Note 6: Long-Term Debt

The Company primarily issues long-term debt to fund capital expenditures at the regulated subsidiaries. The components of long-term debt are as follows:


	Rate	Weighted- Average Rate			Maturity Date	September 30, 2012		December 31, 2011
Long-term debt of American Water Capital Corp. (“AWCC”) (a)
Private activity bonds and government funded debt
Fixed rate	4.85%-6.75%		5.72	%	2018-2040	$	322,610	$	322,610
Senior notes
Fixed rate	5.39%-10.00%		6.25	%	2013-2040		3,089,409		3,089,409
Long-term debt of other subsidiaries
Private activity bonds and government funded debt
Fixed rate	0.00%-6.20%		4.78	%	2012-2041		1,056,460		1,206,332
Mortgage bonds
Fixed rate	5.48%-9.71%		7.40	%	2012-2039		697,800		697,800
Mandatory redeemable preferred stock	8.47%-9.75%		8.61	%	2019-2036		21,001		22,101
Notes payable and other (b)	9.49%-12.17%		11.65	%	2013-2026		1,416		1,691

Long-term debt							5,188,696		5,339,943
Unamortized debt discount, net (c)							41,952		43,888
Fair value adjustment to interest rate hedge							8,183		6,111

Total long-term debt						$	5,238,831	$	5,389,942

(a)	AWCC, which is a wholly-owned subsidiary of the Company, has a strong support agreement with its parent that, under certain circumstances, is the functional equivalent of a guarantee.

(b)	Includes capital lease obligations of $1,089 and $1,264 at September 30, 2012 and December 31, 2011, respectively.

(c)	Includes fair value adjustments recognized in acquisition purchase accounting.

The following long-term debt was issued in 2012:


Company	Type	Interest Rate	Maturity	Amount
Other subsidiaries (1)	Private activity bonds and government funded debt – fixed rate	0.00%-5.00%	2013-2041	$	83,476

Total issuances				$	83,476

(1)

Included in the issuance amount above was $68,746, which was initially kept in Trust pending the Company’s certification that it has incurred qualifying capital expenditures. These issuances have been presented as non-cash in the accompanying Consolidated Statements of Cash Flows. Subsequent releases of all or a lesser portion of these funds by the applicable Trust are reflected as the release of restricted funds and are included in investing activities in the accompanying Consolidated Statements of Cash Flows.

The following long-term debt was retired through optional redemption or payment at maturity during 2012:


Company	Type	Interest Rate			Maturity		Amount
Other subsidiaries	Mortgage bonds – fixed rate		7.95	%		2012	$	4,200
Other subsidiaries	Private activity bonds and government funded debt – fixed rate		0.00%-6.00%			2012-2041		256,834
Other subsidiaries	Mandatory redeemable preferred stock		4.60%-6.00%			2013-2019		1,100
Other	Capital leases and other							275

Total retirements and redemptions							$	262,409

Other activity of long-term debt during the first nine months of 2012 includes debt assumed in an acquisition totaling $25,215. (see Note 3)

On October 31, 2012, the Company issued notices of redemption for $129,000 of outstanding private activity bonds with maturity dates ranging from 2022 to 2032 and interest rates ranging from 5.00% to 5.25%.

Interest income included in interest, net is summarized below:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Interest income	$	2,837	$	2,641	$	8,470	$	8,044

The Company previously entered into an interest-rate swap to hedge $100,000 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. This fixed rate and variable rate interest swap is accounted for as a fair value hedge. The swap matures with the fixed-rate debt in 2017. The Company uses a combination of fixed-rate and variable-rate debt to manage interest rate exposure.

At September 30, 2012 and December 31, 2011, the Company had a $100,000 notional amount variable interest-rate swap fair value hedge outstanding. The following table provides a summary of the derivative fair value balance recorded by the Company and the line item in the Consolidated Balance Sheets in which such amount is recorded:


	September 30, 2012		December 31, 2011
Regulatory and other long-term assets
Other	$	8,209	$	5,824
Long-term debt
Long-term debt		8,183		6,111

For derivative instruments that are designated as and qualify as fair value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current net income. The Company includes the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in interest expense as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest, net
Gain (loss) on swap	$	1,121		$	4,896		$	2,384		$	6,510
Gain (loss) on borrowing		(800	)		(4,797	)		(2,072	)		(6,230	)
Hedge ineffectiveness		321			99			312			280