix
Industrials, to fund the acquisition of the water and wastewater assets of
Citizens Communication Company and to reduce outstanding short-term debt.
Closing will occur in two or more tranches, the first of which took place
on November 6, 2001 in the amount of $298.5 million.
Page 15 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
----------------------------------------------------------------------
Results of Operations
---------------------
Operating revenues for the third quarter and the first nine months of 2001
were higher than for the same periods of 2000 by 8% and 6%, respectively.
Increased revenues were the result of water sales to 40,000 new
customers, authorized increases in rates charged for service and modest
weather pattern improvements.
Water sales volume during the third quarter of 2001 increased 3% to 102.0
billion gallons from 99.5 billion gallons in the third quarter of 2000.
The 260.7 billion gallons of sales volume for the first nine months of
2001 was 1% greater than the 258.0 billion gallons sold in the same period
of 2000.
During 2001, ten utility subsidiaries have received rate decisions, which
are expected to provide approximately $23.5 million in additional annual
revenues. Four subsidiaries have rate increase applications on file
before regulatory agencies, which, if granted in full, would provide
approximately $55.4 million in additional annual revenues. The largest
portion of this total is from two separate requests filed by Pennsylvania-
American and Indiana-American at $39 million and $13 million,
respectively. Decisions in the Pennsylvania and Indiana cases are
expected in the first and third quarters of 2002, respectively.
Operating expenses in the third quarter and the first nine months of 2001
were 8% and 6% higher compared to the same periods in 2000. Operation and
maintenance expenses increased by 8% and 6% in the third quarter and the
first nine months when compared to the same periods in 2000 primarily
because of increased production costs such as power, purchased water and
chemicals. A portion of the expense increase was associated with customer
growth. The increases in depreciation expense for the quarter and first
nine months were related to the Company's ongoing program of utility plant
construction.
Interest expense decreased by 2% in the third quarter and increased 1% in
the first nine months of 2001 compared to the same periods in 2000,
reflecting declining interest rates in 2001. The total allowance for
funds used (equity and borrowed) during construction ("AFUDC") recorded in
the third quarter of 2001 was $2.1 million, compared to $2.2 million in
the third quarter of 2000. AFUDC for the first nine months of 2001 was
$6.4 million compared to $10.0 million for the same period in 2000. The
utility subsidiaries record AFUDC to the extent permitted by the
regulatory authorities. During the third quarter and first nine months of
2001 the Company sold a portion of its telecommunication company
investments and realized pre-tax gains of $1.8 million and $5.2 million in
other income.
Income taxes increased in the third quarter and first nine months of 2001
when compared to the comparable periods in 2000, as a result of increased
earnings in 2001.
Page 16 FORM 10-Q
Net income to common stock was $55.6 million for the third quarter of 2001
compared with $49.7 million for the same period in 2000. Net income to
common stock for the first nine months of 2001 was $128.2 million compared
with $120.0 million for the first nine months of 2000.
Other comprehensive loss was $13.3 million and $19.8 million in the third
quarter and first nine months of 2001, respectively, compared to other
comprehensive loss of $23.9 million and $47.1 million in the same periods
in 2000. The Company's other comprehensive loss represents the unrealized
loss on passive investments in publicly traded securities.
Earnings per share of common stock in 2001 were $.63 for the quarter and
$1.36 for the nine months ended September 30, 2001 prior to one-time
transactions. Earnings per share in 2000 were $.51 for the third quarter
and $1.22 for the nine months year-to-date. In 2001 a $.10 per share
charge resulted from expenses incurred for the RWE/AG transaction and a
$.03 per share net gain was recorded for the sale of the operating system
in Salisbury Massachusetts. After these one-time transactions, per share
earnings in 2001 were $.56 for the third quarter and $1.29 for the year-
to-date.
Capital Resources and Liquidity
-------------------------------
During the first nine months of 2001, 1,154,244 shares of common stock
were issued in connection with the Dividend Reinvestment and Stock
Purchase Plan, and 32,184 shares were issued for non-qualified stock
options that were exercised. Also, 163,892 non-qualified stock options
were granted in connection with the 2000 Stock Award and Inventive Plan
during the first nine months of 2001.
The Company issued 153,648 shares of common stock out of treasury during
the first nine months of 2001 in connection with the Employees' Stock
Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award
and Incentive Plan.
On March 29, 2001 the Company's financing subsidiary, American Water
Capital Corp. (AWCC) closed on its inaugural long-term debt financing of
$140 million. The securities issued are senior unsecured notes carrying an
interest rate of 6.87% maturing on March 29, 2011. The Company loaned the
proceeds of that financing to nine utility subsidiaries to repay short-
term debt. In the first nine months of 2001, the Company invested $7.2
million in the common stock of two subsidiaries.
New Accounting Standards
------------------------
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133), as amended. The statement establishes accounting
and reporting standards for derivative instruments and hedging activities.
SFAS 133 was issued by the Financial Accounting Standards Board in June of
1998 and requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value.
Page 17 FORM 10-Q
This new accounting standard did not have any effect on the Company's
financial position or results of operations. The Company's contracts that
meet the definition of a derivative are for normal purchases and normal
sales, are expected to result in a physical delivery, and are of
quantities expected to be used or sold over a reasonable period in the
normal course of business. The Company has no hedging activities.
In June of 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). SFAS 141 requires all business combinations initiated
after June 30, 2001 to be accounted for using the purchase method. Under
SFAS 142, goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets
that are not deemed to have indefinite lives will continue to be amortized
over their useful lives. The amortization provisions of SFAS 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect
to goodwill and intangible assets acquired prior to July 1, 2001, the
Company is required to adopt SFAS 142 effective January 1, 2002. The
Company is currently evaluating the effect that adoption of the provisions
of SFAS 142 that are effective January 1, 2002 will have on its results of
operations and financial position.
Also in June of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effect that adoption of the provisions of SFAS 143 will have on its
results of operations and financial position.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standard No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur.
SFAS 144 is effective for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the effect that adoption of the
provisions of SFAS 144 will have on its results of operations and
financial position.
Page 18 FORM 10-Q
Subsequent Event
----------------
On November 6, 2001 the Company and its financing subsidiary, American
Water Capital Corp., executed a Note Purchase Agreement for up to $1.2
billion in senior unsecured notes at an interest rate of 4.92%. The notes
will be purchased at par by RWE/AG and mature on November 6, 2006. The
Company and its subsidiaries are using proceeds from the sale of the notes
to acquire the common stock of Azurix North America and Azurix
Industrials, to fund the acquisition of the water and wastewater assets of
Citizens Communication Company and to reduce outstanding short-term debt.
Closing will occur by the issuance of two or more tranches, the first of
which took place on November 6, 2001 in the amount of $298.5 million.
Forward Looking Information
---------------------------
Forward looking statements in this report, including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to
the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. These forward looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed
or implied by such forward looking statements. These factors include,
among others, the following: the success of pending applications for rate
increases; inability to obtain, or to meet conditions imposed for,
regulatory approval of pending acquisitions; weather conditions that tend
to extremes of temperature or duration; availability, terms and
development of capital; business abilities and judgment of personnel;
changes in, or the failure to comply with governmental regulations,
particularly those affecting the environment and water quality;
competition; success of operating initiatives, advertising and promotional
efforts; existence of adverse publicity or litigation; changes in business
strategy or plans; quality of management; general economic and business
conditions; and other factors described in filings of the Company with the
SEC. The Company undertakes no obligation to publicly update or revise
any forward looking statement, whether as a result of new information,
future events or otherwise.
Page 19 FORM 10-Q
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
Exhibit Number Description
-------------- -----------
10 Material Contracts
(a) Note Purchase Agreement for up to $1.2
billion 4.92% senior notes due November 6, 2006
B. Reports on Form 8-K
-------------------
A current report on Form 8-K was filed on August 7, 2001 by the Company
regarding the agreement to acquire Azurix North America Corp. and Azurix
Industrials Corp.
A current report on Form 8-K was filed on August 30, 2001 by the Company
regarding the agreement to sell the Company's New England Operations to
the Kelda Group Plc.
A current report on Form 8-K was filed on September 17, 2001 by the
Company regarding the RWE/AG merger agreement.
A current report on Form 8-K was filed on October 30, 2001 by the Company
regarding the release of the Company's third quarter earnings.
A current report on Form 8-K was filed on November 7, 2001 by the Company
regarding the note purchase agreement with RWE/AG.
A current report on Form 8-K was filed on November 8, 2001 by the Company
regarding completion of the acquisition of Azurix North America Corp. and
Azurix Industrials Corp.
Page 20 FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN WATER WORKS COMPANY, INC.
(Registrant)
Date November 14, 2001 \s\Ellen C. Wolf
---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date November 14, 2001 \s\Robert D. Sievers
---------------------- ---------------------------------------
Comptroller
(Chief Accounting Officer)